Vestcor Response – Chapter 5 Volume II 2020 Auditor General Report | March 24, 2021
March 24, 2021
March 24, 2021
Ms. Lisa Harris, Chair
Standing Committee on Public Accounts
Legislative Assembly of New Brunswick
706 Queen Street
P.O. Box 6000
Fredericton, N.B. E3B 1C5
Vestcor Response – Chapter 5 Volume II 2020 Auditor General Report
Dear Ms. Harris,
Please find the following letter with respect to Chapter 5 Volume II of the 2020 Auditor General Report. While Vestcor understands there is an interest in having us appear before your Committee to discuss this report, we believe that it is important that we provide the following additional detail to you and your Committee members as soon as possible with respect to Vestcor’s, and our pension plan owners’, concerns with respect to the Auditor General’s access requests.
We recognize that the Office of Auditor General (OAG) performs an important function by providing oversight of public funds and of the government’s performance in its delivery of programs and services. We have advised the Auditor General on many occasions that we would be happy to discuss and answer questions on any of the significant amount of our publicly released performance and externally audited financial information. Unlike most other private companies formed under provincial legislation, Vestcor provides a significant amount of public transparency and disclosure on our website at www.vestcor.org.
However, as a fiduciary for a significant amount of investment capital on behalf of our clients it is very important that we follow the Vestcor Act that clearly states that Vestcor is not an agent of the Crown while also respecting the independent structure of our two owners, the New Brunswick Public Service Pension Plan (NBPSPP) and New Brunswick Teachers’ Pension Plan (NBTPP).
It is also important to note that Vestcor Inc., like many other private New Brunswick based organizations, does not represent an entity that is an “auditable entity” under the Auditor General Act and our company is not accounted for in any way in the Public Accounts upon which the OAG reports.
To provide a fuller understanding of our structure, I would like to describe how Vestcor came about.
Vestcor consists of two predecessor entities. The New Brunswick Investment Management Corporation (NBIMC), which was originally a Crown corporation created by the Province in 1996 to be the trustee and investment manager of the funds of the Public Service Superannuation Fund, Teachers’ Pension Fund and Provincial Court Judges’ Pension Fund. The Pension and Employees Benefit Division of the Office of Human Resources, then a Provincial government department, provided the related pension administration activity.
At that time the Province controlled and was fully liable for the promised benefits of those plans. As one would expect NBIMC and the Pension and Employees Benefit Division, as government entities, also regularly appeared before Crown Corporation and Public Account Committees and were subject to the Auditor General Act. In fact, Vestcor’s current public disclosure has not significantly changed since that time.
This structural situation changed materially with the introduction of the shared risk pension model and other pension reforms that were designed and implemented through Provincial legislation in 2012 through 2014. These changes significantly changed the relationship between the Province and the Public Service and Teachers’ pension plans. Each plan is now governed by individual legislation that specifies what their goals, objectives, and responsibilities are. For example, investment programs need to meet not only specific long-term return objectives but also achieve legislated risk parameters.
The Province ceased to control the pension plans and is no longer obligated to pay the pension benefits from the plans or general revenues. Instead, the plans are managed and administered by an independent board of trustees, who are equally appointed by the Province and specified employee bargaining agents. The Province’s (and other participating employers) only obligation is to pay to the trustees the specified pension contributions. The Province’s obligation stops with that payment. These funds are not public assets.
The trustees, and not the Province, now have the responsibility of investing and administering the assets of the plan so as to ensure that there will be sufficient funds to pay the benefits to their members as specified in the respective legislation and supporting governing documents. To that end, the trustees have the obligation to select and hire any service provider and are at liberty to select any suitably qualified investment managers. They concluded that having service providers that were Crown corporations or provincial government departments with reporting and other obligations to the Province, and potentially subject to influence from the Province or its officials, who after all is the employer under the plans, was not compatible with the trustees’ duty to administer the plans independent of the Province. This could result in having the pension fund investment or administration functions moved to service providers located outside New Brunswick, be it Toronto, New York or elsewhere. Not only would this affect a number of well-paid knowledge-based jobs here in New Brunswick but because Vestcor manages approximately 87% of the plan assets internally it would also result in a much higher external investment manager cost to the pension plans.
The NBPSPP and NBTPP trustees, mindful of their obligation to manage the plans independently and in the best interests of the plans’ members formed a joint a Governance Best Practices Working Group, The Working Group concluded that there was a benefit to the pension plans and to the larger New Brunswick economy in creating a single integrated investment manager and pension administrator building on the expertise that was already present. The Working Group proposed the creation of Vestcor which included transferring NBIMC and the Pension and Employee Benefits Division from Provincial government control to their ownership and control.
Vestcor was subsequently established by a private act of the legislature consistent with the fact that it is a private, not public, organization. The full transcript of the May 3, 2016 hearing before the Standing Committee on Private Bills of the Legislature that considered the Vestcor Act shows that Committee members well understood the benefits and outcomes of Vestcor becoming a private organization. The hearings clearly disclosed the fact that Vestcor would not be subject to OAG oversight as these were no longer public assets or obligations.
The OAG suggests that these two pension funds are public funds and that Vestcor’s services are provided to the Province. That is incorrect. The two pension funds are funds of their respective pension plan trustees and allow them to satisfy their pension obligations. Vestcor provides plan specific investment and administration services to each plan under contractually bound agreements. Each pension fund is subject to oversight by the Superintendent of Pensions of the New Brunswick Financial and Consumer Services Commission. Annually each plan provides externally audited financial statements and other information to its’ members. Vestcor also understands that both the NBPSPP and NBTPP also provide the OAG with a significant amount of their internal financial information including access to their external auditor to help assist the OAG with their audit requirements.
Vestcor reports to an independent expert Board of Directors and provides services to clients based on specific contractual service agreements. This includes meeting the long-term returns necessary to fund their specific pension plan within mandated risk levels, which are much lower than traditional defined benefit pension plans. As mentioned earlier, Vestcor provides a significant amount of public disclosure including detailed investment performance, operational results, compensation analysis and disclosure, and annual financial reporting information that is externally audited by a national firm with access pension plan and investment expertise. Vestcor’s compensation arrangements are based on industry best practices and are subject to oversight by our Board of Directors and their Human Resources and Compensation Committee. This information is transparently detailed in Vestcor’s Annual Report and other associated material that is available on our website.
It is also important to note that Vestcor’s information disclosure meets similar standards to other much larger Canadian peer organizations and is substantially more information than the OAG would have access to if the trustees opted to engage outside external investment management and pension administration firms.
Finally, it is important to also note that in addition to our contractual client reporting requirements Vestcor is also regulated by the New Brunswick Financial and Consumer Services Commission as both an Investment Fund Manager and Portfolio Manager.
I trust this information provides more objective detail with respect to Vestcor and the OAG ’s access requests and we look forward to discussing the matter further with you and your Committee at your earliest convenience. In the interim we will also be sharing a copy of this letter with our stakeholders through a public posting on our website www.vestcor.org.
John A. Sinclair
President & Chief Executive Officer
Legislative Committee Members – Standing Committee on Public Accounts
Michael Walton – Chairperson, Vestcor Inc.
Marcel Larocque – Presiding Co-Chair, Vestcor Corp.
Leonard Lee White – Chairperson, New Brunswick Public Sector Pension Plan
Larry Jamieson – Chairperson, New Brunswick Teachers’ Pension Plan