OE News Special Edition June 2014

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Administrator’s ReportPension Plan maintainsstability and looksforward to a strong futureShawn Hatch,AdministratorI am pleased to present the 39th Annual Financial Statements of the Operating Engineers’Benefits and Pension Plans (OEBPP). The Auditor has prepared these statements for thereview of Plan members, and they reflect the stewardship of the Plan’s assets by yourTrustees.With the continuing and unprecedented turmoil in the world’s financial markets, your Boardof Trustees believes the move in 2002 to an Asset-Liability Matching Policy has provided yourpension plan stability during these difficult times. As described in previous editions of thisSpecial Edition your Trustees approved this investment strategy to ensure the long-term stabilityof your pension plan.As you will read, the Plan’s basic investment strategy is unchanged from the previous year. Thisstrategy is intended to give you, the Plan members, a higher level of certainty with respect tothe benefits you are relying on for your retirement. This conservative strategy is consistentwith what a large majority of participants told us they prefer.2013 proved to be a year which saw a rapid rise in interest rates and a quick fall downwards.Our investment strategy maintained stability despite this rather unexpected volatility.Investment policy providing greater certaintyDue DiligenceThe Trustees approved the investment strategy after intensive assessment, on the basis ofextensive professional advice, and with the involvement of provincial regulators.The process began with computer modeling through which the performances of differenttypes of assets were assessed – relative to the liabilities of the plan, and in light of possiblechanges in interest rates and stock market performance. The strategy has been accepetd by theprovincial Superintendent of Pensions, who has responsibility for overseeing pension planmanagement.The strategy was scrutinized by five different actuaries: the OEPP’s own actuary, a special consultantengaged to develop the strategy, and three independent actuaries (two engaged by theOEPP, and one by the Superintendent of Pensions).This strategy isintended to giveyou, the Planmembers, a higherlevel of certaintywith respect to thebenefits you arerelying on for yourretirement.6 News Special Edition Fall 2014
Administrator’s ReportAsset-Liability Matching: The Basic PrincipleOur strategy involves both a significant adjustment in the mix and nature of assets we hold, aswell as a plan specific long term discounted cash flow assessment of the value of some of thoseassets (particularly real estate). The anticipated level of future returns will be much more certain,and the plan will be better protected from the potentially negative impact of changes ininterest rates and stock market performance.The basic principle behind an Asset-Liability Matching Policy is simple, and is summed upin the name. The policy requires us to hold assets that we expect will deliver an income streamcoming as close as possible to matching the estimated liabilities of the Plan (the promises topay benefits to members), over a given time period – regardless of what may happen to interestrates and the stock markets.The Interest Rate ImpactThe following is an example of interest rate impacts. If I want to pay you a certain amount ofmoney now, in return for your promise to pay me $1 per year indefinitely, the amount I’ll haveto pay depends on current interest rates. If rates are high, I’ll be able to pay you less, becauseyou’ll have the opportunity to invest the money I pay you at a high rate of return.In other words, I need fewer assets now to secure certain future payments when interestrates are high. And I need more assets when interest rates are low.A pension plan works the same way. The plan has assets now and needs to make certain paymentsin the future. The current value of a pension plan’s future liabilities (and therefore theassets it needs now to meet those liabilities) goes down as interest rates rise, and goes up asinterest rates drop.In other words, a pension plan needs fewer assets to make the same future payments wheninterest rates are high than when interest rates are low.This has been a growing problem in recent years as interest rates have steadily declined, resultingin an increasing level of liability for the OEPP and other pension plans. By shifting to a differentmix of assets, the Trustees believe we can protect our plan against the impact of lowinterest rates, and of interest rate changes generally.Interest Rates andPromises to PayCost of a promise of a$1/year indefinitely, atdifferent ratesCost Interest Rate$10.00 10%$16.67 6%$20.00 5%$25.00 4%$33.33 3%$50.00 2%Interest Ratesand PensionPlan LiabilitiesAsinterestratesdrop....... thevalue ofpensionplanliabilitiesrises.Special Edition Fall 2014 News 7
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