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Benefits and Pensions MonitorWestern Forest – Western Pulp Partnership Defined Benefit Plan
The Western Forest – Western Pulp (WF-WP)Partnership Defined Benefit Plan falls into the first decile of the API Asset Performance Inc. Pooled Report, “or any indices survey for that matter,” says Barry Hitchens, trustee committee member for the pension committee and secretary of the pension plan. This success comes despite – or perhaps because of – the fact that the fund is managed contrary to many other Defined Benefit pension plans. In fact, the WF-WP pension plan “has a unique set of doctrines and principles which contravene and rebut many of the promoted and advocated principles by the actuarial fraternity,” says Hitchens. Prohibited Unless Permitted “This is the opposite of most charters, which are written with the provisos that most activities are permitted unless they’re prohibited,” says Hitchens. “The fund managers must come before the committee for any investments that are out of the ordinary. The committee is controlling and effectively managing, as is its duty. It is not sub-contracting or largely deferring all of the major decisions to the fund managers.” The second principle is yield maximization. “Most consultants advocate that capital appreciation over income is the primary source of long-term gain. That has proven to be false.
“The science of performance measurement has demonstrated that the long-term calculus, or rate of change, comes from income, not from capital. The reason that income dominates over capital is because it is generally always positive whereas when you net capital losses against capital gain they are actually quite meager. Long-term interest income in dividends accounts for more than 70 per cent of gain when you break down and decompose a rate of return. We have translated that into a yield maximization principle within our managers. Most fund managers and consultants look for capital gain. They relegate income to a secondary – almost a peripheral – position in investment finance. We don’t subscribe to that.” Principle three is balanced managers. The WF-WP pension plan has had two managers, the same two fund managers, since the inception of the pension fund. “We have not accepted the premise that a core of specialty managers in various asset classes is preferred over balanced, which is generally the belief these days. The performance of specialty managers is more volatile, not less, than that of the same component within a balanced manager’s organization.” Investing Internationally
“We’ve invested those funds that used to be international into domestic Canada and thereby we’ve increased our yield and, with the Canadian market outperforming most others, we’ve had a double benefit.” Currently, the asset mix for the plan i s no cash, 4.1 per cent shortterm, 41.2 per cent bonds, 52 per cent Canadian equity, no U.S. equity, and 2.7 per cent international equity. The Canadian equity portion of the mix has had the best returns over the past five years, achieving doubledigits each year. “We just added mortgages as a permissible investment. The fund managers come before the committee quite regularly with new investment vehicles and the committee reviews them. We don’t try to outguess the fund managers, but we monitor their investments very carefully.” |
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