The business economist at work: Ontario Teachers' Pension Plan Board

Business Economics, April, 1998 by Leo de Bever

Five years ago, I definitely did not see a pension fund in my future. Like most economists, I knew little about pension financing. Spending the past three years at the Ontario Teachers' Pension Plan Board (OTPPB, better know as "Teachers'" to the Toronto financial community), has corrected that. A pension fund provides lots of scope for a quantitative economist with a strategic bent. Public and private pension management is a growth area, as retirement financing will likely replace deficits and debt as the main fiscal issue in OECD countries.

Some of my Canadian colleagues consider that last notion a sure sign of compulsive obsession with my subject area. But is it? Most economic models did not even keep track of debt/GDP until its explosion threatened to turn fiscal policy into debt management. The usual GDP accounting framework used for economic analysis has little to say about wealth and its intergenerational distribution.

Yet, population over sixty-five is set to double to 25 percent of the total in two decades. People live longer, so it now takes private assets of more than ten times postretirement income to be self-sufficient after leaving the workforce. Because half the population has no significant net worth, their retirement will create big fiscal and health care pressures. Before we spend those impending fiscal surpluses, let's make sure we have factored in the demographic crunch that will hit around 2010-15.

BACKGROUND

None of this showed up on my own radar screen in late 1994, when I was helping Nomura's Canadian bond clients make sense of Canadian politics and the Canadian economy. I was coasting, albeit in comfort. Nomura gives its foreign experts respect and independence, but there was no logical next career step. One day, I was approached about an economist position at Teachers'. It did not sound all that interesting, but I was urged to take a look anyway.

Once we started talking, Teachers' indicated that it really needed someone to head up its research group, which among other things monitored how well its global asset portfolio matched its Canadian liabilities. It also wanted to find better ways to use quantitative and written information in making investment decisions. Finally, the Fund was looking to improve communications between investment professionals and investment administration.

All of this sounded like a summary of things I had done before. While working on my Ph.D. in economics at Wisconsin, I managed to keep body and soul together by working on computer systems. I was heavily involved in quantitative analysis at the Bank of Canada, and in private consulting at Chase Econometrics Canada. After moving on to Crown Life Insurance, I learned about asset-liability matching and was drafted to strengthen Crown's investment administration systems. At Nomura, I had racked up frequent flyer points visiting clients in Europe and the Far East. I could see the potential, Teachers' redefined the job, and I started 1995 as the Fund's Vice-President of Research and Economics (R&E).

The R&E group has expanded as we kept picking up new assignments. I currently work with a group of twelve great professionals, split about evenly between asset mix, risk management, and our electronic library. We have very eclectic backgrounds: a few doctorates, some CAs, CFAs, CPAs, MAs, MBAs, an "almost"-actuarial designation, library science degrees, conservatory training, and even a bartending certificate. My colleagues are mostly self-starters, although we do pair senior staff with junior colleagues to transfer skills. Our strength is our diversity: a group like this comes up with its best ideas by asking seemingly dumb questions about someone else's area of expertise.

OPERATION OF THE PENSION PLAN

Where does a group like R&E fit in? Like other funds, the OTPPB has departments that look after its main asset classes: fixed income, active equities, indexed Canadian equities, international equity derivatives, real estate, and merchant banking. R&E deals with "top-down" issues, connecting assets and liabilities. Our CEO also refers to us as his "Miscellaneous Department": if no one wants it, send it to R&E. Nothing is a solo effort, but many of our recommendations find their way into policy and have as much impact on surplus as any of the other departments. This can best be illustrated by describing the operation of the Fund, and by outlining key R&E activities of the past three years.

The OTPPB is representative of a growing trend towards professional pension management. Prior to 1990, the Plan was an extension of the Ontario Treasury. Employer and employee retirement contributions were noncash expenses. They were covered by provincial debentures, reducing the need to tap public markets in times of deficits. When the province was booming in the late 1980s, it concluded (quite erroneously) that provincial revenues would never again fall short of expenses. Meanwhile, teachers realized that provincial debentures did not provide the returns and inflation protection offered by other assets. Pension contribution rates were high, and inflation protection had been only partially funded.