Government Operations Committee on June 18th, 2013

[Martin Leroux]

It's a real return, and if you were to include inflation, and it's only inflation at 2%, that would mean a return of 6.1%.

[Jay Aspin, Conservative, Nipissing—Timiskaming, ON]

Okay, fine.

With that in mind, my questions are relative to asset mix or allocation and returns. You've indicated in your briefs that basically there are three classes of asset mix. There are equities, fixed investments, and real return investments. Are you able to break down, in terms of those asset classes, what the returns are?

[Martin Leroux]

Yes, historically, we provide this information in our annual report, but more importantly, for us to formulate our strategic asset allocation, we do develop expectations in terms of returns, but also in terms of volatility of returns, and that is basically what will drive how much will be allocated to each of those asset classes.

[Jay Aspin, Conservative, Nipissing—Timiskaming, ON]

Could you give us a flavour maybe of the various returns in those three asset classes?

[Martin Leroux]

Do you mean going forward?

[Jay Aspin, Conservative, Nipissing—Timiskaming, ON]

Yes.

[Martin Leroux]

In terms of expectations, bonds would be an easy one because there is some evidence that over time bond returns should be pretty close to their current yield, and the yield, as you know, is pretty low currently in the marketplace, so you should expect a return, given the yield environment, of about 3%.

In terms of equity, we do have a more favourable view toward the equity marketplace. We do expect that what we call the equity risk premium should be around 4% to 5%. That would be on top of fixed income, so it would be a return of 7% to 8%.

[Jay Aspin, Conservative, Nipissing—Timiskaming, ON]

In terms of the class asset real returns, you've mentioned there are such investments as real estate, infrastructure, renewable resources. How are you able to determine a rate of return on these? How do you get a fix on that? You can't look it up on a stock chart. How do you do that?

[Martin Leroux]

That's a good question.

There is definitely less available information for those asset classes, but we do have a thorough understanding of how their returns should behave over time, and that's enabling us to basically formulate views on how they would be.... Real estate is an example. Although there is limited information for some asset classes, such as infrastructure, for real estate there is more information, and we're about to have a clear view of what the return will be with those asset classes.

[Mark Boutet]

If I may, I'm not sure if I understood the question correctly. Are you looking for valuation going forward or valuation in terms of returns for the year?

[Jay Aspin, Conservative, Nipissing—Timiskaming, ON]

I'm looking for how you are able to determine a rate of return for those particular asset classes, like real estate, infrastructure, renewable resources. How do you determine how much you've made in a year?

[Mark Boutet]

You're talking about the rate of return. From that perspective, depending on the types of assets, we have external valuation committees where we review all of the different assets. These people are experts in the valuation field and they're external to PSP, so the returns of the private market asset classes are valued internally. They go to our finance and risk committee, and then they go to an external valuation committee. Following that, all of our returns are audited by the auditors of PSPIB, which are the Auditor General of Canada and Deloitte. All of our returns are audited.

[The Chair, NDP, Pat Martin]

Jay, you're over time. If you have a brief summary question—

[Jay Aspin, Conservative, Nipissing—Timiskaming, ON]

Is this subjective, then, because you're asking the opinions of some other people?

[Mark Boutet]

What we are doing is looking at indicative transactions in the market. For example, if we are present in real estate in New York City, we'll look at similar transactions in New York City. We'll have appraisals from experts in that field. It goes to different committees. There is a committee that is independent from PSP, and ultimately it is audited by the Auditor General of Canada.

[Jay Aspin, Conservative, Nipissing—Timiskaming, ON]

Okay.

Thank you, Mr. Chair.

[The Chair, NDP, Pat Martin]

Thank you, Jay.

That concludes the second round of questioning. We have time to get a little bit further into a third round.

I have two points for clarification. I don't believe I heard or saw in the report an estimate of the total amount of brokerage fees you might spend in an average year above and beyond your in-house costs.

Second, on the composition of your board of trustees, if you're moving to a 50-50 contribution rate, will you be moving to a 50-50 composition of the board, employer to employee? Even though some of us are of the view that all pensions are deferred wages of the employee, is that change in the composition of the board in the works? As well, give an idea of the broker fees paid for your investment.

[Kim Gowing]

I'll start first.

I'm not so sure that we're not mixing up two particular boards. There's the Public Service Pension Advisory Board, which is made up of employer and employee representatives and reports to the president. And there is PSPIB, which has a specific board appointed as governor-in-council appointees who are chosen through a nominating committee.

[The Chair, NDP, Pat Martin]

I meant the actual investment board that would be making investment decisions more than policy guidelines.

[Kim Gowing]

Yes, they'd be specific to the investments.

[Mark Boutet]

With regard to your question, we disclose in the financial statements.... I won't quote the actual financial note because I don't recall the number by memory, but I know it is in the financial statement. I would say that for the fiscal year 2012, the transaction costs, which would include brokerage fees for the public market and all of the transaction costs related to private market assets, were roughly $64 million.

[The Chair, NDP, Pat Martin]

Very good.

Is there talk about adjusting the composition of your board to have equal representation of employers and employees, or what is the composition of it now? If they're governor-in-council appointees, who is making these investment decisions on behalf of the employees currently?

[Mark Boutet]

I can try to answer that question.

If you look at the Public Sector Pension Investment Board Act, there is an independent nominating committee put in place, and that committee has the responsibility of proposing to the minister members to be directors of our board of directors. Ultimately, the minister would go through the process of accepting or not accepting, and asking the nominating committee to find other people and going through the process of the governor-in-council appointments.

[The Chair, NDP, Pat Martin]

Are the directors trustees in the sense that they have a fiduciary obligation that trustees of benefit plans have, or are they a board of directors as are members of a corporate board?

[Mark Boutet]

They have the fiduciary duties of a board of directors. We are not a trust.