Vestcor Addresses Most Recent CBC NB Performance Critique | July 11 2018
July 11, 2018
For information purposes only
Fredericton, NB, July 11, 2018 – The following information is being provided by Vestcor to address a recent article published and broadcast by CBC New Brunswick criticizing Vestcor’s overall 2017 investment performance of 8.03% and our incentive compensation program.
Most of our client pension plans were converted to Target Benefit / Shared Risk Pension Plans (Plans) by the Province of New Brunswick in early 2014. On an annual basis, these Plans must now meet a strict legislated risk management test that is filed with and overseen by the Financial and Consumer Services Commission (FCNB) Superintendent of Pensions. This has resulted in the Plans we manage having a much lower risk tolerance than a typical defined benefit pension plan. Consequently, these Plans have also lowered their target rates of return as well.
Vestcor assists clients to construct portfolios that are designed to achieve the long-term returns required by these Plans while taking on a minimum of investment risk. We do this by using strategies that have significantly lower volatility than typical investment approaches, with potentially lower exposure to global stock markets. Consequently, during certain years when equity markets rise (as in 2017), these Plans may therefore produce returns that are slightly lower than less risk constrained pension funds in other jurisdictions. Conversely, lower risk portfolios would be more likely to outperform industry medians during weaker market periods.
Despite the lower risk approach, our results remain strong over the long term, particularly when considering both return and risk. Most importantly, Vestcor’s investment performance has continued to exceed long-term client objectives and has provided clients with approximately $4.3 billion in investment returns over the past four years. As well, RBC (the data provider referenced by CBC) publishes a longer-term four-year risk and return comparison which reports Vestcor’s results to be among the lowest risk of all pensions across Canada while maintaining returns near the median investment return over that period. It is also important to recognize that the RBC results are reported on a gross of fee basis and therefore do not reflect our clients’ significant cost savings from using Vestcor.
Investment Performance Relative to Benchmarks
Vestcor also undertakes active investment management activities to add relative investment value in excess of client approved investment policy benchmarks.
Overall client active management investment activities are targeted to add an extra 0.42% of total portfolio value net of investment costs. This amount represents the approximate long-term performance difference between a median and a top quartile pension fund manager as reported by industry surveys such as the RBC survey referenced above.
Actual relative investment performance is a function of the amount of additional risk taken by Vestcor management versus client investment policy benchmarks and is highly dependent on the investment environment. For example, around the time of the financial markets’ crisis in 2008-09 Vestcor added a limited amount of relative performance as there was limited risk taken due to the market uncertainties at that point in time.
More recently however long-term relative performance has been very strong, and as reported in our 2017 Annual Report has reached an actual annualized level of 0.87% per year. This activity represents approximately $143.1 million of additional investment value in 2017 and approximately $451.3 million of net relative investment value over the past four fiscal periods.
Vestcor’s Compensation Program is designed to attract and retain a team of high quality, New Brunswick-based, investment and administration professionals. The team is focused on delivering on our clients’ objectives, by aligning employees’ interests with those of our clients and other related stakeholders. The program is overseen by the Vestcor Board of Directors with the assistance of its’ Human Resources and Compensation Committee.
The compensation program recognizes the skills and experience required to successfully manage more than $16.6 billion of investment capital directly across global financial markets, and in 2011 the Vestcor Board obtained a positive compensation program assessment by Deloitte LLP in their report “Compensation Practice Assessment Against Financial Stability Board Principles” which is available on our website.
Vestcor operates on the general principle that compensation should consist of a base component and a performance-based incentive component. A pay-for-performance incentive program is typical for our industry. The percentage of compensation that is performance-based is proportional to the level of employee seniority. Performance is generally measured over longer periods of time. This longer-term focus is consistent with Vestcor’s typical client mandate to achieve a precise long-term investment rate of return while minimizing risk.
It is important therefore to note that the reported increase in Vestcor’s performance-based incentive compensation in recent years is well aligned to Vestcor’s strong nominal and relative investment performance that is outlined above.