Good afternoon.
My colleague Martin Leroux and I are pleased to appear before the committee today as you examine chapter 1 of the recent Auditor General's report.
The activities of PSP Investments, more formally known as the Public Sector Pension Investment Board, were not within the scope of the Auditor General's report but we appreciate this opportunity to answer any questions you may have on our activities.
I will keep my remarks brief to leave us as much time as possible for your questions.
PSP Investments is an arm's-length crown corporation that was established 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, the RCMP, and since March 1, 2007, the Reserve Force Pension Plan.
PSP Investments' statutory mandate is to manage the funds in the best interest of the contributors and beneficiaries and to maximize investment returns without undue risk of loss, having regard to 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 returns so that there will be enough assets to cover pension benefits.
It is important to note, however, that factors other than investment performance can affect the funding status of the plans. For example, an increase in life expectancy, as mentioned by Jean-Claude, will increase the liabilities of the plans.
Currently the Chief Actuary has determined that this requires achieving a 4.1% rate of return after inflation over the long term. One can appreciate that achieving such a return objective is not risk free. In fiscal year 2004 we adopted a portfolio diversification strategy that goes beyond public assets like stocks and bonds to include less-liquid private asset classes such as real estate, private equity, infrastructure, and renewable resources. We are able to invest in less liquid assets because we are currently receiving between $4 billion and $5 billion every year, and it is projected that PSP will not be required to pay pension benefits until the year 2030. We can therefore have a long-term view.
Of course, we expect to be rewarded for doing so by achieving some excess returns of illiquidity premiums, which investors typically demand for taking on illiquidity risk. Our overall strategy is expected to provide for better returns and a higher likelihood of achieving the target actuarial rate of return.
So how does our performance so far compare to the actuarial rate of return? For the 10-year period since the adoption of our diversification strategy, from April 1, 2003 to March 31, 2013, PSP Investments has recorded a compound rate of return of 6.1% after expenses and inflation. This compares to the 4.1% actuarial rate of return. In other words, on an annualized basis we have exceeded the objective by 2% per year over 10 years.
This concludes my remarks today. We look forward to your questions.
Thank you.