Thank you and good morning.
My name is Martin Leroux. I am the Vice-President of the Policy Portfolio and Asset Liability Management for PSP Investments—known more formally as the Public Sector Pension Investment Board. Joining me is my colleague Mark Boutet, Vice-President of Communications and Government Relations.
We are pleased to appear before the committee today to answer your questions. I will start with a quick overview of who we are and what we do, but I will be brief to leave as much time as possible for your questions.
PSP Investments is an arm's-length crown corporation that was established back in 2000 to invest the amounts transferred by the Government of Canada for the funding of the post-2000 obligations of the pension plans of the Public Service of Canada, the Canadian Forces, and the RCMP. Since March 2007 we have also invested amounts for the reserve forces pension plan. With more than 400 employees and $64.5 billion in assets under management as of March 31, 2012, PSP Investments is one of the largest pension fund managers in Canada. We've experienced a very rapid growth in assets fuelled by strong positive inflows of about $4 billion to $5 billion over the past few years, and also by our strong investment returns. Our assets under management are expected to exceed $450 billion by 2035.
Our mandate is to manage the funds in the best interest of the contributors and the beneficiaries of the plan and to invest with a view of achieving a maximum rate of return without undue risk of loss, having regard for the funding policies and requirements of the plans and their ability to meet their financial obligations.
More simply stated, this means that PSP Investments' mandate is to ensure that, given the current level of contributions, we earn sufficient return, so that there will be enough assets to cover pension benefits—that is, in the absence of other factors affecting the funding of the plans.
Currently, the Chief Actuary has determined that this requires achieving a 4.1% rate of return after inflation.
One can appreciate that achieving a 4.1% return after inflation is not risk-free. There is no single risk-free asset class or investment strategy that would deliver such a return year after year. This is particularly true in today's low interest rate environment, so at least a minimum amount of investment risk must be taken in order to achieve the desired level of return. In other words, PSP Investments must invest in the financial market to achieve its legislated mandate.
Let me give you an overview of how we achieve that. The blueprint for how we invest in the financial market to achieve the 4.1% rate of return is what we call the policy portfolio. It is basically our long-term strategic asset allocation. It dictates where every dollar we receive will be deployed in the market—in Canadian equity, foreign equity, bonds, real estate, and so on. This asset allocation strategy is the key determinant of risk and returns over time.
You will see that our current policy portfolio goes beyond public asset classes like stocks and bonds, and we do include a significant allocation to less liquid private asset classes, namely, real estate, private equity, infrastructure, and renewable resources. Those asset classes involve ownership interests in assets that do not trade on public exchanges, such as an equity stake in private companies or in an office tower.
Why are we doing this? If you look at the way the obligations of the plan are funded, we expect PSP Investments to continue receiving strong and positive inflows of capital until 2030. In other words, we won't need to sell assets to pay benefits for a long period of time. This puts us in a unique position where we can have a very long-term view with respect to our investments. It thus provides us with the opportunity to invest in assets that are private and less liquid.
Of course, we expect to be rewarded for doing so by receiving some excess returns or “illiquidity premiums”, which investors typically demand for taking on illiquidity risk—risk that we can afford given our special circumstances.
We also invest in what we call “real return” asset classes—such as real estate, infrastructure and renewable resources. Why? Because, in addition to capturing illiquidity premiums, these types of assets are considered a good match for the inflation-sensitive nature of the plans' liabilities.
As a result, the policy portfolio is expected to provide for a better return than a portfolio invested only in public markets such as bonds and equities. It is also expected to provide a better match with the pension obligations, the pension liabilities, and how they are funded, thereby reducing the risk associated with the funding of the plans and thus contributing to their sustainability.
You may ask how we have done so far. Have we achieved the actual rate of return of 4.1% after inflation? Since we started our diversification strategy of investing in less liquid private assets back in 2004, PSP has recorded a compounded rate of return of 7.6% after expenses. This compares to an actual rate of return of 6.2% over the same period. That is the actual rate plus inflation. So we have exceeded the actual rate of return, despite the fact that this period included one of the worst market meltdowns since the Great Depression.
This concludes my remarks today.
We look forward to your questions.