Good morning.
Mr. Chair and members of Parliament, I want to thank you for inviting us here today to discuss the current liquidity crisis, its impact on our financial system, and in particular its impact on pension funds.
My name is John Valentini. I am executive vice-president and chief operating officer of the Public Sector Pension Investment Board, otherwise known as PSP Investments. With me here today is Pierre Malo, first vice-president of asset allocation strategies and research.
PSP Investments is a Crown corporation created in 1999 by the Government of Canada to invest net contributions received after April 1, 2000 from the pension plans of the Public Service, the Canadian Forces and the Royal Canadian Mounted Police. We also manage employer and employee contributions to the Reserve Force Pension Plan made after March 1, 2007.
We are one of the youngest and fastest-growing investment managers. It is important to note that we are an investment manager and not a pension plan manager. Responsibility for liabilities rests with the federal government. The pension payments under defined benefit plans are guaranteed by the Government of Canada. We report to the Treasury Board and to each of our stakeholders, through their respective ministers, the Minister of Public Safety and the Minister of National Defence. The Office of the Chief Actuary of Canada produces a triennial report on each of the Plans, and the next one is scheduled to be released this year for the period ending March 31, 2008. Our financial statements are also audited by the Auditor General of Canada.
Historically, we have performed favourably amongst our peers in Canada. According to RBC Dexia, in the past four fiscal years ending March 2008, we ranked in the top quartile of peer pension funds in Canada based on investment performance. However, our short-term performance these past two years has clearly been impacted by the liquidity crisis that began in 2007. The ABCP crisis was clearly one of the first consequences of the global liquidity crisis. I know that this committee has studied ABCP, so I will not prolong my discussion of it, other than to say that we are extremely fortunate that the PanCanadian Investors Committee for the Restructing of Non-Bank ABCP was able to successfully restructure the non-bank ABCP market in Canada.
PSP Investments participated actively in the restructuring process. A successful resolution of the crisis is a major achievement that will help most investors, small and large, to ultimately recover the majority of their investments.
Until the fall of 2008, the global liquidity crisis remained somewhat contained. Then, in September 2008, the other shoe dropped. The financial world changed dramatically after the collapse of several large financial institutions. Confidence was broken, and financial markets around the world plunged. It was the worst sell-off since the Great Depression.
Liquidity disappeared and volatility increased dramatically. Buyers became sellers. Many investors were forced to sell their investments across all asset classes at depressed prices. While managing liquidity was challenging last autumn, PSP managed to work through that time quite effectively.
It is important to note that this was not the first time in the past decade that we experienced such a large market movement that affected pension fund returns. In 2001 equity markets dropped approximately 18%. In our own fiscal year of 2004, equity markets and PSP Investment performance rose more than 25%.
There is no doubt that the current financial crisis exacerbated a serious problem that was already present in the pension industry--namely, the funding position of many pension plans. When looking for solutions to this problem, one has to look at the basic equation of a pension plan: net contributions plus investment returns--the assets--should equate the present value of the future benefits to be paid--the liabilities. If contribution levels or investment returns are too low, or if the liability structure changes, then we see a deficit developing.
I will concentrate on how investment managers try to mitigate the market volatility. In the case of PSP Investments, the investment policy is developed taking into account the liability structure of the pension plans, the desired contribution level of the stakeholders, and the perceived risk appetite of the sponsor and stakeholders. We are currently working with Treasury Board Secretariat and the Office of the Chief Actuary in developing a financing policy that would clarify these key elements.
How do we invest the net contributions? In an ideal world, the net contributions we receive could be invested in Canadian government inflation-linked bonds, and the risk associated would be zero. Unfortunately, this is not a feasible solution. Therefore, we need to invest in different market instruments with a higher risk-adjusted return. This is done through diversification. Since 2004, PSP Investments has diversified into more asset classes, including private investments, real estate, and infrastructure. Diversification has added significant value to PSP's investment performance over that period.
In fact, a review of long-term results that we had performed ourselves last year on the major funds in Canada indicated that private investment returns in real estate, private equity, and infrastructure all outperformed the total overall return of each of those funds, thus outperforming public markets.
PSP Investments is in a unique position. We have the liquidity and the flexibility to take a long-term view of our investments. Each year we receive a steady inflow of new funds of almost $4 billion. Net contributions are projected to remain positive until the year 2030. Because of this, we are less affected by the crisis than many other investors.
We are seeing distressed price levels for many assets, including solid infrastructure and real estate assets with good cashflows and built-in price increases. As patient buyers, we are well positioned to benefit from the drop in asset prices, which means that our stakeholders will ultimately benefit from today's distressed prices. That is good for our stakeholders, and that is ultimately good for the Canadian taxpayer. Of course, for us to succeed, we need markets and the global economy to succeed as well.
I would like to thank you for your attention and for giving us the opportunity to address you today.