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John D. Cannell Manager and Treasurer Toronto Transit Commission Pension Fund Society

Before achieving his chartered accountant designation, John D. Cannell worked six years in public practice. In 1977, he joined the Toronto Transit Commission Pension Fund Society. During his tenure, he’s seen the pension industry change for the better and for the worse. He refers to its current status as about as ugly as he has seen in his 25 years in the industry.

Although he did not coin the term, John Cannell suggests that the pension industry has been hit by the ‘perfect storm’ – a combination of brutal market reversals, abnormally low interest rates, and deteriorating demographics.

“The equity markets have suffered the bursting of the TMT bubble, corporate malfeasance, and geo-political uncertainties, all in a very short time,” says Cannell, manager and treasurer of the Toronto Transit Commission Pension Fund Society.

In comparing the current market reversals to the crash of 1929, Cannell says the 1929 crash lasted 33 months and reduced the market levels by 86 per cent. If the markets ‘bottomed out’ – as some predict they have – in October of 2002, this time the damage has been a more modest, but still painful, 35 per cent reduction as measured by the Dow Jones in the U.S.

Impact On Sponsors

On top of that, abnormally low interest rates have caused dramatic increases to actuarial liabilities as discount rates have been inexorably forced down. This combination of decreasing asset values and increasing liabilities has had a very large impact on the funding of many major pension plans in Canada and the U.S.

“These reversals have tipped many plans from healthy surplus positions to substantial unfunded liability positions in a matter of a few short years,” says Cannell.

Finally, demographics have, and will have, a negative impact on pension funding as baby boomers move into retirement. At the TTC Pension Fund Society, the ratio of active members to retirees was four-to-one in 1985. More recently, that ratio has shrunk to two-to-one. Cannell says many industries are worse off than TTC, with pension plan sponsors facing substantial increases in pension costs.

Fortunately, the TTC Pension Fund Society may not have been hit as hard as some pension plans. In 1997, the society conducted an asset/liability modelling study in response to concerns that it would be vulnerable to a major market correction. In fact, Cannell was quoted in the press on a few occasions about his pessimistic views of where the markets were headed. The study identified that the society’s ability to fund obligations would be at risk if there were a major market correction. At that time, it implemented a risk management strategy using derivatives while exposure limited to single stocks was rigidly reinforced by the society’s board of directors.

New Products

The negative returns in the equity markets have led investors to consider new products. As a matter of fact, Cannell says alternative investments have become one of the hotter topics in the pension industry. However, he says there is a huge learning curve for the average plan sponsor. Sponsors will need to know a lot more about new products or have access to a consultant who does. Also, pension plans will need to establish a clear rationale for the decision to invest in new products before actually doing so. “Successful investments will require time and patience.”

As far as new products are concerned, the society has been invested in real estate long enough that it does not consider it either a new asset class or an alternative. Other new asset vehicles, such as hedge funds, will require significant work before Cannell is comfortable with them.

“Ours is basically a conservative operation. Issues such as transparency, benchmarking, long-term results, and survivorship bias will have to be better resolved before I recommend new products.”

The TTC Pension Fund Society is a separate legal entity from the Toronto Transit Commission. It is a jointly trusteed, Defined Benefit and Defined Contribution hybrid plan with a board of eight (four appointed by the TTC and four appointed by Local 113 of the Amalgamated Transit Union). The society has 10,000 active members and 5,000 pensioners. Member contributions are matched, dollar for dollar, by the society.

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