OE News Special Edition June 2014

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Administrator’s ReportThe Plan’s Asset MixThe large majority of our assets continue to be made up of bonds. A bond is simply a promiseto re-pay a certain amount of money at a specified date, with interest payments in the interimbased on a fixed rate. It is a “fixed-income asset”, meaning that there is no doubt as to the rateof return it will deliver. The only risk relates to the survival of the bond issuer. Although thiscan be an issue with corporate bonds, it is much less of an issue with government bonds. Thepie charts below show all of the Operating Engineers’ Pension Plan assets by class and whateach manager holdsBY ASSET CLASS0.4% Real Estate –(Internal Mortgages)0.8 % Fengate CapitalManagement2.6 % Fiera Capital4.8% ACMMortgage Fund II0.3% Realcor MortgageFund (External Mortgages)Real Estate –RevenueProducing19.9%Philips Hager & North61.1%0.2% Real Estate –Non-Revenue Producing5.6% PrepaidLeases3.2% ConcertProperties1% Short-termBY INVESTMENT MANAGERPension PlanAdministrator9.8%Realty InvDivision (Total)20.5%0.3% Realcor MortgageFund (external)0.8% Fengate CapitalManagement2.6% Fiera Capital Management4.8% ACM - MortgageFund IIPhilips Hagar & North61.1% PHN –Bond Fund60.7%8 News Special Edition Fall 2014
Administrator’s ReportThe following table illustrates the investment returns of each investment manager over thepast two years:RATE OF RETURN BY ASSET MANAGER AS AT APRIL 30, 2013Total Manager ResultsJan. - Apr. 4Mths %Sep - Dec. 4Mths %May - Aug. 4Mths % 1 Year% 2 Year %Phillips Hager & North - Bond Fund 1.50% 1.20% 6.20% 9.20% 17.30%Mortgage Fund Two 2.60% 1.20% 4.40% 8.20% 11.50%Fengate Capital Management -0.60% - - - -Fiera Capital 2.80% 1.40% 6.50% 11.10% -Realty Investment Division / Realcor Mortgage Fund -3.00% 15.70% -12.50% -1.90% 7.40%Pension Plan Administrator -1.00% 8.30% -6.30% 0.60% 5.30%TOTAL FUND 0.40% 4.80% 0.60% 5.70% 13.40%The most important point, however, is what bonds do in response to interest rate changes.If interest rates are high, the value of a bond will be less than when interest rates are low. Thesame principles are at work as in the example above. The promise of fixed future payments isworth more in a low interest rate world because alternative investment opportunities are lessattractive.In other words, the current value of bonds goes down as interest rates rise, and goes up asinterest rates drop.Greater Certainty in All Investment ClimatesSince our plan’s assets continue to be heavily focused on bonds, the value of our assets andliabilities will largely move in tandem in response to future interest rate changes. If interestrates were to rise, the current value of both our liabilities and our assets would go down. Similarly,if the trend towards lower interest rates continues, both values will increase.This is the most important part of the “match” that an Asset-Liability Matching Policy requires.When there’s a match between asset and liability income streams, there’s certainty thatfuture payments can be made.In moving to bonds, we have moved away from stock market or equity assets. Equities have nofixed rate of return, and therefore cannot be reliably matched against anticipated liabilities.Also they do not respond in a predictable way to interest rate changes.As interest rates dcline, we know that the value of our future liabilities will increase. But wedon’t know what will happen to the value of the equities – it may stay the same, it may decrease,or it may increase (although the rate of increase may or may not match the rate of increase inliabilities). These multiple possible outcomes – most of which result in a mismatch betweenassets and liabilities – reduce the certainty that the plan will be able to meet its futureobligations.Because of their unpredictability, equities create inherent challenges for Trustees in the managementof pension plans. What has made matters particularly difficult in recent times is thefluctuation of asset values in the stock markets, coupled with increases in plan liabilities as aresult of declining interest rates.Interest Rates,Pension PlanLiabilities and BondsAsinterestratesdrop …... and sodoes thevalue ofbonds.... thevalue ofpensionplanliabilitiesrises …Special Edition Fall 2014 News 9
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OE News Special Edition June 2014

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