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Since taking the reins in 2007, CEO Jim Leech has led the Ontario Teachers’ Pension Plan steadily towards its goal of becoming the world’s leading pension plan organization. Along the way he has faced a global financial crisis, increased investment in foreign markets, and implemented systems and process changes that are making Teachers’ a model for other pension organizations. While demographic and economic challenges are sure to continue, Leech is confident that Teachers’ sustained success will demonstrate the viability of the defined-benefit pension plan.
It’s not very often that Jim Leech is left dumbstruck by an invitation. But that was the case in April 2011, when the President and CEO of the Ontario Teachers’ Pension Plan was summoned to 10 Downing Street, home of British Prime Minister David Cameron, for an audience with several of his finance officials.
“I had no idea why I was there,” Leech recalls. Cameron’s team said: “We’ve watched you buy Birmingham Airport, Bristol Airport, Scotia Gas Networks, Camelot Group [Britain’s national lottery system], and you just closed on HS1 Limited [owner of the Channel tunnel rail link]. Who are you guys?”
It isn’t just the British who have taken notice of the OTPP’s success, both before and after Leech took over in 2007. New York City recently approved a plan to follow the OTPP’s governance model, under which the pension fund is managed by a professional, independent board that delegates operations to the CEO who is tasked with hiring investment personnel to manage and maximize its assets. The state of Washington announced shortly after that they, too, were adopting the model.
Leech is perhaps most renowned for his leadership during two of the greatest challenges to face OTPP since its inception: the recession of 2008-09, and the massive demographic crunch currently playing out as Ontario’s huge cohort of baby boomers prepares to retire.
The fund has just been rebalanced to correct a $17.2-billion shortfall of assets when compared to projected future pension costs, but another preliminary shortfall is expected this year. That’s despite strong recent asset performance. Teachers are, on average, working 26 years and living 30 more in retirement. Weak interest rates on investments also hurt, not to mention the fact that annual benefit payments exceed contributions by $1.8-billion as retiree ranks swell. Generous benefit programs have also allowed teachers to retire earlier. “There isn’t a pension plan in the world created to work on that math,” Leech says. “We have to evolve, and we will.”
In early 2008, Leech was also challenged with navigating the worst recession since the Great Depression. The OTPP’s net assets plummeted from $108.5-billion in 2007 to $87.4-billion in 2008, before recovering over the next two years. Having experienced past recessions, Leech and his chief investment officer Neil Petroff had developed a knack for predicting catastrophe. In the pre-market meltdown summer of 2008, the two wondered aloud just how bad the crisis could get. They agreed it could intensify. They were very right.
They doubled OTPP’s liquidity requirements, saving billions of dollars in assets as markets crashed that fall. “You need flexibility to make adjustments,” he says of the decision. “The key thing is you don’t want to end up in a liquidity squeeze, and that’s what happened to other institutions.”
While the crash tested his managerial mettle, Leech soon refocused on sustainability. Specifically, he saw that many of the organization’s financial modelling and technical support systems were far outdated, and in some cases unable to manage relatively new financial instruments, such as derivatives. The organization’s proprietary risk-management system was another concern. He sees OTPP’s five-year, $75-million back-end IT management upgrade as a key factor in maintaining the fund’s current growth trajectory; perhaps most importantly, he feels the organization is more than a year ahead of other pension funds on the technology front.
Perhaps even more complicated was communicating necessary changes to the teachers whose money he manages. In 2011, for example, to balance the fund Teachers’ sponsors the Ontario government and the Ontario Teachers’ Federation, invoked a measure making inflationary increases conditional rather than guaranteed, as they had been in previous years. As Leech explains, that change amounts to just a $1 difference per month for teachers who retired in 2009, but amounts to millions in savings over the long term.
Selling that change unilaterally would have been tough for the sponsors if they hadn’t previously initiated a sustainability working group comprised of key stakeholders – including the Ontario Teachers Federation, teachers’ unions, the provincial government and the OTPP – to highlight various options to ensure the fund’s long-term existence. The group whittled a list of 22 key areas of concern down to nine, which they monitor every quarter: everything from early-retirement contract clauses, to the number of days retirees can work while collecting a pension. He also understood that in the past, any changes to pensions sparked massive reaction from stakeholders. So Leech established a communications group that meets every two weeks to give each stakeholder group input into strategic messaging. They also created a website called fundingyourpension.com to provide teachers with up-to-date information on news related to the fund, while employing focus groups to test the effectiveness of those communiqués.
Attracting the right crop of investment-management talent and taking a very comprehensive approach to market research are other savvy business strategies. After identifying massive opportunities in emerging markets in 2004, the OTPP began sending personnel to research investment opportunities in countries such as Brazil, Chile and South Africa, thoroughly understanding the potential returns – and the potential risks – for the fund. A diverse range of foreign investments now comprise a multi-billion dollar asset mix, with non-Canadian holdings accounting for $38.2-billion of the $47.5-billion equities portfolio.
It’s these battle-tested management strategies that have built credibility and helped silence critics of the defined-benefit pension plan model. “If anybody can save defined benefit plans, this place should be able to,” Leech insists. “If this place can’t, I think it’s a failure everywhere, but we’re determined to show that the rush to defined contribution is a big mistake.”