Pension Connection your 2013 ANNUAL REPORT Working in partnership to secure your pension income
Pension Connectionyour
2 0 1 3 A n n u A l R e p o R t
Working in partnership to secure your pension income
2013 ANNUAL REPORT
ContentsProfile 1
Financial&OperationalHighlights 2
TheBoard 4
ReportoftheBoardChair 5
ReportoftheChiefExecutiveOfficer 7
ManagementDiscussion&Analysis 9
PlanLiabilitiesandFundingStatus 9
InvestmentManagement 14
InvestmentPerformance 19
InternalControlOverFinancialReporting 21
ChangeinNetAssets 22
PlanMemberServices 23
CompensationDiscussion&Analysis 28
2013ATRFFinancials 36
11-YearFinancialandStatisticalReview 56
CorporateDirectory 57
Table of
2013 ANNUAL REPORT 1pRoFIle
Profile
TheAlbertaTeachers’RetirementFundBoard(ATRF) isacorporationestablishedundertheTeachers’ PensionPlansAct.
ATRFisthetrustee,administratorandcustodianoftheassetsoftheTeachers’PensionPlanforallAlbertateachersemployedinschooljurisdictionsand charterschools.
ATRFisalsothetrustee,administratorandcustodian ofthePrivateSchoolTeachers’PensionPlanforteachersemployedbythoseprivateschoolsthat haveelectedtojointheplan.
TheplansaredefinedbenefitpensionplansregisteredundertheIncomeTaxActandaresponsoredbytheGovernmentofAlbertaandtheplanmembers,who arerepresentedbyTheAlbertaTeachers’Association.Theseplansponsorsareresponsibleforchangesto plandesign,benefitsandfunding,andshareinplangainsandlosses.
TheTeachers’PensionPlancovers:
• 38,099activeteachers;
• 24,652retiredmembers;and
• 12,149inactiveteachers.
ThevalueoffundingliabilitiesrelatingtoserviceaccruedsubsequenttoAugust31,1992bymembers oftheTeachers’PensionPlanexceedsthefundingvalueofassetsby$2.859billion.
ThePrivateSchoolTeachers’PensionPlanhas adeficiencyof$9.096millionandcovers:
• 247activeteachers;
• 185retiredmembers;and
• 215inactiveteachers.
Total Membership Profile
33% Retired Members
16% Inactive Teachers
51% Active Teachers
16%
33%
51%
2 2013 ANNUAL REPORT FINANCIAL&OPERATIONALHIGHLIGHTS
HiGHliGHtsFinancial & Operational
Atrf finAnCiAl Position At AUGUst 31
$Thousands
2013 2012
Investments
FixedIncome $ 2,635,188 $ 2,464,446
PublicEquities 4,626,692 3,821,766
PrivateCompanies 591,673 358,590
Infrastructure 278,243 186,940
RealEstate 446,019 334,913
NetInvestmentRelatedAssets 2,049 24,178
8,579,864 7,190,833
OtherAssets 1,163 3,196
NetAssetsAvailableforBenefits 8,581,027 7,194,029
ActuarialValueofAccruedPensionObligations 9,406,344 9,108,721
Deficiency $ 825,317 $ 1,914,692
ACtiVitY DUrinG YeAr enDeD AUGUst 31
$Thousands
2013 2012
BenefitandInvestmentOperations
InvestmentEarnings $ 1,024,552 $ 511,967
InvestmentOperationExpenses (33,150) (23,316)
991,402 488,651
NetContributions 684,381 632,878
BenefitsPaid (283,328) (257,478)
MemberServiceExpenses (5,457) (5,094)
395,596 370,306
IncreaseinNetAssets 1,386,998 858,957
IncreaseinAccruedPensionObligations (297,623) (814,356)
DecreaseinDeficiency $ 1,089,375 $ 44,601
2013 ANNUAL REPORT 3FINANCIAL&OPERATIONALHIGHLIGHTS
59% Return Enhancing GlobalEquity 37.5% CanadianEquity 15.0%PrivateEquity 6.5%
33.5% Fixed Income UniverseBonds 20.0% Long-TermBonds 11.5%MoneyMarket 2.0%
7.5% Inflation Sensitive RealEstate 4.5% Infrastructure 3.0%
Asset Mix - Post-1992 Period teachers’ Pension Plan atAugust31,2013
59%
33.5%
7.5%
Key Accomplishments – 2012-13
• Metorexceededallserviceturnaroundbenchmarksforourservicestoretired,activeandinactive planmembers
• Receivedveryhighapprovalratingsfrommembersontheplanmemberandretiredmembersurveys
• Completedacomprehensiveasset-liabilitymodellingstudyandrevisionstothefund’s targetpolicyassetmixandinvestmentpolicy
• Implementedthecoresoftwarecomponents ofthenewprivateinvestmentsystem
• Redesignedandimplementedanewplanmemberwebsite“MyPension”andanewcorporatewebsite
• Successfullyimplementedthenewplanmemberidentificationnumbersystem
• Continuedfurtherenhancementstosystems,processes,controlsandreportingthatwill contributetoATRF’songoingsuccess
• Recognizedashavingoneofthelowestplan memberadministrativeservicecostsinthe industryat$87permember
Fund Results
• FortheyearendedAugust31,2013,thefundreturned14.0%exceedingthefund’sbenchmark of11.5%by2.5%
• Overthepast15yearstheTeachers’PensionPlaninvestmentreturnwas6.3%,1.3%shortoftheinvestmentobjectiveof7.6%.TheannualizedrateofreturnforthePrivateSchoolTeachers’PensionPlanoverthesame15-yearperiodhasbeen6.0%
• Overthese15years,theratesofreturnoninvestmentswereimpactedbyasevereequitymarketdownturnandfinancialturmoilin2000-02andin2008-09.Theamortizationofthedeficienciesresultingfromthelowmarketreturnsandthereductioninthefundingdiscountratehave beenthelargestcontributorstotheincrease infundingcontributions
net Assets of Atrf ($Billions)
5.537
8.581
6.335
2013
2012
2011
2010
2009
7.194
4.956
teachers' Pension PlanPost-1992 Period
8.071
2.85910.930
FundingLiabilities 10.930
FundingValueofAssets 8.071
FundingDeficiency 2.859
atAugust31,2013 ($Billions)
Private school teachers' Pension Plan
FundingLiabilities 48.582
FundingValueofAssets 39.486
FundingDeficiency 9.0969.09648.582
39.486
atAugust31,2013 ($Millions)
4 2013 ANNUAL REPORT THEBOARD
From left to right: GregMeeker,HarryBuddle,KarenElgert,LowellEpp,SandraJohnston,GeneWilliams.
BoArDThe
GREG MEEKER AssistantPrincipalatRossSheppardHighSchoolinEdmonton; ChairoftheBoardandViceChairoftheAuditCommittee.
HARRY BUDDLE Retired-PresidentandCEOofCapitalCitySavings-ServusCreditUnion; ViceChairoftheInvestmentCommitteeandFinanceandPlanningCommittee.
KAREN A. ELGERT Principal,EcoleQueenElizabethJr.High,WetaskiwinRegionalSchoolDivision; ViceChairoftheHumanResourcesandCompensationCommittee; memberoftheInvestmentCommittee.
LOWELL K. EPP ExecutiveDirector,CapitalMarketswithAlbertaTreasuryBoardandFinance; ViceChairoftheBoard;ChairoftheInvestmentCommitteeandAuditCommittee.
SANDRA JOHNSTON Coordinator,TeacherWelfarewithTheAlbertaTeachers’Association; ChairoftheFinanceandPlanningCommittee; memberoftheAuditCommittee.
GENE WiLLiAMS ActingAssistantDeputyMinister,Peopleand ResearchDivisionwithAlbertaEducation; ChairoftheHumanResourcesandCompensationCommittee.
2013 ANNUAL REPORT 5REPORTOFTHEBOARDCHAIR
GregMeeker
BoArD CHAirReport of the
Ensuringthelong-termfundingsustainabilityofdefinedbenefitpensionplansisamajorfocusofallpensionplanboards,thesponsorsofplansandthecontributorstothoseplans.Thiskeyissuehasbecomemorechallengingoverthepastdecadeduetothelowinterestrates,weakmarketreturnsandincreasinglongevityofplanmembers.Almostallplanshaveincreasedcontributionrates.Someplanshavedecreasedbenefits.Someplanshavechangedbenefits,sothattheywillbepaidonlyiftheplanisfullyfunded.
Focus on Meeting the Pension Promise
OurprincipalobjectiveistosecurethepensionsofAlbertateachers,whichmeansthatourmainfocus isonplanfundingandensuringthatsufficientassetsareinplacetomeetfuturepensionpayments. TheplanbenefitsthataretobeprovidedbyATRFaresetbytheplansponsors,TheAlbertaTeachers’AssociationandtheGovernmentofAlberta.TheATRFBoard’sresponsibilityistoensurethatthesebenefitsarefundedwithintheprescribedlegislativeprovisions.TheBoardhasonlyoneoptionavailablewhendeficienciesoccur,andthatistoraisecontributionrates.Thenecessarycontributionrateincreaseshavebeenimplementedtoensurethelong-termfundingsustainabilityofplanbenefitsandthefundedpositionsoftheplanshaveimprovedoverthepastyear.
UndertheTeachers’PensionPlan,contributionrateshavebeenincreasedtoensurethatthe$2.9billiondeficiencyisfullyfundedwithinthe15-yearperiodrequiredbylegislation.Thelimitingofshorter-termsalaryincreases,pursuanttotheAssurance for Students Act,producedexperiencegainsforplanliabilitiesthatoffsetotherexperiencelosses. Inaddition,ourrecentinvestmentresultshave beenstrong,withthefundreturning14.0%inthe pastfiscalyearendedAugust31,2013.Consequently,
thepreviouslyanticipatedadditionalcontribution rateincreaseofalmost1%in2015nolonger appearsnecessary.
SimilarlyforthePrivateSchoolTeachers’PensionPlan,contributionrateshavebeensettoensuretheplan’s$9.1milliondeficiencyisfundedwithin15years. Theprojectedcontributionrateincreasein2015 of2%isunlikelytoberequired.
Action to Ensure Longer-Term Funding Sustainability
Inthe2011-12fiscalyear,wecompletedacomprehensivereviewofthefundedpositionandfundingpoliciesoftheplans.Thekeyresultofthisreviewwasthedecisiontoimprovethefundingmarginforpotentialfutureadverseplanexperiencebydecreasingtheliabilitydiscountrateto6.25%peryear.
Inthepastfiscalyear,weconductedadetailedasset-liabilitymodellingstudywiththeInvestmentCommittee,management,andexternalfundingandinvestmentadvisors.Thepurposeoftheasset-liabilitymodellingstudywasto:
• seektheoptimalpolicyassetmixofthefundinvestmentsfortheplansgiventhefunding policiesandtheunderlyingliabilitystructures;
• minimizetheprobabilitythatthefundingcontributionratemayexceedamaximumthreshold;and
• maintainanacceptableaveragelong-termcontributionrate(i.e.maximizeinvestmentreturnwithintherisktoleranceoftheplansponsors).
Followingdetailedmodelling,stressanalysisandtesting,theresultsoftheasset-liabilitymodellingstudyshowedthatsomemodestchangestothetargetpolicy
6 2013 ANNUAL REPORT REPORTOFTHEBOARDCHAIR
assetmixhadthepotentialtoofferamorefavourablerisk-returnprofilefortheplansinthefuture.Thetargetpolicyassetmixwillbechangedtoaddanallocation toabsolutereturnstrategies.Thesestrategieswill betargetedtoimprovediversificationbyofferingreturnsthathavelittlecorrelationtoATRF’sothermajorassetclasses.Inaddition,ourCanadianandglobalpublicequitieswillbeconsolidatedintoa singleassetclassandexpandedwiththeaddition ofanemergingmarketcomponent.
TheBoardcontinuestomonitorthefinancialpositionoftheplansonanongoingbasis.Wecarefullyexaminethefundingstructureoftheplans,andthevariousfundingassumptionswithmanagementandATRF’sactuary.Wealsostresstestthefundingassumptionsandmakechangestotheselong-termassumptionsasrequired.Inaddition,weprovidetheplansponsorswithdetailedinformationonthecurrentfundedstatusoftheplanandonforward-lookingfundingchallengesthatmayarisefortheplans.
Acknowledgements
IcongratulateandthanktheemployeesofATRFfortheirsuccessinmeetingtheneedsoftheplanmembersandothercustomers,inthesuperiorvalue-addedinvestmentperformanceandintheircost-effectiveexecutionoftheongoingbusinessplanobjectives.Iwishtothanktheexternalmembersof theInvestmentCommitteefortheircounselonour keyinvestmentandfundingissues,andintheireffectivecontributiontoourrecentasset-liabilitymodellingstudy.IwouldalsoliketorecognizemyfellowBoardmembersfortheirongoingfocusonenhancingcorporategovernanceandeffectiveoversightofATRFoperations.
GregMeeker
BoardChair
TheBoardiscommittedtogoodgovernanceandbelievesthatongoingimprovementinthecorporategovernanceofATRFwillleadtoenhancedlong-termvalueforplanmembersandsponsors.OurStatementofCorporateGovernancePracticesisfoundonourwebsite.Gotowww.atrf.com>CorporateGroup>ATRFGovernance>CorporateGovernance.
2013 ANNUAL REPORT 7REPORTOFTHECHIEFExECUTIVEOFFICER
EmilianGroch
Report of theCHief eXeCUtiVe offiCer
ATRFachievedongoingstrongperformanceinallareasinthe2012-13fiscalyear.Investmentreturnsexceededthefund’sbenchmarkandthefundingobjectiveoftheplans;planmemberserviceturnaroundbenchmarksweresurpassed;highratingswerereceivedfromplanmembersurveys;plannedgrowthinATRFoperationswasimplemented;and,newbusinessplaninitiativesweresuccessfullycompleted.
TheATRFfundreturnedaverystrongpositivereturnof14.0%inthepastyear.Thisrateofreturnexceededthefund’s2012-13fiscalyearbenchmarkby2.5%,surpassedthefundingrate-of-returnobjectiveoftheplansandadded$172millioninadditionalfundgrowth.Overthepastfouryears,theinvestmentportfoliooftheATRFfundhasreturnedanannualaveragereturnof9.1%ascomparedtothe7.9% fundbenchmark,providinganaveragevalue- addedreturnof1.2%peryear.
However,thesepositiveratesofreturnhavenotfullymitigatedtheimpactsthattwosevereequitymarketdownturnshavehadonratesofreturnoverthepast13years.ThefundoftheTeachers’PensionPlanhasreturnedonaverage4.6%eachyearsinceSeptember2000,whichis2.9%peryearshortofthetargetedfundingrate-of-returnobjective.Thisandtheimpactsfromtheverylowinterestratesandincreasingplanmemberlongevityhaveresultedinsubstantialfundingshortfalls.TheTeachers’PensionPlanhasafundingdeficiencyof$2.9billionasatAugust31,2013,whilethePrivateSchoolTeachers’PensionPlanhasafundingdeficiencyof$9.1million.Thesedeficienciesarebeingfundedbyadditionalcontributionsfromactiveteachersandtaxpayers/employersover15years.
Service to Plan Members
Resultsfromthesurveysofactivemembers,retiredmembersandnewlyretiredmembersinthepastyearwereverypositive,withhighratingsreceivedinallareas.Wehaveserviceturnaroundbenchmarksforallserviceprocessesandexceededthesebenchmarksin allareaslastyear.Inaddition,ATRFcontinuestohave averycost-effectivestructurewithindustry-leadingplanmemberservices,andcoststhatarealmosthalfoftheaveragecostofagroupofsimilarCanadianpension planorganizations.
Weredesignedandimplementedanewplanmemberandcorporatewebsite.Onlineserviceenhancementsforplanmembersregisteredforthesecuredplanmemberwebsite,MyPension,wereputinplace. Also,anewplanmemberidentificationnumbersystemwaslaunchedsuccessfullyforallplanmembersandATRFsystems.Basedonfeedbackreceivedfromplanmembers,andourreviewofindustrybestpractices, wewillcontinuetomakefurtherenhancementsto planmemberservicesandcommunications.
Ongoing Fund Growth
Wecontinuetoimplementourplanstobuildandmaintainasuccessful,cost-effectiveinvestment programfortheassetsofthefund,includingasignificantcommitmenttoutilizingcost-effectiveinternalresources.Weweresuccessfulinaddingadditionalstaff,particularlyinbuildingthe investmentprogramsforinfrastructure,realestateandprivateequity.Wealsoimplementedtherequired
8 2013 ANNUAL REPORT REPORTOFTHECHIEFExECUTIVEOFFICER
administrative,controlandreportingfunctionstosupportbest-practiceoperationsoftheseilliquid assetclasses,includingtheimplementationofthe coresoftwarecomponentsofanewprivateinvestmentsystem.Weanticipateaddingamodestnumberofadditionalstaffinthe2013-14fiscalyear.
TheinvestedassetsoftheTeachers’PensionPlanrepresentplanliabilitiesforpensionableserviceafterAugust1992makingtheplanaveryyoungplanwithpositivecashflowforthenext15years.Assetsundermanagementareprojectedtoreach$15billioninfiveyears.Ourfocusforthenextyearwillbeininvestingthesegrowingfundassets,identifyinginvestmentopportunitiestogrowourinfrastructure,realestateandprivateequityassetclasses,andimplementing ournewallocationstoabsolutereturnstrategies, asnotedintheReportoftheBoardChair.
Acknowledgements
IwanttocongratulatethestaffofATRFforanotherstrongyearofperformanceandforsuccessfullymeetingourbusinessplans.Imustalsoacknowledgetheirsuccessful,ongoingcommitmenttoserving theneedsoftheplanmembersandourothercustomers,andinworkingtosecurethepensions ofAlbertateachers.
IwishtothanktheBoardmembersandthemembersoftheInvestmentCommitteefortheirongoing supportofourbusinessplaninitiatives,theirsoundadviceandtheirfocusonthelong-termfundingsustainabilityoftheplans.
EmilianGroch
ChiefExecutiveOfficer
2013 ANNUAL REPORT 9MANAGEMENTDISCUSSION&ANALYSIS
AnAlYsisManagement Discussion &
ThissectionoftheAnnualReportprovidesadetailedoverviewfrommanagement’sperspectiveoftheliabilities,assets,investmentsandserviceactivitiesofATRFthatwillassistreadersinreviewingATRF’sperformanceandfinancialposition.Itcontainsforward-lookingstatementsreflectingmanagement’sobjectives,outlook,andexpectationsthatinvolverisksanduncertainties.Ouractualresultswilldifferfromthoseanticipated.
PLAN LiABiLiTiES AND FUNDiNG STATUS
TheTeachers’PensionPlanandthePrivateSchoolTeachers’PensionPlanhaveuniqueliabilitystructuresandfundingarrangements.Theliabilitiesrelatetothreedistinctcomponents:
• thepre-September1992benefitperiodfor theTeachers’PensionPlan(Pre-1992Period);
• thepost-August1992benefitperiodfortheTeachers’PensionPlan(Post-1992Period);and
• thePrivateSchoolTeachers’PensionPlan.
Teachers’ Pension Plan: Pre-1992 Period
TheliabilitiesofthePre-1992PeriodconsistoftheactuarialvalueoftheaccruedPre-1992Periodpensionbenefits.Therearenofundassetsinrespectoftheseliabilities.TheGovernmentofAlbertaguaranteesthepaymentofbenefitsrelatedtothePre-1992PeriodandisprovidingATRFsufficientfundseachmonthtopaythesebenefitsastheybecomedue,andprovidedATRFatotalof$440millioninthepastfiscalyear.
Teachers’ Pension Plan: Post-1992 Period
ThecostofbenefitsbeingearnedforserviceafterAugust1992,includingthe60%cost-of-livingpensionadjustmentprovision,issharedequallybetween activemembersandtheGovernmentofAlberta. Activemembersareresponsiblefortheadditional 10%cost-of-livingpensionadjustmentprovision.Fundingdeficienciesundertheplanareamortized byadditionalcontributionsfromactivemembers andtheGovernmentofAlbertaovera15-yearperiod. SincePost-1992Periodbenefitsarenotguaranteediftheplanisterminated,theprimaryobjectiveistoensuretherearesufficientassetstopayallPost-1992Periodbenefits.
Funding Policy
Thefundingpolicysetsouttheprinciplesandguidelinesgoverningthefundingrequirements ofthebenefitsinrespectofserviceunderthe planinaccordancewiththeplan’slegislationandtheobjectivesoftheBoard.TheoverallobjectiveistoensurethefundingsustainabilityofthePost-1992Periodplanoverthelongtermandtoensuretheprovisionofbenefitstoplanmembersand theirbeneficiaries.
TheBoardandmanagementreviewthefundingpolicyforthePost-1992PeriodTeachers’PensionPlanannually.EffectiveSeptember1,2012,weincreasedthemarginforadverseplanexperience,bydecreasingtheplan’sliabilitydiscountrateto6.25%peryear,tomoreeffectivelymanageyear-to-yearvolatilityandtoenhanceintergenerationalfundingequity.TheresultingincreaseinplanfundingcontributionratescameintoeffectSeptember1,2013.
10 2013 ANNUAL REPORT MANAGEMENTDISCUSSION&ANALYSIS
Thekeyelementsofthecurrentfunding policyareasfollows:
• Theprimaryobjectiveisbenefitsecurityfocusedonmaximizingthelikelihoodofattainingandmaintainingaplanfundedratioofatleast100%.Thisisacriticalcomponentinthefundingsustainabilityoftheplan,andisenhancedbythegovernancestructureofATRFandtheextremelylowlikelihoodoftheplanwindingup.
• Contributionratestabilityisakeysecondaryobjective.Thecostoftheplanshouldbesustainableovertimeandreflectalong-term viewoftheplan’sassetsandliabilities.Theplanshouldbefundedtoensurethatthelevelofrequiredcontributionsremainsrelativelystablewithoutunduefluctuations,anddonotincrease tounaffordablelevels.
• Basedontheplan’scost-sharingarrangement,itisexpectedthat,totheextentpossible,eachgenerationofactivemembersandtaxpayerswillfundthebenefitsaccruingforthatgenerationofactivemembers.
• Theactuarialliabilityoftheplanisdeterminedunderbothabest-estimate-assumptionbasis, usingmanagement’sbest-estimateoffutureevents,andafunding-assumptionbasis.Underthefunding-assumptionbasis,management’sbest-estimateassumptionforthelong-terminvestmentrateofreturnmaybeadjustedforaprovisionforpotentialadverseplanexperience.
• Thefunding-assumptionbasisisdeterminedbytheplan’sactuary,inconsultationwithATRF,toachievethefundingobjectives.Thefunding-assumptionbasisissetsuchthattheliabilitiesfallwithinarangeof100%and125%oftheliabilitiesbasedonthebest-estimate-assumptionbasis,withatargetrangeof110%to115%ofthebest-estimateliabilities.
• Toachievestabilityincontributionrates, thefunding-assumptionbasiscanbeadjustedtoachieveliabilitiesnotlessthan100%ofbest-estimateliabilitiesinordertoreducedeficitswheretheplanandfundareundermoreextremefinancialpressures,ortoachieveliabilitiesofupto125%ofbest-estimateliabilities,therebyprovidingareserveforfutureadverseplanfundingexperience.
Funding Study Results
AnactuarialfundingstudyofthePost-1992PeriodTeachers’PensionPlanwascompletedasatAugust31,2013.Thestudy’sassumptionswerethesameasthoseusedinthefundingvaluationasatAugust31,2012 withthefollowingexceptions:
• minoradjustmentsweremadetomortality,retirementandterminationrateassumptionstoreflecttheresultsofa2013studyoftheactualexperienceofthoseeventsundertheplan;
• shorter-termsalaryincreaseexpectationswererevisedtoalignwiththelimitingofsalarygrowthofplanmemberspursuanttotheAssurance for Students Act;and
• thepaceofimprovementsinfuturemortality rateswasacceleratedtoalignwithrecent industryresearch.
ThefollowingtableoutlinestheresultsofthefundingstudyasatAugust31,2013.
1Theplanusesanactuariallyacceptedpracticeofsmoothingmarketreturns overafive-yearperiodtomoderateshort-termadjustmentstocontributionrates. Thispracticeisintendedtoevenouttheimpactfromthevolatilityofmarketreturnsontheplan’sfundedstatus.AsatAugust31,2013,theplan’sfundingvalueofnetassetsavailablewas$469millionlowerthanthefairvalueofnetassetsavailable(2012:$261millionhigher).
teachers’ Pension Plan Post-1992 PeriodatAugust31,2013 ($Billions)
FundingLiabilities 10.930
FundingValueofAssets1 8.071
Funding Deficiency 2.859
Thefundingstudyshowedthecontribution ratesthatwereimplementedSeptember1,2013 remainadequate.
1YMPEistheYear’sMaximumPensionableEarningsusedbytheCanadaPensionPlan($52,500in2014).
teachers’ Pension PlanContribution rates September2013 (%ofSalary)
Teachers
TotalTeacherContribution 13.46
SalaryuptoYMPE1 11.44
SalaryaboveYMPE 16.34
Government 12.65
2013 ANNUAL REPORT 11MANAGEMENTDISCUSSION&ANALYSIS
Thecurrenttotalplancontributionrateis26.11%oftotalteachersalaries,consistingofacurrentservicecostof16.2%ofsalariesandtotaldeficiencycontributionsof9.91%ofsalaries.Thetotalplandeficiencycontributionswilldecreaseoverthenext 14yearsastherespectivedeficienciesareamortizedovertheirrespective15-yearfundingperiodsas showninthechartbelow.
9.9%
8.2%
7.1%
6.9%
6.0%
3.8%
2.7%
0.0%
Estimated Total Deficiency Contribution Rates2013to2027
2013-16
2017-18
2019-20
2024-25
2021-22
2026
2023
2027
Plan Funding Challenges
Akeyassumptioninthefundingoftheplanisthatthefundwillearnanaverageinvestmentreturneachyearequaltothediscountrateusedforfundingpurposesnetofinvestmentcosts.Actualinvestmentreturnsyeartoyearcanbequitevolatileandabsentanyadjustmentwouldleadtofrequentcontributionrateadjustments.Todampentheimpactofvolatilemarketreturnsontheplan’sfundedstatus,theplanusesanactuariallyacceptedpracticeofsmoothingmarketreturnsoverafive-yearperiod.Thispracticeproducesafundingvalueofplanassetsthatinanygivenyearcanbehigherorlowerthanmarketvalue.Overanyfive-yearperiod,however,thetwovaluesareexpectedtoconvergetothesameamount.
AsatAugust31,2012,thefundingvalueofassets was$261millionhigherthanmarketvalue.This meantthatmarketreturnswouldhavehadtoexceedtheassumedfundingdiscountrateby$261million
overthecourseofthefollowingfiveyearsinorder toavoidacontributionrateincreaseofabout1% ofsalary.However,duetotherecentstrongpositive fundreturns,theplanhadfundingvalueofassetsof $469millionlessthanmarketvalueasatAugust31,2013.Thisnowplacestheplaninapositionthatmarketreturnsmaybe$469millionlessthanassumedfortheplan’sfundingneedswithnoresultingimpact oncontributionrates.
Wealsocarriedoutvariousstresstestsonourlong-termfundingassumptions.Forexample,ifthefuturelong-termrateofreturnoninvestmentsisonly5.75%,totalplancostwouldincreasebyafurther3.78%ofteachersalariesto29.89%fromthe26.11%totalplanfundingcostasofSeptember2013.
Best-Estimate Valuation Results
Weconductabest-estimateactuarialvaluationforthepurposesofthefinancialstatements.Thisbest-estimatevaluationusesamark-to-marketapproachthatvaluesplanliabilitiesandassetsbasedoncurrentmarketvalues.Ittherefore,doesnotusethe6.25%discountrateappliedinthefundingvaluation,asthefundingvaluationincludeda1.00%provisionforpotentialadverseplanexperienceinitsdiscountrate.Asaresult,thebest-estimatevaluationwasconductedusinga7.25%best-estimatediscountrate.
Theactuariallyacceptedpracticeofsmoothingmarketreturnsoverafive-yearperiodusedinthefundingvaluation,cannotbeutilizedforthebest-estimateactuarialvaluationasthefairvalueofnetassetsmustbeused.Accordingly,theassetandliabilityamountsofthebest-estimateactuarialvaluationdifferfromthoseinthefundingvaluation.
Thetablebelowoutlinestheresultsofthe best-estimatevaluationasatAugust31,2013.
teachers’ Pension Plan Post-1992 PeriodatAugust31,2013 ($Billions)
Best-EstimateLiabilities 9.365
FairValueofAssets 8.540
Deficiency 0.825
12 2013 ANNUAL REPORT MANAGEMENTDISCUSSION&ANALYSIS
Private School Teachers’ Pension Plan (PSTPP)
Thecostofbenefitsbeingearned,includingthe60%cost-of-livingpensionadjustmentprovision,issharedequallybetweenactivemembersandprivateschoolemployers.Activemembersareresponsiblefortheadditional10%cost-of-livingpensionadjustmentprovision.Fundingdeficienciesundertheplanareamortizedbyadditionalcontributionsfromactivemembersandtheprivateschoolemployersovera 15-yearperiod.Sincebenefitsarenotguaranteed iftheplanisterminated,theprimaryobjectiveistoensuretherearesufficientassetstopayallbenefits.
PSTPP Funding Policy
TheBoardhasalsoadoptedafundingpolicyforthePSTPPthatsetsouttheprinciplesandguidelinesgoverningthefundingrequirementsofthebenefitsinrespectofserviceundertheplaninaccordancewiththeplan’slegislationandtheobjectivesoftheBoard.Theoverallobjectiveistoensurethesustainabilityoftheplanoverthelongtermandtoensuretheprovisionofbenefitstoplanmembersandtheirbeneficiaries.EffectiveSeptember1,2012,weincreasedthemarginforadverseplanexperience,bydecreasingtheplan’sliabilitydiscountrateto6.25%peryear,tomoreeffectivelymanageyear-to-yearvolatilityandtoenhanceintergenerationalfundingequity.TheresultingincreaseinplanfundingcontributionratescameintoeffectSeptember1,2013.
PSTPP Funding Study Results
AnactuarialfundingstudyofthePSTPPwascompletedasatAugust31,2013.ApartfromtheexceptionsoutlinedearlierforthePost-1992PeriodTeachers’PensionPlan,thestudy’sassumptionswerethe sameasthoseusedinthefundingvaluationasatAugust31,2012.
Thefollowingtableoutlinestheresultsof thefundingstudyasatAugust31,2013.
Private school teachers’ Pension PlanatAugust31,2013 ($Millions)
FundingLiabilities 48.582
FundingValueofAssets1 39.486
Funding Deficiency 9.096
1 Theplanusesanactuariallyacceptedpracticeofsmoothingmarketreturnsover afive-yearperiodtomoderateshort-termadjustmentstocontributionrates. Thispracticeisintendedtoevenouttheimpactfromthevolatilityofmarketreturnsontheplan’sfundedstatus.AsatAugust31,2013,theplan’sfundingvalueofnetassetsavailablewas$2.021millionlowerthanthefairvalueofnetassetsavailable(2012:$2.287millionhigher).
Thefundingstudyshowedthecontribution ratesthatwereimplementedSeptember1,2013remainadequate. 1YMPEistheYear’sMaximumPensionableEarningsusedbytheCanadaPensionPlan($52,500in2014).
Private school teachers’ Pension PlanContribution rates September2013 (%ofSalary)
Teachers
TotalTeacherContribution 11.77
SalaryuptoYMPE1 10.22
SalaryaboveYMPE 14.60
Employers 10.99
Thecurrenttotalplancontributionrateis22.76%oftotalteachersalaries,consistingofacurrentservicecostof18.09%ofsalariesandtotaldeficiencycontributionsof4.67%ofsalaries.Thetotalplandeficiencycontributionswilldecreaseoverthenext 14yearsastherespectivedeficienciesareamortizedovertheirrespective15-yearfundingperiodsasshowninthechartbelow.
4.7%
1.5%
0.7%
0.0%
Estimated PSTPP Total Deficiency Contribution Rates2013to2027
2013-24
2025
2026
2027
2013 ANNUAL REPORT 13MANAGEMENTDISCUSSION&ANALYSIS
PSTPP Plan Funding Challenges
Akeyassumptioninthefundingoftheplanisthatthefundwillearnanaverageinvestmentreturneachyearequaltothediscountrateusedforfundingpurposesnetofinvestmentcosts.Actualinvestmentreturnsyeartoyearcanbequitevolatileandabsentanyadjustmentwouldleadtofrequentcontributionrateadjustments.Todampentheimpactofvolatilemarketreturnsontheplan’sfundedstatus,theplanusesanactuariallyacceptedpracticeofsmoothingmarketreturnsover afive-yearperiod.Thispracticeproducesafundingvalueofplanassetsthatinanygivenyearcanbehigherorlowerthanmarketvalue.Overanyfive-yearperiod,however,thetwovaluesareexpected toconvergetothesameamount.
AsatAugust31,2012,thefundingvalueofassets was$2.287millionhigherthanmarketvalue. Thismeantthatmarketreturnswouldhavehadtoexceedtheassumedfundingdiscountrateby$2.287millionoverthecourseofthefollowingfiveyearsinordertoavoidacontributionrateincreaseofabout2%ofsalary.However,duetotherecentstrongpositivefundreturns,theplanhadfundingvalueofassetsof$2.022millionlessthanmarketvalueasatAugust31,2013.Thisnowplacestheplaninapositionthatmarketreturnsmaybe$2.022millionlessthanassumedfortheplan’sfundingneedswithno resultingimpactoncontributionrates.
Wealsocarriedoutvariousstresstestsonourlong-termfundingassumptions.Forexample,ifthefuturelong-termrateofreturnoninvestmentsisonly5.75%,totalplancostwouldincreasebyafurther3.95%ofteachersalariesto26.71%fromthe22.76%planfundingcostasatSeptember2013.
PSTPP Best-Estimate Valuation Results
Weconductabest-estimateactuarialvaluationforthepurposesofthefinancialstatements.Thisbest-estimatevaluationusesamark-to-marketapproachthatvaluesplanliabilitiesandassetsbasedoncurrentmarketvalues.Ittherefore,doesnotusethe6.25%discountrateappliedinthefundingvaluation,asthefundingvaluationincludeda1.00%provisionforpotentialadverseplanexperienceinitsdiscountrate.Asaresult,thebest-estimatevaluationwasconductedusinga7.25%best-estimatediscountrate.
Theactuariallyacceptedpracticeofsmoothingmarketreturnsoverafive-yearperiodusedinthefundingvaluation,cannotbeutilizedforthebest-estimateactuarialvaluationasthefairvalueofnetassetsmustbeused.Accordingly,theassetandliabilityamounts ofthebest-estimateactuarialvaluationdifferfromthoseinthefundingvaluation.
Thefollowingtableoutlinestheresultsofthe best-estimatevaluationasatAugust31,2013.
Private school teachers’ Pension Plan atAugust31,2013 ($Millions)
Best-EstimateLiabilities 41.235
FairValueofAssets 41.508
Surplus 0.273
Funding Risks Looking Forward
Thefundingstudiesandvaluationsarebasedonassumptionsthatwilldifferfromactualplanexperience.Anydifferencebetweentheassumptionsandplanexperiencewillemergeasgainsorlossesinfuturefundingstudiesandvaluations.Keyamongthoseassumptionsistheexpectedrateofreturnof thefundandtherecanbesignificantdeviationfromthisestimateovershorterperiodsoftime.
Theapproachtosmoothinginvestmentgainsandlossesadoptedbytheplanscanservetodampendramaticchangestocontributionratesduetoshort-termmarketvolatility.Thisapproachdealteffectivelywithinvestmentlossesstemmingfromthe2007-2009financialcrisisasitprovidedtimeformarketstorecovertherebyavoidingunnecessarycontributionrateincreases.Similarly,thestronginvestmentperformanceinthe2012-13fiscalyearhasprovidedbothplanssomeabilitytomitigateanypotentialmarketlossesoverthenextfiveyears.
Whilethesmoothingmethodologyisaneffectivewaytostabilizecontributionratesduringshort-termmarketvolatility,failuretoachievetheassumedfundingdiscountrateonaverageoverthelongtermwillrequirecontributionrateincreases.
14 2013 ANNUAL REPORT MANAGEMENTDISCUSSION&ANALYSIS
INVESTMENT MANAGEMENT
Forfirsttimeinseveralyears,financialmarketsbegantoreflectamoreoptimisticviewofthefutureinfiscal2012-13.Earlysignsofeconomicstabilizationin Europeandanew,moreproactivegovernmentinJapangaveinvestorsconfidencethatthecomingyearwillbebetterthanthepast.Whiledevelopingeconomiessawslowgrowth,NorthAmericaneconomiescontinuedonapathofmodest,butpositivegrowth.Thiscombinationprovidedasolidbackdropforglobalequitymarketstorecordverystronggains.Conversely,fixed-incomemarketswereweakforthefirsttimeinseveralyears,astheU.S.begantopubliclycontemplateslowingdownthehighdegreeofmonetarystimulusithadbeenmaintainingsince2008.
InthefiscalyearendedAugust31,2013,ATRF’sinvestmentportfoliorecordeditsfourthconsecutiveyearofpositivereturns,andthestrongestsingle- yearreturninoveradecade.Thefundgenerated areturnof14.0%.
ATRF’sinvestmentoperationscontinuetodevelopinsupportoftheoverallgrowthinassets,whichincreasedfrom$7.2billionto$8.6billionduringtheyear.Inparticular,wecontinuetomakegoodprogresstowardreachingourlong-termtargetallocationstonon-publiclytradedassetsincludingrealestate,infrastructureandprivateequity.Weexpectthatitwilltakeseveralmoreyearstoreachtheseallocationtargetsaswebuildadiversifiedportfoliooflong-termassetsthatmeetourreturngoalsinarisk-controlledandcost-effectivemanner.Duringtheyearwelaunchedasignificantsoftwareimplementation projectthatwillenhanceourmanagementandcontroloftheseprivate-marketassets.Acomprehensive asset-liabilitymanagementstudywascompletedduringtheyearwhichwillresultinadditional changestoourtargetpolicyassetmixnextyear.
Target Policy Asset Mix
ThefollowingtargetpolicyassetmixwasadoptedbytheBoardin2009andimplementationbeganin2010.Asnotedabove,progresscontinuestowardreachingourlong-termgoalsfortheilliquidassetclassesofprivateequity,infrastructureandrealestate.
50% Return Enhancing GlobalEquity 30.0% CanadianEquity 10.0%PrivateEquity 10.0%
25% Fixed Income UniverseBonds 11.5% Long-TermBonds 11.5%MoneyMarket 2.0%
25% Inflation Sensitive RealEstate 15.0% Infrastructure 10.0%
Long-Term Target Policy Asset Mix atAugust31,2013
50%
25%
25%
Asplanned,ATRFundertookacomprehensiveasset-liabilitymodelingstudyin2013.Thisstudywasspecificallyfocusedonunderstanding,managingandreducingtheriskofsignificantfuturecontributionrateincreaseswithinthecontextofthefundingpolicy.FinalresultsofthestudywerereceivedinJulyandnewchangestothetargetpolicyassetmixwillreflectthisgoal.ArevisedtargetpolicyassetmixisexpectedtobeapprovedbytheBoardinearly2014andimplementationwillfollowlaterinthefiscalyear.
Return Enhancing Assets
Returnenhancingassetsarethoseassetswhoseprimarypurposeistoincreasetheoverallreturnofthefundoverthelongterm.Includedinthiscategoryofassetsarepublicandprivateequities,aswellasotherstrategiesprincipallydesignedtogeneratereturn.
1 Includescash,accruedincomeandderivativeswithineachassetclass.
return enhancing AssetsatAugust31,2013 ($Millions) (%)
GlobalEquity 3,507 40.8
CanadianEquity 1,315 15.3
PrivateEquity 592 6.9
Total1 5,414 63.0
Public Equity Markets
The2012-13fiscalyearwasgenerallystrongforequitymarkets,asthelackofincrementalnegativenewsrestoredadegreeofconfidenceandallowedinvestorstocapitalizeonreasonablevaluations.Despitethestrongreturns,therewasvolatilitythroughoutthe yearandthedisparityinreturnsfromdifferent regionswaslarge.
2013 ANNUAL REPORT 15MANAGEMENTDISCUSSION&ANALYSIS
NorthAmericahasbeenthebackboneoftheglobaleconomyforthelastfewyears,generatingmodest, butpositiveGDPgrowthandprovidingafoundation forotherregionstorecoverfollowingtheburstingofthecreditbubblein2008.TheUnitedStateswasthemostproactivenationindealingwiththebaddebtsonthebalancesheetsoffinancialinstitutionsandrecoveredmorequicklythanmanyotherpartsofthedevelopedworld.Asaresult,U.S.equitymarketsagaindeliveredstrongreturnsthispastyear.
Europewasandcontinuestobeinthemidstofasevererecession,butatthemarginthereappeartobeatleastsomesignsofstability.Althoughunemploymentisaseriousissueandeconomiccontractionhasbecomethenorm,therateatwhichthesehavedeterioratedhasdiminished.EconomicgrowthhasnowinchedintopositiveterritoryfortheoverallEuropeanUnionandeventhemostdeeplytroublednationsarecontractingatslowerrates. Theproblemsthesenationsfacearenowherenearbeingresolvedbutinvestorshavestartedtolookbeyondthecurrentsituation.Whencomparingstockmarketreturnsforvariouscountriesaroundtheworld,mostofthehighestreturningmarketswereinEurope.
Emergingmarketswereadisappointmentforinvestorsasnegativereturnswererecordedinnumerousmarkets.Formany,theemergingmarketsaresynonymouswithChinaanditsgrowthprospects.InvestorshavebeenconcernedwiththeslowinggrowthrateinChina,howeveritisstillstronger thanmostpartsoftheworld.Goingforward,theinvestmentworldmustbecomeaccustomedtoalowerlong-termgrowthrateinChinaasthiseconomyhasnowbecomethethirdlargestbehindtheUnitedStatesandtheentireEuropeanUnion.NoonecandenythatthegrowthandindustrializationofChinaandsimilarmarketswilllikelycontinueformanyyearstocome,howevereventhisgrowthwillgothroughcyclesasthecountryexperiencesconstraintswithrawmaterials,labour,andavailablecapital.ThesequestionsregardingtherateofgrowthcausedChinaandotheremergingmarketstobesomeofthepoorerperformingstockmarketsthispastyear.ChinamanagedasmallpositivereturnwhileIndia,Russia,andBrazilexperiencednegativereturnsduringtheperiod.Eachofthesenationshadavarietyofreasonsfortheirnegativeperformancehoweverattherootofitallwerequestionsregardingeconomicgrowth.
Arguably,oneofthemorenoteworthyeventsofthepastyearwastheappointmentofShinzoAbeasPrimeMinisterofJapan.FollowingmorethantwodecadesofpooreconomicgrowthinJapan,Abehasinitiatedaggressivemeasurestorestoreabove-trendgrowthinJapan.TheoptimismthisstrategyhasfosteredisevidentintheperformanceofJapan’sequitymarket. Inlocalcurrencyitwasthebestperformingstockmarketinthedevelopedworld,returningover50%inthe2012-13fiscalyear.Thiswasoffsettosomeextentbytheroughly20%depreciationintheJapaneseyen,howeverthiswaspartoftheanticipatedoutcome.Thesentimentlevelsofbusinessesandconsumershavemovedhigherandthishastranslatedintogreaterspendingandevenhigherrealestatepricesinsomeareas.TimewilltellifdeflationwillfinallybedefeatedinJapan,butforthetimebeing,positiveactionshavebeenputintomotion.
TheCanadianstockmarketgeneratedasolidreturnofover9%forthe2012-13fiscalyear,butunderperformedAmericanandotherglobalmarkets.ThepastyearwasoneoftwostoriesfortheCanadianmarketasthepoorperformanceoftheresourcesectorwasinstarkcontrasttothebalanceofthemarket,whichgeneratedsubstantiallypositivereturns.
Theworstperformingsectorwasmaterials,whichwasburdenedbyweakcommoditydemandfromemergingmarkets,aswellasthepoorperformanceofgoldstocks.Contrastingtheweaknessofthematerialssectorwasthestrongperformanceinthefinancial,consumer,industrial,andtechnologysectors.Thebroadstrengthacrossthesesectorsisindicativeof theunderlyinghealthoftheCanadianeconomy.
Private Equity Markets
Theimpactofcontinuedstrongpublicequitymarketvaluationswasfeltacrosstheprivateequitymarketsinthefirsthalfof2013,translatingtoincreasedconfidencebyinvestorsandhencestrongerfundraisingtotals.Currentvaluationlevelshavealsodictated acautiousinvestmentpaceforrecentprivateequityfundsandanattractiveseller’smarketformore matureportfolios.
Liquidityforprivateequity-backedcompaniesimprovedin2013largelyduetoabettercreditenvironmentandastrongermarketforpublicstockofferings.Creditmarketconditionsexceeded
16 2013 ANNUAL REPORT MANAGEMENTDISCUSSION&ANALYSIS
expectationsinthefirsthalfof2013,withyear-to-datedebtissuanceeclipsingthestronglevelsof2012.Eachofthesefactorscontributedtoastrongyearforprivateequityinvestors.
Performance of Return Enhancing Assets
ATRF’sreturnenhancingassetsareheldinavariety ofdifferentportfoliosinbothpublicandprivatemarkets.Theseportfoliosarewelldiversifiedbyinvestmentstyle,marketcapitalization,geography andvintageyear(forprivateequityfunds)inorder toprudentlymanagerisk.Fiscal2012-13wasaverystrongyearforbothpublicandprivateequitymarkets,andATRF’sactivemanagementaddedadditionalvalue.Fortheyear,returnenhancingassetsgeneratedatotalreturnof23.4%,whichexceededthebenchmark1 returnof21.2%.
return enhancing vs. Benchmark Performance toAugust31,2013
23.4%
21.2%
4.4%
6.3%
6.1%
4.0%
1-YearReturn
1-YearBenchmark
5-YearReturn
5-YearBenchmark
10-YearReturn
10-YearBenchmark
ATRF’sglobalequityassetclassiscomprisedofadiversifiedcombinationofportfolios,allofwhich areexternallymanaged.Takentogethertheseportfoliosreturned27.1%forthefiscalyear, exceedingthe25.7%returnofthebenchmark MSCIWorldIndexby1.4%.
Asnotedabove,theCanadianequitymarketlaggedmostothermajormarketsin2012-13,butthebenchmarkS&P/TSxIndexstillpostedasolidreturnof9.3%.ATRFactivelymanagesitsCanadianequitiesthroughacombinationofinternallyandexternallymanagedportfolios.Alloftheseportfoliosperformedwellinthepastyear,deliveringacombinedreturn of16.4%,whichrepresentedadded-valueof7.1%overthebenchmark.
Privateequityassetsconsistofanumberoflimitedpartnershipsanddirectinvestmentsthatarevaluedbyourgeneralpartnersonafairvaluebasiseveryquarter.Asvaluationsforprivateequityinvestmentsaretypicallyreportedonthebasisofcalendarquartersratherthanourfiscalquarters,ourreportedreturns fortheseassetsaretime-laggedbytwomonths. Asaresult,thesereturnsrepresentthe12-monthperiodendedJune30,2013.Overthistime,our privateequityassetsdeliveredastrongreturnof17.9%,butfellshortofthebenchmarkreturnof 23.7%.ATRF’sbenchmarkforprivateequityisthe MSCIWorldIndexplusanilliquiditypremiumof2.0%.
Ouractivecurrencyinvestmentstrategymaintainsderivativeexposuretoglobalcurrencymarketswithinapre-defined,controlledandmonitoredlevelofrisk.Thegoalofthestrategyistoaddabsolutevaluetothefundoverthelongterm.Afterthreeconsecutiveyearsofpositivereturns,thestrategygeneratedalossof$3.1millioninthe2012-13fiscalyear.Thisrepresentedasmallnegativeimpactonthetotalfundreturnofapproximately0.04%.
1 Thebenchmarkreturnisastandardagainstwhichactualinvestmentperformancecanbeevaluated.ATRFbenchmarkreturnsvaryby assetclassandreflectthereturnonrecognizedmarketindicesforsomeassetclasses,andlong-termreturntargetsforotherassetclasses.
Rates of RetuRn - RetuRn enHanCInGrates of return - return enhancing AssetstoAugust31,2013
1 Year (%) 5 Years (%) 10 Years (%)
Asset Class ATRF Benchmark ATRF Benchmark ATRF Benchmark
CanadianEquity 16.4 9.3 4.3 1.3 9.3 8.1
GlobalEquity 27.1 25.7 4.2 4.0 n/a n/a
PrivateEquity 17.9 23.7 3.6 4.6 n/a n/a
TotalReturnEnhancing 23.4 21.2 4.4 4.0 6.3 6.1
2013 ANNUAL REPORT 17MANAGEMENTDISCUSSION&ANALYSIS
Fixed-Income Assets
Fixed-incomeassetsarethoseassetswhoseprimarypurposeistooffersafetyandliquidity,aswellaslimittheoverallvolatilityofreturns.
1 Includes$12.2millioninaccruedinterest.2Includes$8.5millioninaccruedinterest.
fixed incomeatAugust31,2013 ($Millions) (%)
UniverseBonds1 1,458 17.0
Long-TermBonds2 713 8.3
MoneyMarket 282 3.3
Total 2,453 28.6
Fixed-Income Markets
Forthemajorityofthefiscalyear,theactionsofgovernmentsandcentralbankscontinuedtobetheprimaryinfluenceoninterestrates,overshadowingeconomicfundamentals.ThefirsteightmonthsofthefiscalyearsawGovernmentofCanada10-yearyieldstradeinafairlynarrowrangeof1.7%to1.9%,largelyduetotheextremelyeasymonetarypolicyofcentralbanks.AftertheU.S.FederalReservebegandiscussingthepossiblereductionofitsquantitativeeasingprogram,ratesrosequickly,andexceeded2.7%beforetheendofthefiscalyear.InCanada,corporateandprovincialbondsoutperformedfederalbondsascontinuedspread-tighteninginthefirsteightmonthsoftheyearhelpedtooffsettheincreaseingovernmentbondyieldslaterintheyear.
Performance of Fixed-Income Assets
Fixed-incomeassetsareheldinacombinationofportfolios,inordertoensurediversifiedexposure toshort,mediumandlong-durationbonds,aswell ascreditandprivatedebt.Asubstantialmajority oftheseassetsaremanagedin-housebyATRF’sinvestmentteam.
fixed income vs. Benchmark Performance toAugust31,2013
5.6%
5.2%
5.6%
5.6%
-2.0%
-2.9%
1-YearReturn
1-YearBenchmark
5-YearReturn
5-YearBenchmark
10-YearReturn
10-YearBenchmark
Afterhoveringatornearall-timelowsearlyinthefiscalyear,bondyieldsrosemateriallyinthelastthirdofthefiscalyear.Asaresult,Canadianbondmarketsdeliverednegativereturnsforthefirsttimeinseveralyears.Onacombinedbasis,ATRF’sfixed-incomeassetsreturned-2.0%,whichexceededthebenchmarkreturnof-2.9%.
Withinthefixed-incomecategory,theuniversebondassetclassreturned-0.4%,outperformingthebenchmarkDExUniverseBondIndex,whichreturned-1.1%.Theoutperformanceoftheportfolioswaslargelyduetotheopportunisticmanagementof creditexposureoverthecourseoftheyear.
Long-termbondsweremuchmoreseverelyimpactedbythelate-yearriseininterestratesthantheshorter-termuniversebondportfolio.AsaresultthebenchmarkDExLong-TermGovernmentBondIndexposteditsworstreturninmanyyears,-6.4%inthefiscalyear.ATRF’slong-termbondportfoliogeneratedaverysimilarreturntotheindexat-6.4%,althoughweweretacticallyunderweightinthisassetclassthroughmostofthefiscalyear.
ForthesecondyearinarowtheBankofCanadaleftitsbenchmarkshort-terminterestrateunchanged.Asaresult,ATRF’smoney-marketportfoliogeneratedthesame1.1%,returnasintheprioryear,slightlyexceedingthe1.0%returnofthebenchmarkDEx 30DayT-BillIndex.
18 2013 ANNUAL REPORT MANAGEMENTDISCUSSION&ANALYSIS
Inflation Sensitive Assets
Inflationsensitiveassetsareassetsthatareheldinparttomitigatetheriskofunexpectedinflation.Investmentsinthiscategorytypicallyexhibitreturnsthatareatleastpartiallycorrelatedtoinflationoverthelongterm.ThisisbeneficialtoATRFinthelong runaspensionbenefitsundertheplansare70%indexedtoinflation.ATRFincludesbothrealestate andinfrastructureinthisassetcategory.
Inflation Sensitive Assets atAugust31,2013 ($Millions) (%)
RealEstate 443 5.2
Infrastructure 275 3.2
Total 718 8.4
Real Estate
Globalrealestatetransactionvolumesroseinthefirsthalfof2013,andfull-yearactivityisexpectedtoexceed2012levelsbyasmuchas5%to10%.Thiswouldmarkthefourthconsecutiveyearofgrowthinrealestateactivity.Theamountofnewcapitalenteringthesectorcontinuestobesubstantialasinvestorsseekyield-basedalternativestothebondmarket.Asyieldshavebeendrivendownonprimeproperties,investorsareshowingsignsofmovingfartherouttheriskcurve.
Performanceofglobaldevelopedrealestatemarketswassomewhatmixedin2012-13.WhileNorthAmericanandsomeEuropeanmarketsrose,otherEuropeanandmanyAsianmarketsdeclinedinvalue.
Globalsupplyofnewrealestateisundercontrolwhichhashelpedoffsettheeffectsofrelativelysluggishgloballeasingdemand.Highqualitydowntownofficespaceislikelytobecomeinshortsupplyifleasingactivitybeginstoimprovein2014.InCanada,investorsentimentbegantoshiftmoderatelyinthesecondhalfofthefiscalyearasinvestorsreactedtothepotentialforhigherborrowingcosts.Thismayultimatelyhave animpactonmarketprices.
Infrastructure
Moreandmoreinstitutionalinvestorsareallocatingfundstoinfrastructureasthesetypesoflong-termcoreassetsarewell-suitedtopensionfunds.Thelowinterestrateenvironmentofthelastfewyearshasimpactedpricingasinvestorstendtopricecoreinfrastructureassetsrelativetobondyields.Thisgrowinginstitutionalinvestordemandforinfrastructureassetshasledtoarapidincreasein thenumberofinfrastructurefundslaunchedoverrecentyears.
Asthelowinterest-rateenvironmentpersistedfor mostoftheyear,pricesforinfrastructureassetscontinuedtorise.Inparticular,coreassetsinEuropewerehighlysoughtafter,andthisinterestwasreflectedinassetvalues.Aswithrealestate,sentimentmaybeshiftingsomewhat,astheincreaseininterestrates inthesecondhalfoftheyearisexpectedtohave amoderatingimpactonbothdemandandpricing.
rates of return – fixed incometoAugust31,2013 1 Year (%) 5 Years (%) 10 Years (%)
Asset Class ATRF Benchmark ATRF Benchmark ATRF Benchmark
UniverseBonds -0.4 -1.1 5.9 5.1 5.5 5.4
Long-TermBonds -6.4 -6.4 4.6 5.0 n/a n/a
MoneyMarket 1.1 1.0 1.0 0.8 2.2 2.0
TotalLiabilityMatching -2.0 -2.9 5.6 5.2 5.6 5.6
2013 ANNUAL REPORT 19MANAGEMENTDISCUSSION&ANALYSIS
Performance of Inflation Sensitive Assets
ATRF’srealestateandinfrastructureprogramscontinuedtogrowin2012-13asweworktowardachievingourlong-termallocationof25%oftotalassets.Onacombinedbasis,inflationsensitiveassetsgeneratedastrongreturnof9.9%,whichexceededthebenchmarkreturnof5.6%.
Rates of Return - Inflation Sensitive AssetstoAugust31,2013 1 Year (%)
Asset Class ATRF Benchmark
RealEstate 11.04 6.10
Infrastructure 7.88 4.63
TotalInflationSensitive 9.86 5.57
ATRF’srealestateassetsareconcentratedincoremarketsinCanada,theU.S.andEurope.Asnotedabove,thesemarketslargelyperformedwellin 2012-13leadingtopositiveresultsfromourrealestateportfolio.Fortheyear,ATRF’srealestateinvestmentsreturned11.0%,wellinexcessofthebenchmark returnof6.1%.Thebenchmarkreturncontinuesto beaweightedcombinationoftheannualchangein theCanadianConsumerPriceIndex,plus4.25%formatureassets,andtheactualreturnoftheportfolio fornon-matureassets.
ATRF’sinfrastructureassetsareprimarilylocatedinCanadaandEurope.Theseassetsdeliveredareturnof7.9%inthe2012-13fiscalyear,whichcomparesfavourablytothebenchmarkreturnof4.6%.Similartorealestate,thebenchmarkreturnforinfrastructureisaweightedcombinationoftheannualchangeintheCanadianConsumerPriceIndexplus4.75%formatureassets,andtheactualportfolioreturnoftheportfoliofornon-matureassets.
INVESTMENT PERFORMANCE
Long-Term Investment Objective
Theprimarylong-terminvestmentobjectiveof thefundistomeetthefundingdiscountrateofthe plans,netofinvestmentcostsoverthelongterm.Thistargetisanessentiallong-termassumptionindeterminingthefundingrequirementsoftheplans toensurethatplanbenefitsarefundedinaccordancewiththeestablishedfundingstructure.Weexaminetheinvestmentperformanceofthefundovera 15-yeartimeperiodinordertocoincidewiththe 15-yearamortizationperiodofdeficienciesrequiredunderthelegislatedfundingstructure.
Infiscal2012-13theinvestmentobjectiveofthefundwas6.64%,representingafundingdiscountrateof6.25%plustotalinvestmentcostsof0.39%.Thetotalinvestmentreturnof14.0%exceededthatobjective byasignificantmargin.
Overthepast15years,boththefundingdiscountrateandinvestmentcostsoftheplanhavechanged.Thefundingdiscountratehasbeenreducedfrom8.50%to6.25%overthistimeperiod,asforecastsoflong-terminvestmentreturnshavefallenandtheBoardhasreducedtheoverallfundingriskoftheplans.Investmentscostshaveincreasedslightlyoverthis timeasATRFhasincreaseditsinvestmentinilliquidassets,whichareattractivelong-terminvestments, buthaveahighercostofmanagement.
Overthepast15yearstheTeachers’PensionPlaninvestmentreturnwas6.3%,whichwas1.3%shortoftheinvestmentobjectiveof7.6%overthesametimeperiod.ThereturnforthePrivateSchoolTeachers’PensionPlanisslightlydifferentinthatitdidnotincludetheloantotheGovernmentofAlbertathat waspartoftheassetsoftheTeachers’PensionPlanuntiltheendof2009.Theannualizedrateofreturn forthePrivateSchoolTeachers’PensionPlanover thesame15-yeartimeperiodhasbeen6.0%.
20 2013 ANNUAL REPORT MANAGEMENTDISCUSSION&ANALYSIS
Overthistimetheratesofreturnoninvestmentswereimpactedbyasevereequitymarketdownturnandfinancialturmoilin2000-02,andagainin2008-09. Theamortizationofthedeficienciesresultingfromthelowmarketreturnsandthereductioninthefundingdiscountratehavebeenthelargestcontributorstotheincreaseinfundingcontributions.
Long-TermInvestmentObjective
6.3%
6.0%
7.6%
15-Year return vs. long-term investment objectivetoAugust31,2013
Teachers’PensionPlanReturn
PrivateSchoolTeachers’PensionPlanReturn
Benchmark Performance
Asameasureoftheoveralleffectivenessofouractiveinvestmentstrategies,wecomparetheactualperformanceoftheinvestmentportfoliotothereturnonthefund’sbenchmarkoverbothshortandlong-termperiods.ThebenchmarksforeachassetclassareselectedbytheBoardandInvestmentCommittee. Thetotal-fundbenchmarkiscalculatedbyaggregatingthereturnsoneachasset-classbenchmark,andweightingthemtoreflectthefund’spolicyassetmix.
Asthe2012-13fiscalyearprogressed,amorestableenvironmentinEuropeandpositivepolicymeasuresinJapanprovidedamorefavourablebackdropforequitymarkets.Inthisenvironmentwemaintainedanassetmixthatwasoverweightequities,andunderweightfixed-incomeassets,whichaddedvalueoverthebenchmark.Additionally,mostofATRF’sinternalandexternalportfoliosdeliveredstrongreturnsrelativetotheirrespectivebenchmarks.Thesetwoinfluencescombinedtoresultinatotalfundreturnthatsignificantlyexceededthebenchmark.
AsillustratedinthetablebelowtheTeachers’PensionPlanfundandthePrivateSchoolTeachers’PensionPlanfundreturned14.0%inthemostrecentyear,whichexceededthebenchmarkreturnby2.5%.Althoughthereturnofthetwofundsisthesameoverthepastyear,itdiffersoverlongertimeperiodsduetotheinfluenceoftheloantotheGovernmentofAlberta,whichwasrepaidinearly2010.
OverthefiveyearsendedAugust31,2013, theTeachers’PensionPlanfundreturnexceeded itsbenchmarkby0.5%annually,whileover10yearsthefundreturnexceededitsbenchmarkby0.2%annually.ThePrivateSchoolTeachers’PensionPlanfundreturnis0.4%aheadofitsbenchmarkover fiveyears,whileitis0.2%aheadofthebenchmarkover10years.
teachers’ Pension Plan return vs. Benchmark Performance toAugust31,2013
1-YearReturn
1-YearBenchmark
5-YearReturn
5-YearBenchmark
10-YearReturn
10-YearBenchmark
14.0%
11.5%
5.1%
6.4%
4.6%
6.2%
Private school teachers’ Pension Plan return vs. Benchmark Performance toAugust31,2013
1-YearReturn
1-YearBenchmark
5-YearReturn
5-YearBenchmark
10-YearReturn
10-YearBenchmark
14.0%
11.5%
4.3%
5.9%
3.9%
5.7%
2013 ANNUAL REPORT 21MANAGEMENTDISCUSSION&ANALYSIS
Socially Responsible Investing
Animportantpartofourlong-terminvestment strategyinvolvesencouragingcompaniestobothrecognizeandadoptbestpracticesinallaspects ofcorporategovernance,includingissuesrelated tosocialresponsibility.Weaccomplishthisinthreedifferentways.
First,ourinternalandexternalinvestmentmanagers,communicateregularlywiththemanagementandboardsofcompaniesinwhichweinvest.Issuesrelatedtocorporategovernanceandsocialresponsibilityareincludedinthesediscussions.
Also,wecommunicatewithotherinstitutionalshareholders,andcontributeregularlytojointinitiativeswhicharefocusedonimprovingcorporategovernanceamongcorporations.ATRFisafoundingmemberoftheCanadianCoalitionforGoodGovernance(CCGG),whichincludesmanyof Canada’slargestinstitutionalinvestorsinitsmembership.TheCCGG’sprimarymandateis topromotebettergovernancepracticesamongCanadiancorporations.
Finally,weencouragecompaniestostriveforbettercorporategovernanceandadvocateforimprovedshareholderrightsthroughourproxyvotingpractices.Ourproxyvotingguidelinesarereviewedeveryyearandarecontinuallyupdatedtoreflectdevelopingbestpracticesincorporategovernance.TheguidelinesalsoexpresssupportfortheOECDGuidelinesforMultinationalEnterprises,whichisacomprehensivesetofprinciplesandstandardsforresponsiblebusinessconductinareassuchastheenvironment,employmentandindustrialrelations,sustainabledevelopment,consumerinterestsandtaxation.TheseguidelineshavebeenendorsedbythemembercountriesoftheOrganizationforEconomicCooperationandDevelopmentasaunique,government-backedinternationalcorporateaccountabilitymechanismaimedatencouragingresponsiblebusinessbehaviouraroundtheworld.
INTERNAL CONTROL OVER FINANCIAL REPORTING
ATRFbusinessplansincludeactionplanstoenhancegovernanceandmanagementofinternalcontrolprocessesandsystemstoprovideanappropriatelevelofduediligenceandsecurityinATRF’sinternalcontrols,financialoperations,andreportingandinformationsystems.
Managementbasesitsevaluationoftheeffectivenessofinternalcontroloverfinancialreportinguponthe“InternalControl–IntegratedFramework”,publishedin1992bytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO).
ATRFisnotrequiredbylaworregulationtoperformthisannualevaluation.Wehavechosentoperformthisevaluationandmeetthesestandardsasapartofourcommitmenttostronggovernanceandaccountability.
TheChiefExecutiveOfficerandtheDirector,FinancialServicesareresponsibleforthedesignandmaintenanceofinternalcontroloverfinancialreporting,toprovidereasonableassurancethatitisreliableandthatthepreparationofthefinancialstatementsconformswithCanadianaccountingstandardsforpensionplans.Theyarealsoresponsibleforthedesignandmaintenanceofdisclosurecontrolsandprocedurestoprovidereasonableassurancethatallmaterialinformationisgatheredandreportedtomanagementonatimelybasis.
Wehavecompletedthe2012-13fiscalyearevaluationoftheeffectivenessofourinternalcontroloverfinancialreportinganddisclosurecontrolsandprocedures.Basedupontheresultsoftheevaluation,theChiefExecutiveOfficerandDirector,FinancialServiceshaveconcludedthatinternalcontroloverfinancialreportinganddisclosurecontrolsandproceduresareproperlydesignedandoperatedeffectivelythroughouttheyear.NochangesweremadeininternalcontrolsoverfinancialreportingduringtheyearendedAugust31,2013,thatmateriallyaffected,orarereasonablylikelytomateriallyaffect,internalcontroloverfinancialreporting.
22 2013 ANNUAL REPORT MANAGEMENTDISCUSSION&ANALYSIS
CHANGE IN NET ASSETS
The2012-13fiscalyearreturnedafourthconsecutiveyearofgrowthinnetassetswithayear-over-yearincreaseinfundassetsof$1.387billion(anincrease of19.3%)leavingthefiscalyear-endvalueat $8.581billion.Investmentearningsof$1.025billionand$362millionofpositivenetcashflowsfromcontributionsabovebenefitpaymentsand expenses,accountedforthischange.
2013
2009 4.956
2010 5.537
2011 6.335
2012 7.194
8.581
net Assets ($Billions)
Costs of Providing Services
Theincreaseininvestmentcosts,from$23.316millioninthepreviousyearto$33.150millionforthe2012-13fiscalyear,accountedforthe96.4%overallincreaseinthe$38.606milliontotaloperatingcosts.Theincreaseininvestmentcostswasrelatedtotheadditionalstaffandadvisoryservicesrequiredtobuildtheinvestmentprogramsforinfrastructure,realestateandprivateequityassetclasses,andtoexternalinvestmentmanagementfeesthatincreasedinconjunctionwiththegrowthininvestedassets.Investmentcostswereabout39centsforeach$100ofassets,ascomparedto32centsinthepreviousyear.Thesecostsexcludemanagementfeesforprivateequity,infrastructureandrealestatefunds,andcommissionspaidwhentradingsecurities.However,allsuchcostsaredeductedindeterminingnetinvestmentreturns.
investment Costs($Thousands) 2013 2012
Externalinvestmentmanagementfees $19,782 $14,651
Salariesandbenefits 10,010 5,321
Custodialandbanking 1,105 1,110
Professionalandconsultingservices 1,042 995
Communicationandtravel 541 503
Premisesandequipment 479 276
Boardandcommittee 103 305
ActuarialFees 14 10
Other 74 145
Total $ 33,150 $ 23,316
Cost ($ dollars) per $100 of assets $ 0.39 $ 0.32
Planmemberservicecostsincreasedto$5.457million,from$5.094millioninthepreviousyear.Thecostofprovidingservicestoplanmembersinthe2012-13fiscalyearwas$87permember,significantlylessthantheaveragecostof$148permemberforagroupofmajorCanadianpublicsectorpensionorganizationsthatbenchmarkcostandservicelevels.
Plan Member service Costs($Thousands) 2013 2012
Salariesandbenefits $3,559 $3,344
Professionalandconsultingservices 658 543
Premisesandequipment 457 475
Communicationandtravel 439 328
Actuarialfees 131 91
Boardandcommittee 127 135
Custodialandbanking 36 31
Other 50 147
Total $ 5,457 $ 5,094
Cost ($ dollars) per plan member $ 87 $ 82 Operatingcostswillincreaseasthevalueofinvestmentsadministeredgrowsandthenumber ofplanmemberscontinuestorise.Weremaincommittedto:
• implementingprudent,cost-effective investmentandadministrationstructures,
• carefullymanagingbothinvestmentandadministrativecosts,and
• providingplanmemberswithhigh-qualityserviceandinvestmentreturnsthatmeetthelong-termfundingrequirementsoftheplans.
2013 ANNUAL REPORT 23MANAGEMENTDISCUSSION&ANALYSIS
PLAN MEMBER SERVICES
Plan Members
Planmembersinclude:
• 38,346activememberswhoaccruedpensionableserviceduringthe2012-13fiscalyear;
• 24,667retiredmembers;and
• 12,364inactivemembers.
Theactivecategoryincludes1,262disabledteacherswhoearnedpensionableserviceinthe2012-13fiscalyear.Thenumberofdisabledteachersaccruingpensionableserviceasapercentageofthetotalnumberofactiveteachershasremainedstableoverthelastfiveyears.
number of number of Percentage Year ended Disabled Active of Disabled August 31 teachers teachers teachers
2013 1,262 38,346 3.3%
2012 1,388 38,336 3.6%
2011 1,349 38,242 3.5%
2010 1,328 38,578 3.4%
2009 1,247 38,442 3.2%
493
Age and Gender Distribution of Active and Disabled Members
MaleFemale
< 30
35-39
40-44
45-49
50-54
55-59
60+
30-34
1,5434,105
3,885
1,5803,546
1,375
1,0142,651
1,129
3,559
1,654
4,4991,071
1,5364,706
Thenumberofnewretiredmemberswhocommenced theirpensioninthe2012-13fiscalyearwas1,131, aslightdecreasefrom1,234inthepreviousyear. Itisexpectedthattheaveragenumberofnewretiredmembersaddedeachyearwillbeapproximately1,000forthenextdecade.
1,060
1,056
986
1,234
number of new Pensions GrantedasofAugust31,2013
2013
2009
2010
2011
2012
1,131
Plan Member statistics 2013 2012 2010 2005 2000
Activemember averageage 42.1 42.1 41.7 42.4 42.7
Activemember averageyearsof 10.1 11.5 11.1 12.2 12.0 pensionableservice
Retiredmember averageage 69.0 69.0 68.0 68.0 68.0
Newretiredmember averageage 59.7 59.0 59.0 58.0 57.8
Average pensionable serviceofnew
26.0
25.9 26.2 26.4 26.6
retiredmember
24 2013 ANNUAL REPORT MANAGEMENTDISCUSSION&ANALYSIS
Timely Service to Plan Members
ATRFhasadedicatedandknowledgeableteamofemployeesprovidingservicesinacost-effectivemanner toactiveteachers,retiredmembers,inactiveteachers,beneficiaries,andtheirrepresentatives.
Wehaveestablishedbenchmarksforthedeliveryofservicesandmeasureourbenefitdeliveryagainstthosebenchmarks.Forthe2012-13fiscalyear,weshortenedourbenchmarksforthreeservices–purchaseestimatesandterminationbenefitpaymentsdecreasedfrom10daysto7days,andurgentwritteninquiriesfrom7daysto5days.Belowareourresultsforthe2012-13fiscalyear,withcomparisonsforthe2011-12fiscalyear.Weexceededthebenchmarkinallprocesses.
Our Focus on Customer Service
In2012-13,wecontinuedtoconductbestpracticereviewsforourcustomerserviceprocesses,andindoingsoidentifiedandimplementedseveralenhancements.OneenhancementwastoprovideeachplanmemberwithanATRFIDNumber,whichcanbeusedasauniqueidentifierandtoregisterforthesecuredonlinememberwebportalMyPension.Also,planmemberswhoareregisteredforMyPension nowreceive,intheirSecureMessageCentre,anestimateofthecosttopurchasepensionableservicewhentheyreturntoteachingfromanemployer-approvedleave.
2013 Plan Member Survey
Thesurveywasdistributedelectronicallyto12,573activeplanmemberswhowereregisteredforonlineservices.ATRFreceivedhighratingsfromjustover2,700planmemberswhoresponded,representing anexcellentresponserateof21.5%.Theobjectives ofthesurveyweretoassesshowwellATRFis meetingplanmemberinformationandservice needs,andtoevaluatetheeffectivenessofATRFprogramsandinformationsources.
ATRFachievedtopmarksagain,with96%ofrespondentsratingouroverallserviceasgood toexcellent.
Respondentsalsogavehighratingstoourcommunicationmaterial:
• 95%indicatedthattheannualplanmemberstatementhelpedthemunderstandtheirpensionbenefits,itwasinformative,anditwaseasytoread.
• 95%foundthe“PensionPoints”newslettertobeeasytoread,informativeandtimely.
• Ofthe39%whoreadtheAnnualReportHighlights,95%indicateditwasinformativeand92%saiditassistedtheminunderstandingthefinancialstatusofthepensionplan.
• 97%ofrespondentswhovisitedthewebsitefoundittobeveryinformative,and93%saiditwaseasytofindinformationonthewebsite.
• 91%ofrespondentswhousedonlineservicesindicatedthepensionestimatorwasavaluabletool,and94%foundthepurchasecalculatorvaluable.
service Benchmarks for Average elapsed Average elapsed Provided 2012-13 time in 2012-13 time in 2011-12
Ongoingpensionpayments Onthethirdlast Allpayments Allpayments businessdayofthemonth madeontime madeontime
Pensionoptionspackagefornewpensions Within10daysofapplication 3days 2days
Paymentfornewpensions Within7days 4days 3days
Pensionestimate Within7days 1day 1day
Purchaseestimate Within7days 2days 2days
Terminationbenefit Within7days 1day 1day
ReciprocalTransferestimates Within14days 9days(TransferIn) 6days(TransferIn) 6days(TransferOut) 3days(TransferOut)
Urgentwritteninquiriesincludingemailinquiries Within5days 1day 1day
Non-urgentwritteninquiriesincludingemailinquiries Within10days 1day 1day
Telephoneinquiries Within1day Lessthan1day Lessthan1day
2013 ANNUAL REPORT 25MANAGEMENTDISCUSSION&ANALYSIS
• Ofthe2,022respondentswhoviewedthe videosonourwebsite,90%ratedthemas goodtoexcellent.
Wereceivedover300comments,mostofthempositiveandsomewithconcernsandsuggestionsforpossibleimprovement.SomeplanmembershadconcernsabouttheeaseofaccessingonlineservicesandwerebasedonthefunctionalitythatwasinplacepriortoMay2013.ChangesimplementedwiththenewATRFwebsiteandMyPensionhaveaddressedthoseconcerns.Wewillusethefeedbackreceivedtoimplementadditionalinitiativestoimprovecommunicationmaterialandaccesstopersonalinterviewsin2013-14.
New Pensioner Questionnaire
Eachofthe1,131planmembers,whoretiredduringthe2012-13fiscalyear,receivedaNewPensionerQuestionnaire.ThesenewlyretiredplanmembersareaskedquestionsaboutthequalityofservicetheyreceivedfromATRFstaff,thecommunicationmaterialtheyaccessedduringthepensionapplicationprocess,and,iftheyutilizedthem,theirassessmentofourwebsiteandonlineservices.
Ofthe10.7%whoresponded:
• 98%ratedATRFserviceandcommunication asgoodtoexcellent,
• 71%indicatedtheywereregisteredfor onlineservices,
• 87%saidtheyhadvisitedthewebsite,and
• 50%hadusedthewebcalculatortodo pensionestimates.
Respondentswereinvitedtoprovide writtencomments.Whilethemajorityofthe 155commentswerepositiveandfocusedon excellentcustomerserviceandknowledgeof ATRFstaff,wewillusethecommentsand suggestionstocontinuetoimprovethelevel ofcustomerserviceprovidedtoourretiring planmembers.
2013 Retired Member Survey
ProvidingaccurateandtimelypensionpaymentsandinformationtoretiredmembersareprimarygoalsofATRF.Duringtheyear,wesurveyedretiredmemberstoobtainfeedbackontheeffectivenessofourserviceandcommunicationactivities.Wesentbothanelectronicsurveyandthetraditionalpapersurveyto10,843, or44%,ofretiredmembers.Atotalof3,558surveyswerereturned,aresponserateof33%.Overall, thesurveyresultsindicatethatretiredmemberscontinuetoholdATRFinhighregardandthatATRF issuccessfullymeetingretiredmembers’service andinformationneeds.
• 97%ofrespondentsagreedthatknowledge-base,responsivenessandcompletenessofserviceprovidedbyourstaffwereeithergoodorexcellent.
• 99%agreedorstronglyagreedthatthePensionUpdatenewsletterwaseasytoread,timelyandinformative.
• 99%foundthewebsitetobeinformative andeasytouseandread.
• Over95%ofrespondentsindicatedtheywereeithercomfortableorcompletelycomfortableinusingthesecuredonlineMyPensionfunctionstoupdatecontactinformation,incometaxinformationandbankinginformation.
WhilesurveysofATRFservicescontinuetoindicateahighlevelofsatisfactionwithservicelevels,wewilluseideaswritteninthe‘comments’sectionofthesurveystocontinuetomaintainastrongfocusondevelopingandimplementingsystemenhancementsandcommunicationtoolstohelpusmeetincreasingservicerequirements.WewillcontinuetofocusonelectronictoolsthroughMyPension,theJoinOur EmailListfeatureandotherweb-basedfeatures.
26 2013 ANNUAL REPORT MANAGEMENTDISCUSSION&ANALYSIS
Communication Activities
OurteamoffourPensionCounsellorsprovidesindividualcounsellingsessionsinourofficeinEdmonton,aswellasatmanylocationsthroughoutAlberta.Duringthe2012-13schoolyear,936planmembersvisitedourofficeforapersonalinterview.Inaddition,weconducted658interviewswithplanmembersat10differentlocationsacrosstheprovinceandwithanadditional625teachersat10Teachers’Conventions.Planmembersregisterfortheseindividualinterviewsusingouronlineregistrationfunctionandcanrequestpensionestimatesfortwoprojectedretirementdates.Inaddition,theycanaskustopreparemoredetailedinformationforthem,forexample,anestimateofthecosttopurchasepensionableserviceandtheimpactthatwould haveontheirpensionamount.
Wewereinvitedtopresentourseminar,YourPensionMatters,toover900planmembersat18locationsaswellastoabout600teachersat10Teachers’Conventions.ManyoftheseminarpresentationstakeplaceatworkshopsorganizedbytheRetirementConsultantsofTheAlbertaTeachers’Association.
Inadditiontointerviewsandseminars,weprovideinformationdirectlytoplanmembersthroughannualplanmemberstatements,newslettersandannualreporthighlights.Over4,400activeandinactiveplanmembers,and2,700retiredmembers,havechosentoreceivethesemailingsinelectronicformatbyregisteringforJoinOurEmailList.
ATRFcouldnotprovidecurrentinformationdirectlytoplanmemberswithoutplanmemberdata,includingaddresses,whichwereceiveelectronicallyonamonthlybasisfromemployers.Thetimelinessofthedatasubmissionscontinuetoimproveeveryyear.WethankandcongratulatethepayrollstaffofemployersfortheirsuccessandcommitmenttoprovidingdatatoATRF.About70%ofplanmembersreceivedtheirannualstatementsbyDecember7,2012,andallplanmembershadreceivedthembyFebruary27,2013.
Website and Online Services (MyPension)
During2012-13weredesignedandimplementedanewwebsite.WealsorevampedthesecuredplanmemberwebsitecalledMyPension.Wereorganizedwebcontentandupdatednavigationtoolstomakeiteasierforplanmemberstofindtheinformationtheyneed.Inconjunctionwiththewebsitelaunch,wemailedallplanmembersanATRFIdentificationNumber.PlanmemberscanusethisnumbertoidentifythemselveswhentheycallusandtoaccesstheirconfidentialinformationthroughMyPension.
Almost17,500activeandinactiveplanmembers and10,400retiredmembersarenowregistered totakeadvantageofthefunctionsavailablethroughMyPension.Allregisteredplanmemberscanview andupdatetheirpersonalinformationonline. Over27,900pensionestimatesweredoneonlinein2012-13.Eachmonth,anaverageof2,000planmembersaccessedtheirplanmemberstatementonline.Ofthe1,131pensionapplicationsprocessedduringtheyear,207weresubmittedelectronicallythroughMyPension.Overthepastyear,2,100 retiredmembersaccessedtheirT4Ainformation,and1,700viewedtheirpensionpaymentinformationelectronicallythroughMyPension.
WhileourwebsiteandMyPensionservicesarekeyelementsinourcustomerserviceandcommunicationinitiatives,planmembersalwayshavethechoiceofaccessingservicesandinformationinthemannertheyprefer–inperson,inwriting,bytelephone,oronline.
2013 ANNUAL REPORT 27MANAGEMENTDISCUSSION&ANALYSIS
Plan Member Benefits
Thegrowthinthenumberofretiredmembersandtheimpactofcost-of-livingadjustments(COLA)haveresultedinanincreaseintotalannualpensionpaymentsof6.6%to$712millionasatAugust31,2013.Undertheexistingfundingstructure,despitetherecentvolatilityoffinancialmarketsandtheimpactofinvestmentreturnsonassetvalues,thefundiswellpositionedtomeetongoingcash-flowrequirements.Theaveragenewmonthlypensionpaidin2012-13 was$3,129comparedto$2,999inthepreviousyear.
AprovisionoftheTeachers’ Pension Plans Actthataffectsourretiredmembersisthere-employmentrule.Theprovisionlimitstheamountofworkundercontractinapositionthatrequiresateachingcertificatewhileinreceiptofapension.Ifaretiredmemberworks morethan0.6ofayearwithinaschoolyear,thepensionisreduceddollarfordollarbytheamount ofsalaryrelatingtotheserviceaccruedoncethe limitisreached.
EffectiveSeptember1,2011,substituteservicewasremovedfromtheplanrulesrelatingtore-employmentofretiredmembers.Basedontherevisedlegislation,
607retiredmembersreturnedtoteachingundercontractwhilereceivingapensionfromATRF.Thiswasaveryslightdecreasefromthe643in2011-12.Oftheretiredmemberswhoreturnedtoworkundercontract,38earnedgreaterthan0.6ofayearofservice,whichresultedinareductionoftheirpensionpaymentfortheamountofsalaryearnedoncetheretiredmemberhadexceeded0.6ofayearofservice.
Cost-of-Living Adjustments
Forpensionableservicebefore1993,retiredmembersreceiveacost-of-livingadjustment(COLA)of60%ofthechangeintheAlbertaConsumerPriceIndex(ACPI).COLAforpensionableserviceafter1992is70%oftheACPIchange.
InJanuary2013,COLAadjustmentswerebasedonanACPIincreaseof1.60%,comparedto2.00%inJanuary2012.Pensionsthathadbeenpaidfortheentire2012calendaryearreceiveda0.96%increaseforpre-1993serviceanda1.12%increaseforpost-1992service.Pensionspaidforlessthanafullyearreceiveda pro-ratedportionoftheCOLA.
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
10.0%
5.0%
0.0%
Change in the Alberta Consumer Price index 2003-2013
1.3%1.7%
5.7%
3.6%
4.9%
3.6%
2.0%
0.1%1.0%
2.0%
1.6%
28 2013 ANNUAL REPORT
AnAlYsisCompensation Discussion &
COMPENSATIONDISCUSSION&ANALYSIS
ThefollowingisthereportoftheHumanResourcesandCompensationCommittee(HRCC)oncompensationoftheChiefExecutiveOfficerandChiefInvestmentOfficer(“executives”).ATRF’sexecutivecompensationprogramobjectivesareto:
• Rewardexecutivesinamannerconsistentwithcompetitivemarketpracticeandtherebyimprovetheorganization’sabilitytoattractandretainhighqualityprofessionals.
• Focustheexecutiveteamoncriticalbusinessandinvestmentissuesidentifiedinthestrategicplan.
• Aligninterestsoftheexecutiveteamwithpensionplanmemberinterestsbyencouragingandrewardinglong-termperformance.Thisissupportedbypromotingapay-for-performanceculture.
• Rewardtheexecutiveteamforsuperior performanceonresults.
• EnsuretotalpayreflectsthesharedeffortsoftheexecutiveteambyrewardingacollegialcultureandteamworkthatisassessedthroughindividualperformanceassessmentsconductedbytheHRCCandBoardonanannualbasis.
Human Resources and Compensation Committee Mandate
TheHRCCassiststheBoardinfulfillingitsoversightresponsibilitiesinrelationtothecorporation’shumanresourcesandcompensationmatters.
ItiscomposedofallsixmembersoftheBoard, eachofwhomisindependentofmanagement. TheHRCCretainsexternaladvisorstoprovide executivecompensationandanyotherexpertise theCommitteedeemsnecessary.
TheHRCCmetthreetimesduring2012-13fiscalyear. Itconductedincamerasessionsatthebeginningandendofeachmeeting,withoutmanagementpresent.
TheHRCC’skeyresponsibilitiesinclude:
• theappointment,performanceevaluation,compensationstructureandsuccessionplanning fortheChiefExecutiveOfficer;
• approvingthecompensationofexecutives;
• approvingthecompensationphilosophyrecommendedbytheChiefExecutiveOfficer fornon-executivestaffofATRF;
• ensuringappropriatesuccessionplanningbytheChiefExecutiveOfficerforkeystaffpositions;
• reviewinghumanresourceandcompensationaspectsofthecorporation’sbusinessplan;
• ensuringthattheriskmanagementframeworkappropriatelyconsidershumanresourceandcompensationrisks;and
• approvingincentiveandsupplementary pensionplans.
2013 ANNUAL REPORT 29COMPENSATIONDISCUSSION&ANALYSIS
Compensation Philosophy
ATRF’sexecutivecompensationphilosophy establishesthefoundationforitscompensationprogram.Itsaimisto:
• supporttheorganization’sbusinessstrategies anddesiredculture;
• stateitsdesiredcompetitivepositionandmix ofcompensationelements;and
• beresponsivetotheorganization’sobjectivesandemployee’swantsandneeds.
ATRF’scompensationprogramisdesignedtopaycompetitivelywhilesupportingATRF’sobjectivesofsecuringthepensionsofplanmembersthroughthecost-effectiveandefficientuseofresources.Ofcriticalimportanceistheoverarchingstrategytoachievethemaximum,risk-controlled,cost-effective,long-terminvestmentreturnsrequiredtomeetthefundingrequirementsoftheplans.
Ameaningfulportionofvariablecompensationisbasedontheoverallsuccessoftheorganization.Thecompensationprogramprovidesincentiverewardsforvalue-addedandabsoluteinvestmentreturns,aswellasotherimportantbusinessobjectivessuchasmaintainingqualitycustomerservice,andthecost-effectiveandefficientuseofresources.
ATRFbelievesinapay-for-performanceculture.Accordingly,alargeportionofvariableexecutivecompensationislinkedtoachieving“abovemedianperformance”againstperformancehurdles.“Abovemedianperformance”andperformancehurdlesaredeterminedusingaholisticapproachthatconsidersrelevantexternaldatasources,historicalperformanceandriskofATRF’sfund,andthecurrentinvestmentstrategyandportfolioassetmix.Asignificantportion ofexecutivecompensationislinkedtolonger-term,value-addedandabsoluteinvestmentperformance.
Managing Risk
ATRFconsideredtheimplicationsoftherisksassociatedwithitscompensationpoliciesandpractices, toensureitscompensationprogramdoesnotincentmanagementbehavioursoutsidetheorganization’s riskappetite.Compensationriskismanagedby:
• theHRCC’sindependencefrommanagement,andretentionofitsownexternalcompensationadvisor;
• workingwithinanenterprise-wideriskmanagementframeworkandinvestingwithin theInvestmentPolicy;
• establishingappropriateperformancemeasuresthataligntothebusinessstrategy;
• settingindividualandteamaccountabilities forachievingobjectives;
• settingthresholdlevelsofperformancefor allincentiveplansandnotpayingincentives unlessthresholdperformanceisachieved;
• usingappropriatepayoutcurvesandcappingincentivepayoutopportunities;
• includinglong-termperformancemeasures (i.e.four-yearratesofreturn)intheshort-termincentiveplanaswellasthelong-termincentive plantoaligncompensationpayoutswiththetimehorizonofthefund;and
• includingnon-investmentmeasuresinthe annualincentiveplan.
Comparator Groups Used to Set Competitive Pay
ATRF’soverallobjectiveistoprovidecompetitivecompensationcomparedtothoseorganizationsagainstwhichitcompetesfortheskillsandexpertiseofinvestment-relatedandmanagementprofessionals.CompensationisbenchmarkedagainstotherCanadianin-housepensionfundsandinstitutionalinvestmentorganizationsofsimilarsizeandcomplexitytoATRF.Withinthesecomparatorgroups,ATRFreviewscompensationlevelsofcomparablejobs,assessesperformanceagainstbenchmarks,aswellastherelativesizeandinvestment-structurecomplexity ofitspeers.
30 2013 ANNUAL REPORT COMPENSATIONDISCUSSION&ANALYSIS
Compensation Process and Compensation Consultants
ATRF’scompensationstrategyandstructureareregularlyreviewed.Eachyear,theHRCCreviewsandapproves thecomparatorgroups,overallbasesalary,andtheannualperformancemeasures,targetsandweightingsfor theincentiveplans,basedonmarketconditions.MarketdataisprovidedtotheHRCCbyexternalsources. TheHRCCusesthefollowingdecisionmakingprocesswhensettingexecutivecompensation:
Compensation Plan Structure
Thecompensationstructureforexecutivesbalancesfixedandvariablepaylinkedtolonger-termperformance.Theelementsoftheexecutivecompensationplanincludeabasesalary,benefits,pensionandperformance-basedshortandlong-termincentiveplanstoalignexecutiveswithpensionplanmemberinterests.ATRFbelievesthatlonger-terminvestmentsuccessthroughprudentrisktakingismoreimportantthanvolatileshort-termgains,andthisphilosophyisreflectedinitsshortandlong-termincentiveplandesigns.
Base Salary
Basesalariesareintendedtobecompetitivewiththemarketandarereviewedannuallyattheendofeachfiscalyear.SalariesaresetbasedonindividualperformanceandsalaryrangeadjustmentswithinATRFmarketcomparators.BasesalariesforexecutivesarereviewedandapprovedbytheHRCCannually.
TheHRCCissupportedbyindependent,externalhumanresourcesandcompensationconsultantsthatareretainedby,andreportdirectlyto,theHRCC. Inthe2012-13fiscalyear,theHRCC’sindependentadvisorforgovernance,humanresourceandcompensationpurposeswasGlobalGovernanceAdvisors(GGA).Duringthe2012-13fiscalyear, GGAassistedtheHRCCin:
• undertakingareviewofATRF’sCEO successionplanning;
• reviewingexecutivecompensationlevelsagainstthecompensationphilosophyandexternalmarket;
• analyzingthecorrelationofexecutivepayforperformancewithinthecompensationprogram;
• developingtheCEObalancedscorecard;and
• draftingtheCompensationDiscussionandAnalysis.
GGAdidnotprovideanyotherservicestoATRFortomanagement.TheHRCCreviewsallfeesandthetermsofconsultingservicesprovidedbyitscompensationconsultant,andisresponsibleforitsowndecisions,whichmaytakeintoconsiderationmorethantheinformationandrecommendationsprovidedbyitscompensationconsultantormanagement.
1. EstablishCompensation
Philosophy,PrinciplesandObjectives
2. Designcompensationtoalignwithcompensation
philosophyandcompetitivemarket
3. Establishandcalibrateperformanceobjectives
4. Assessimpactofcompensationthroughscenarioanalysisand
forwardandbacktesting
5. Determine performance-basedincentiveawards
2013 ANNUAL REPORT 31COMPENSATIONDISCUSSION&ANALYSIS
Long-Term Incentive Plan (LTIP)
TheLTIPisdesignedtoencourageandrewardlong-termperformance,criticaltoATRF’ssuccess;attract,retainandmotivateparticipantsbyprovidingadditionalcompensationifinvestmentperformancegoalsareachieved;and,toalignparticipantinterestswithpensionplaninterests.TheLTIPhasafour-yearvestingperiodbeforeafirstpaymentisawardedtoaplanparticipantbasedonrelativevalue-addedperformanceabovethebenchmarkportfolio,netofinvestmentoperatingcostsandisfurthermodifiedbyabsolutefundperformance.Thethreshold,targetandmaximumvalue-addhurdlesarecalibratedtoaccountforATRF’sinvestmentstrategyandportfoliomix,whichinherentlyaccountsforATRF’sriskprofile.
ParticipationintheLTIPislimitedtoexecutives,managementandseniorinvestmentprofessionals.Participantsreceiveanotionalgrant(reflectedasapercentageofsalary),atthebeginningofafour-yearperformanceperiod.Thegrantisequaltothetargetawardopportunity,andcouldincreaseordecreasebasedonfinalinvestmentperformanceresultsrelativetothebenchmarkportfolio,netofinvestmentoperatingcosts.Attheendoftheperformanceperiod,thefour-yearrollingaverageperformanceofthetotalfundiscalculated.Amultiplierisappliedtothetargetplanaward,basedontheinvestmentperformanceofthetotalfundaftertakingintoaccountfeespaidtoexternalmanagersanddirectinvestmentcostsascomparedtospecificbenchmarksapprovedbytheHRCC.Themultiplieriscappedatthreetimesthevalueofthetargetaward.Exceptforcertainsituations, aneligibleemployeemustbeactivelyemployed asofthepaymentdateinordertoreceiveapayout.
Annual Incentive Plan
Theannualincentiveplanisdesignedtoattract,retainandmotivatehigh-qualitypeople,andtoprovidecompetitive,performance-basedopportunitiesbasedonmarketpracticesandATRF’sbusinessstrategy.Performancemeasures,targetsandweightingsareapprovedannuallybytheHRCC.Corporate,fundandportfoliobenchmarksaswellasindividualobjectivesareestablishedatthebeginningoftheyear,andactualperformanceisevaluatedattheendoftheyear.Eachparticipant’stargetcorporateincentivepaymentiscalculatedbasedonapercentageofsalary.Basedonactualperformanceagainstpre-approvedobjectives,payoutscanrangefromzerototwotimesthetargetcorporateincentiveamount.
Investmentincentivepaymentsarebasedontheachievementoftotalfundand/orportfolioperformanceaboveestablishedbenchmarks.ConsistentwithATRF’scompensationobjectives,paymentsarecalculatedbasedona75%weighttowardslong-termperformanceresultsoverafour-yearrollingaverageperiodand25%towardstheperformanceinthepastyear.Targetinvestmentincentiveopportunitiesaresetasapercentageofsalaryandrewardfordeliveringtargetbenchmarkperformanceorbetter.Basedontotalfundand/orportfolioperformance,actualpaymentscanrangefromzerototwotimesthetargetincentiveamount.Theannualincentiveplanhasathresholdlevelofperformance.Ifthethresholdisnotmet,incentivepaymentsarenotmade.Thethreshold,targetandmaximumvalue-addhurdlesarecalibratedtoaccountforATRF’sinvestmentstrategyandportfoliomix, whichinherentlyaccountsforATRF’sriskprofile.
2010 2011 2012 2013 2014 2015 2016 2017
Grant
Grant
Grant
Grant
Payout
Payout
Payout
Payout
Payout Timeline
32 2013 ANNUAL REPORT COMPENSATIONDISCUSSION&ANALYSIS
Pension and Benefits
ATRFprovidesacompetitivebenefitsprogram thatincludespensionbenefits,healthanddental- carebenefits,lifeinsurance,illnessandlong-termdisabilitycoverage,professionalmembershipsand carallowances.
AllATRFstaffparticipateintheLocalAuthoritiesPensionPlan(LAPP).Thisisadefinedbenefitpensionplan,andprovidesforapensionof1.4%foreachyearofpensionableservicebasedontheaveragesalaryofthehighestfiveconsecutiveyearsuptotheYear’sMaximumPensionableEarningsundertheCanadaPensionPlanand2.0%ontheexcess.BenefitsunderthisplanarecappedbypensionablesalaryreachedatthemaximumpensionbenefitlimitallowedunderthefederalIncome Tax Act.
Whereearningsareinexcessofthiscappedpensionablesalary,anon-registered,unfundedSupplementaryEmployeePensionPlan(SEPP)providesforapension,inrespectofserviceafterAugust1999equaltothepensionformulaundertheLAPP,withnocapappliedtopensionablesalary,lesstheinitialpensionprovidedundertheLAPP.ParticipationintheSEPPislimitedtoexecutives,management,AssetClassHeadsandSeniorPortfolioManagers.ForpensionableservicebeforeSeptember1,2012,pensionablesalaryundertheSEPPincludes50%oftheactualannualincentivetarget-levelamountpaidundertheannualincentiveplan.ForpensionableserviceafterAugust31,2012,pensionablesalaryislimitedtobasesalarypaid.
Summary Performance
Forthe2012-13fiscalyear,incentiveplancompensationwaspaidinrelationtomeetingandexceedingpre-setcorporateobjectives,individualportfoliobenchmarksandtoproportionatelyrecognizetheabove-benchmarkperformanceoftheoverallfundinthepastfiscalyear.
Investment Performance
Inthe2012-13fiscalyear,thefundearnedarateofreturnof14.0%,exceedingthefund’s11.5%benchmarkby2.5%.Thisoutperformanceresultedin$172millionofvalue-addedinvestmentperformancebyATRF,whichwillbereinvestedintothefund.
Overthefour-yearperiodendedAugust31,2013,theinvestmentfundearnedarateofreturnof9.1%.Thiscomparestothefund’s7.9%benchmarkreturnresultingina1.2%or$280millionofvalueaddtotheassetsofthefund.
Corporate Performance
ATRF’sHRCCestablishedthefollowingcorporateobjectivesforthe2012-13fiscalyear,whichalignwithATRF’sstrategic,enterprise-wideriskmanagementandbusinessplans.Executives’performance-basedincentivesweremeasuredbasedontheirachievementagainsteachoftheseobjectives.
Objective Measure Achieved
PolicyAssetMix Completerisk-focusedassetliabilitystudy,andreviewandupdatethe AboveTarget investmentpolicyandassetmix
Implementrelatedgrowthinstaff,midandback-officeinvestmentfunctions, BelowTarget controlsandreporting
Implementplannedgrowthinilliquidassetprogram Target
EnterpriseRisk Provideplansponsorswithproactivesupportandinformationonplan Maximum ManagementPlan sustainability,fundingcontributionraterequirementsandbenefitissues
Supporttheboarddevelopmentinitiatives Maximum
PlanSponsorResults Provideinformation,supportandassessplansponsors’issuesand AboveTarget maintainATRF’sreputation
InvestmentResults TotalFundValueAddReturn Maximum
2013 ANNUAL REPORT 33COMPENSATIONDISCUSSION&ANALYSIS
Summary Compensation Table
Thetablebelowprovidescompletedisclosureofsalary,annualincentivepayments,valueofSEPPbenefitsand allothercompensationearnedforyearsendedAugust31,2013,2012and2011bytheChiefExecutiveOfficer, ChiefInvestmentOfficerandthethreeothermosthighlycompensatedseniorstaff.
PensionsundertheSEPPwillbepaidwhentheycomedue.Accordingly,nopre-fundingoccurs.SEPPfinancingcostsareincludedinpensionexpense.
3 AllOtherCompensationincludesvacationpayoutsandtheemployer’sshareofallemployeebenefitsandcontributionsorpaymentsmadeonbehalfofemployees,includingpension(excludingSEPP),healthanddentalcare,lifeinsurance,long-termdisabilityplan,professionalmemberships,andcarallowances.
($Dollars) ChangeinPresentValueofAccruedBenefitdueto:
PresentValueofAccrued BenefitAccrualand InterestCostand PresentValueofAccruedNameandPosition BenefitsAugust31,2012 ChangeinPlan ChangeinAssumptions BenefitsAugust31,2013
Emilian Groch ChiefExecutiveOfficer 614,500 56,800 41,500 712,800
Derek Brodersen ChiefInvestmentOfficer 330,300 40,400 14,000 384,700
Charlie Kim SeniorPortfolioManager,Equities 40,200 10,300 1,300 51,800
Andy Elson SeniorPortfolioManager,FixedIncome 54,600 10,300 3,000 67,900
Rakesh Saraf Head,PrivateInvestments 35,500 17,000 1,900 54,500
Annual Long-Term Incentive Incentive All Other Total Name and Position Year Salary Plan Plan1 SEPP2 Compensation3 Compensation
Emilian Groch 2013 375,000 474,900 522,200 56,800 45,600 1,474,500ChiefExecutive 2012 375,000 237,100 10,000 (89,100) 40,300 573,300Officer 2011 320,000 86,000 – 294,400 40,000 740,400
Derek Brodersen 2013 300,000 306,100 320,400 40,400 44,500 1,011,400ChiefInvestment 2012 300,000 128,300 6,100 (189,600) 40,000 284,800Officer 2011 255,000 48,300 – 204,000 38,300 545,600
Charlie Kim 2013 223,600 169,200 209,500 10,300 33,600 646,200SeniorPortfolio 2012 216,000 124,600 3,900 (6,400) 30,500 368,600Manager,Equities 2011 204,300 54,000 – 13,100 27,100 298,500
Andy Elson 2013 211,100 85,600 170,900 10,300 33,000 510,900SeniorPortfolio 2012 200,400 65,000 2,900 20,300 30,600 319,200Manager,FixedIncome 2011 190,000 59,400 – 16,300 28,800 294,500
Rakesh Saraf 2013 250,000 190,200 – 17,000 34,000 491,200Head, 2012 210,000 123,800 – 12,200 31,000 377,000PrivateInvestments 2011 191,700 72,800 – 13,300 28,800 306,600
Summary Compensation Table ($Dollars–Audited)
1 AstheLTIPwaseffectiveSeptember1,2008,thefirstactualpayoutforeligibleparticipantswasdeterminedasatthecompletionofthe2011-12fiscalyear.2 ThepresentvalueoftheaccruedbenefitsoftheSEPPisestimatedbasedontheprojectedbenefitmethodproratedonservice,incorporatingthesameassumptionsused forthePlans(seeNote5(a)tothefinancialstatements),andrepresententitlementsthatmaychangeovertime.Inparticular,thepresentvalueforthenamedemployees isbasedonbenefitamountsthathavebeenprojectedforsalaryincreasestoretirementandasofAugust31,2013theamount,recordedinaccountspayable,is$1,271,600(2012-$1,075,100).Thepresentvalueofaccruedbenefits,basedontheaccruedpensionablesalaryearnedtoAugust31,2013,thatwouldbepaidifallnamedemployeesleftemploymentis$1,020,400(2012-$795,900).
34 2013 ANNUAL REPORT COMPENSATIONDISCUSSION&ANALYSIS
Long-term Incentive Awards, Accumulated Value
LTIPawardsaregrantedatthestartofafiscalyearandpaidoutattheendofthefour-yearvestingperiod. ThefollowingtableshowstheLTIPandestimatedfuturepayoutsforthefivemosthighlycompensatedsenior staff.ThefuturevalueoftheawardsgrantedbutnotyetvestedareestimatedasatAugust31,2013,basedon:
• actualperformancemultipliersforfiscalyears2010-11,2011-12and2012-13,andpro-formamultipliers ofone(1.0x)forfutureyears;and
• actualfundratesofreturnforfiscalyears2010-11,2011-12and2012-13,andnoassumedgrowth infutureyears.
Succession Planning
ATRFhasshort-termcontingencyplansandlonger-termsuccessionplansinplacefortheChiefExecutiveOfficerandseniormanagement.Inidentifyingpotentialsuccessors,theBoardandChiefExecutiveOfficerconsiderATRF’sfuturebusinessstrategy,thecoreskillsandexperiencesrequiredtocarryoutthisstrategyandtheleadershipabilitiesofindividuals.Wheretherearegapsinexperienceorskillsofpotentialsuccessors,theChiefExecutiveOfficerdiscussesdevelopmentalopportunitieswiththeindividualandwiththeBoard.TheBoardalsoensures thattheBoardmembersgettoknowthepotentialsuccessorsidentified,throughBoardpresentationsandevents.
TheHRCCreviewsthesuccessionplanfortheentireleadershipteamonanannualbasis.Thesuccessionplan fortheChiefExecutiveOfficerwasupdatedin2012-13.
Long-Term Incentive Plan Awards and Estimated Future Payouts
1Representsthetargetvalueatthetimeofgrant;noawardispayableifperformanceisbelowathresholdvalue-addhurdle.2Representsthemaximumvaluepayableattheendofthefour-yearvestingperiod.SeetheLTIPsectionfordetails.
Year of Award Maximum Name and Position Grant (Target Value)1 Value2 2014 2015 2016
Emilian Groch 2012-13 281,300 843,900 – – 766,200ChiefExecutive 2011-12 281,300 843,900 – 843,900 –Officer 2010-11 240,000 720,000 720,000 – –
Derek Brodersen 2012-13 180,000 540,000 – – 490,300ChiefInvestment 2011-12 180,000 540,000 – 540,000 –Officer 2010-11 127,500 382,500 382,500 – –
Charlie Kim 2012-13 89,400 268,200 – – 243,600SeniorPortfolioManager, 2011-12 84,000 252,000 – 252,000 –Equities 2010-11 81,600 244,800 244,800 – –
Andy Elson 2012-13 84,400 253,200 – – 230,000SeniorPortfolioManager, 2011-12 80,200 240,600 – 240,600 –FixedIncome 2010-11 76,000 228,000 228,000 – – Rakesh Saraf 2012-13 100,000 300,000 – – 272,400Head, 2011-12 84,000 252,000 – 252,000 –PrivateInvestments 2010-11 76,700 230,100 230,100 – –
Estimated Future Payouts at fiscal year ending August 31:
($Dollars–Audited)
2013 ANNUAL REPORT 35COMPENSATIONDISCUSSION&ANALYSIS
Board Remuneration
TheTeachers’ Pension Plans ActprovidesthatnoremunerationcanbepaidtoanyBoardmemberwhois employedbyanemployercoveredbytheplans,theGovernmentofAlbertaorTheAlbertaTeachers’Association.TheBoardannuallyreviewsandsetstheremunerationforBoardmemberswhoareeligibletoreceiveremuneration.ThereviewisbasedonasurveyoftheremunerationratesbeingpaidbyothersimilarCanadianpublic-sectorpensioninvestmentandadministrationorganizations.OnlyoneBoardmemberwaseligibleto receiveremunerationinthe2012-13fiscalyear.
Inthepastyear,Boardremunerationwaspaidaccordingtothefollowingschedule:anannualBoardmemberretainerof$15,000;anannualcommitteechairretainerof$4,000;aBoardmeetingfeeof$1,200,andcommitteemeetingfeesof$800,formeetingsuptofourhoursinanyoneday,and$1,200formeetingsinexcessoffourhoursinanyoneday.SeparatefeesarenotpaidforcommitteemeetingsheldthesamedayasaBoardmeeting.
Boardmembersarereimbursedforreasonableexpensesfortravel,mealsandaccommodation,asrequired.
Duringthe2012-13fiscalyear,BoardmembersattendedallBoardmeetingsandeachapplicablecommitteemeeting,exceptthatoneBoardmemberwasunabletoattendoneBoardmeetingandanotherBoardmember wasunabletoattendtwomeetingsoftheInvestmentCommittee.
1 AppointedtotheBoardDecember19,2012.2 RetiredfromtheBoardSeptember23,2012.
Board remuneration ($Dollars–Audited)
Board Board Committee Meeting Total 2012-13 Total 2011-12Member Retainer Meetings Meetings Fees Remuneration Remuneration
HarryBuddle 15,000 7/7 11/11 16,800 31,800 30,200KarenElgert n/a 7/7 8/10 n/a n/a n/aLowellEpp n/a 6/7 13/13 n/a n/a n/aSandraJohnston1 n/a 4/4 11/11 n/a n/a n/aGregMeeker n/a 7/7 6/6 n/a n/a n/aGeneWilliams n/a 7/7 9/9 n/a n/a n/aSharonVogrinetz2 n/a 0/0 0/0 n/a n/a n/a
36 2013 ANNUAL REPORT ALbERTA TEAchERs’ RETiREmENT FUNdFINANCIALS
finAnCiAls2013 ATRF
Management’sResponsibilityforFinancialReporting 37
IndependentAuditor’sReport 38
Actuary’sOpinion 39
FinancialStatements 40
NotestotheFinancialStatements 42
2013 ANNUAL REPORT 37ALBERTA TEACHERS’ RETIREMENT FUND MANAGEMENT’SRESPONSIBILITYFORFINANCIALREPORTING
Management’s Responsibility for
ThefinancialstatementsoftheAlbertaTeachers’RetirementFundBoardandallinformationintheAnnualReport aretheresponsibilityofmanagementandhavebeenapprovedbytheBoard.ThefinancialstatementshavebeenpreparedinaccordancewithCanadianaccountingstandardsforpensionplans.Wherenecessary,management hasmadeinformedjudgmentsandestimatesoftheoutcomeofeventsandtransactionswithdueconsideration tomateriality.
FinancialandoperatingdataelsewhereintheAnnualReportisconsistentwiththeinformationcontained inthefinancialstatements.
FortheintegrityoffinancialinformationincludedinthisAnnualReport,managementreliesontheorganization’ssystemofinternalcontrolsandsupportingprocedures.Thissystemhasbeenestablishedtoensurewithinreasonablelimitsthatassetsaresafeguarded,thattransactionsareproperlyexecutedinaccordancewithmanagement’sauthorization,andthattheaccountingrecordsprovideasolidfoundationfromwhichtopreparethefinancialstatements.Controlsincludehighqualitystandardsforhiringandtrainingemployees,anorganizationalstructurethatprovidesawell-defineddivisionofresponsibilitiesandaccountabilityforperformance,andthecommunicationofpoliciesandguidelinesthroughouttheorganization.
UltimateresponsibilityforthefinancialstatementsrestswiththeBoard,whichisassistedinitsresponsibilitiesbythestaffandtheAuditCommittee.TheAlbertaTeachers’RetirementFundBoard’sexternalauditor,theAuditorGeneral,hasconductedanindependentexaminationofthefinancialstatementsinaccordancewithCanadiangenerallyacceptedauditingstandards,performingsuchtestsandotherproceduresasheconsidersnecessarytoexpresstheopinioninhisreport.TheAuditCommitteeoftheBoardreviewstheAuditor’sReportandthefinancialstatementsandrecommendsthemforapprovalbytheBoard.TheAuditorGeneralhasfullandunrestrictedaccesstodiscusstheauditandrelatedfindingsregardingtheintegrityoffinancialreportingandtheadequacyofinternalcontrolsystems.
MylesNorton,CMA,CFA Director,FinancialServices
EmilianV.Groch ChiefExecutiveOfficer
SignaturesPending SignaturesPending
finAnCiAl rePortinG
38 2013 ANNUAL REPORT ALbERTA TEAchERs’ RETiREmENT FUNdINDEPENDENTAUDITOR’SREPORT
Independent Auditor’srePortTotheAlbertaTeachers’RetirementFundBoard
Report on the Financial StatementsIhaveauditedtheaccompanyingfinancialstatementsoftheAlbertaTeachers’RetirementFundBoard,whichcomprisethestatementoffinancialpositionasatAugust31,2013,andthestatementsofchangesinnetassetsavailableforbenefitsandchangesinpensionobligationsfortheyearthenended,andasummaryofsignificantaccountingpoliciesandotherexplanatoryinformation.
Management’s Responsibility for the Financial StatementsManagementisresponsibleforthepreparationandfairpresentationofthesefinancialstatementsinaccordancewithCanadianaccountingstandardsforpensionplans,andforsuchinternalcontrolasmanagementdetermines isnecessarytoenablethepreparationoffinancialstatementsthatarefreefrommaterialmisstatement, whetherduetofraudorerror.
Auditor’s ResponsibilityMyresponsibilityistoexpressanopiniononthesefinancialstatementsbasedonmyaudit.IconductedmyauditinaccordancewithCanadiangenerallyacceptedauditingstandards.ThosestandardsrequirethatIcomplywithethicalrequirementsandplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreefrommaterialmisstatement.
Anauditinvolvesperformingprocedurestoobtainauditevidenceabouttheamountsanddisclosuresinthefinancialstatements.Theproceduresselecteddependontheauditor’sjudgment,includingtheassessmentof therisksofmaterialmisstatementofthefinancialstatements,whetherduetofraudorerror.Inmakingthose riskassessments,theauditorconsidersinternalcontrolrelevanttotheentity’spreparationandfairpresentationofthefinancialstatementsinordertodesignauditproceduresthatareappropriateinthecircumstances,butnotforthepurposeofexpressinganopinionontheeffectivenessoftheentity’sinternalcontrol.Anauditalsoincludesevaluatingtheappropriatenessofaccountingpoliciesusedandthereasonablenessofaccountingestimatesmadebymanagement,aswellasevaluatingtheoverallpresentationofthefinancialstatements.
IbelievethattheauditevidenceIhaveobtainedissufficientandappropriatetoprovideabasisfor myauditopinion.
OpinionInmyopinion,thefinancialstatementspresentfairly,inallmaterialrespects,thefinancialpositionofthe AlbertaTeachers’RetirementFundBoardasatAugust31,2013,andthechangesinitsnetassetsavailable forbenefitsandchangesinitspensionobligationsfortheyearthenendedinaccordancewithCanadian accountingstandardsforpensionplans.
[OriginalSignedbyMerwanN.Saher,FCA] AuditorGeneral December17,2013 Edmonton,Alberta
2013 ANNUAL REPORT 39ALBERTA TEACHERS’ RETIREMENT FUND ACTUARY’SOPINION
Actuary’soPinionAonHewitthasbeenengagedbytheAlbertaTeachers’RetirementFundBoard(“ATRF”)toprepareactuarialvaluationsfortheTeachers’ Pension PlanandthePrivate School Teachers’ Pension Plan (the“Plans”)asat August31,2013.Thepurposeofthesevaluationsistodeterminethenecessaryactuarialinformationfor financialstatementreportingforthePlansinaccordancewithSection4600oftheCanadianInstituteof CharteredAccountants’Handbook(“CICA4600”).
Ourvaluationshavebeenpreparedbasedon:
• membershipandassetdataprovidedbyATRFasatAugust31,2013andadjustedtoreflect anticipatednewhiresasatSeptember1,2013;
• assumptionsthatweunderstandhavebeenadoptedasATRFmanagement’sbestestimates;and• actuarialcostmethodsandassetvaluationmethodsthatareinaccordanceCICA4600.
Basedontheworkwehaveperformed,includingconductingreasonabilitytestsonthemembershipandassetdata,wehaveconcludedthat,inouropinion:
• thedataissufficientandreliable;• theassumptionsadoptedasbestestimatebyATRF’smanagementare,inaggregate,appropriate
whenconsideringthecircumstancesofthePlansandthepurposeofthevaluations;• theactuarialcostmethodsandtheassetvaluationmethodsemployedareappropriateforthe
purposeofthevaluations;and• thevaluationsconformwiththerequirementsofSection4600ofthehandbookofthe
CanadianInstituteofCharteredAccountants.
WhiletheactuarialassumptionsusedtoestimatethePlans’liabilitiesrepresentATRFmanagement’sbestestimateoffutureeventsandmarketconditionsatAugust31,2013,thePlans’futureexperiencewilldifferfromtheactuarialassumptions.Emergingexperiencedifferingfromtheassumptionswillresultingainsorlossesthatwillberevealedinfuturevaluations,andwillaffectthefinancialpositionofthePlans.
Ouropinionshavebeengiven,andourvaluationshavebeenperformed,inaccordancewithacceptedactuarialpracticeinCanada.
RobertJ.Thiessen DonaldL.IrelandFellow,CanadianInstituteofActuaries Fellow,CanadianInstituteofActuariesFellow,SocietyofActuaries Fellow,SocietyofActuaries
November12,2013
SignaturesPending SignaturesPending
40 2013 ANNUAL REPORT ALbERTA TEAchERs’ RETiREmENT FUNdFINANCIALSTATEMENTS
stAteMentsFinancial
Theaccompanyingnotesarepartofthesefinancialstatements.
ApprovedbytheBoard
GregMeeker LowellEpp Chair ViceChair
2013 2012
Assets
Investments(Note3) $ 8,579,864 $ 7,190,833
Contributionsreceivable 19,405 17,234
Otherassets 1,620 1,020
8,600,889 7,209,087
Liabilities
Accountspayable(Note4) 19,862 15,058
Net assets available for benefits 8,581,027 7,194,029
Accrued pension obligations (Note5) 9,406,344 9,108,721
Deficiency $ 825,317 $ 1,914,692
statement of financial Position AsatAugust31($Thousands)
SignaturesPending SignaturesPending
2013 ANNUAL REPORT 41ALBERTA TEACHERS’ RETIREMENT FUND FINANCIALSTATEMENTS
statement of Changes in Pension obligations FortheyearendedAugust31($Thousands) 2013 2012
Accrued pension obligations, beginning of year $ 9,108,721 $ 8,294,365
Increase (decrease) in accrued pension obligations
Interestonaccruedbenefits 665,750 586,557
Benefitsaccrued 434,207 427,515
Changesinactuarialassumptions (583,737) –
Experiencelosses 64,731 57,762
Benefitspaid (283,328) (257,478)
297,623 814,356
Accrued pension obligations, end of year (Note 5) $ 9,406,344 $ 9,108,721
Statement of Changes in Net Assets Available for Benefits FortheyearendedAugust31($Thousands) 2013 2012
Net assets available for benefits, beginning of year $ 7,194,029 $ 6,335,072
Investment operations
Investmentincome(Note6) 217,346 187,125
Changeinfairvalueofinvestments(Note6) 807,206 324,842
Administrativeexpenses(Note7) (33,150) (23,316)
Netinvestmentoperations 991,402 488,651
Member service operations
Contributions(Note8)
Teachers 352,549 327,369
TheProvince 324,613 301,832
Employers 1,756 1,458
Nettransfersfromotherplans 5,463 2,219
Benefitspaid(Note9) (283,328) (257,478)
Administrativeexpenses(Note7) (5,457) (5,094)
Net member service operations 395,596 370,306
Increase in net assets available for benefits 1,386,998 858,957
Net assets available for benefits, end of year $ 8,581,027 $ 7,194,029
Theaccompanyingnotesarepartofthesefinancialstatements.
42 2013 ANNUAL REPORT ALbERTA TEAchERs’ RETiREmENT FUNdNOTESTOTHEFINANCIALSTATEMENTS
stAteMentsNotes to the Financial
NOTE 1DESCRIPTION OF PLANS
ThefollowingdescriptionoftheTeachers’Pension PlanandthePrivateSchoolTeachers’PensionPlan (the“Plans”)isasummaryonly.
a) General
TheAlbertaTeachers’RetirementFundBoard(“ATRF”),acorporationoftheProvinceofAlberta(the“Province”)operatingundertheauthorityof theTeachers’PensionPlansAct,ChapterT-1,RSA2000,isthetrusteeandadministratorofthePlans.ThePlansarecontributorydefined-benefitpensionplansfortheteachersofAlberta.
ThePlansareregisteredpensionplansasdefinedintheIncome Tax Act(registrationnumber0359125)andarenotsubjecttoincometaxesinCanada.ThePlansmaybesubjecttotaxesinotherjurisdictionswherefulltaxexemptionsarenotavailable.
b) Obligations relating to the period before September 1992
TheTeachers’PensionPlan’sassetsandobligationsrelatedtopensionableserviceafterAugust31,1992(the“Post-1992period”)havebeenaccountedforseparatelyfromtheassetsandobligationsrelated topensionableservicepriortoSeptember1,1992(the“Pre-1992period”)and,accordingly,thesefinancialstatementsandnotesincludeonlyPost-1992periodtransactionsoftheTeachers’PensionPlanandtransactionsofthePrivateSchoolTeachers’PensionPlan.
EffectiveSeptember1,2009,theProvince assumedfullresponsibilityforobligationsrelated toPre-1992periodpensionableserviceandprovidestherequiredamountstoATRFtopaytheobligationsonamonthlybasis.
c) Funding
ThedeterminationofthevalueofthebenefitsandtherequiredcontributionsforthePlansismadeonthebasisofperiodicactuarialvaluations.
AllteachersundercontractwithschooljurisdictionsandcharterschoolsinAlbertaarerequiredtocontributetotheTeachers’PensionPlan.CurrentservicecostsandrelateddeficienciesarefundedbyequalcontributionsfromtheProvinceandtheteachers.Anadditional10percentcostoflivingadjustmentforserviceearnedafter1992isfundedentirelybytheteachers.
CertainotherdesignatedorganisationsinAlbertaalsoparticipateintheTeachers’PensionPlanunderthesamefundingarrangements,excepttheseorganisationsmaketheemployercontributionsratherthantheProvince.
CertainprivateschoolsparticipateinthePrivateSchoolTeachers’PensionPlan.Plancostsare fundedbycontributionsfromtheemployers andtheteachers.
2013 ANNUAL REPORT 43ALBERTA TEACHERS’ RETIREMENT FUND NOTESTOTHEFINANCIALSTATEMENTS
d) Retirement pensions
Retirementpensionsarebasedonthenumberofyearsofpensionableserviceandthehighestconsecutivefive-yearaveragesalary.Pensionsarepayabletoteacherswhoretireaftercompletionofatleastfiveyearsofpensionableservice,withcertainrestrictions,andwhohaveattainedage65.Unreducedpensionsarealsopayabletoteacherswhohavereachedatleastage55andthesumoftheirageandserviceequals85.Withcertainrestrictions,reducedearlyretirementpensionsarepayabletoteacherswhoretireonorafterage55withaminimumoffiveyearsofpensionableservice.
e) Disability benefits
TeacherswhoaredisabledafterAugust31,1992 arecreditedwithpensionableservicewhile disabled.Teachersdonotcontributetothe Planswhiledisabled.
f) Termination benefits
Refundsorcommutedvaluetransfersareavailablewhenateacherceasesemployment.
g) Death benefits
Deathbenefitsareavailableuponthedeathofateacherandmaybeavailableuponthedeathof aretiredmember.Thebenefitmaytaketheform ofalumpsumpaymentorasurvivorpension.
h) Other provisions
PurchaseofpastserviceandreinstatementofrefundedserviceisallowedonabasisthatiscostneutraltothePlans.
i) Cost-of-living adjustments
Pensionspayableareincreasedeachyearbyanamountequalto60percentoftheincreaseintheAlbertaConsumerPriceIndex.Theportionof pensionearnedafter1992isincreasedbyanadditional10percentoftheincreaseinthe AlbertaConsumerPriceIndex.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of presentation
ThestatementspresenttheaggregatefinancialpositionofthePlans.Thesefinancialstatements arepreparedinaccordancewithCanadianaccountingstandardsforpensionplans.Section4600–PensionPlans,oftheCanadianInstituteofCharteredAccountants(“CICA”)Handbook,prescribes accountingpoliciesspecifictoinvestmentsandpensionobligations.Foraccountingpolicieswhichdonotrelatetoeitherinvestmentsorpensionobligations,InternationalFinancialReportingStandards(“IFRS”)areapplied.TotheextentthatIFRSisinconsistent withSection4600,Section4600takesprecedence.
44 2013 ANNUAL REPORT ALbERTA TEAchERs’ RETiREmENT FUNdNOTESTOTHEFINANCIALSTATEMENTS
b) Investments
Investments,investmentreceivablesandinvestmentliabilitiesarerecognizedonatradedatebasis andarestatedatfairvalue.
i)VALUATIONOFINVESTMENTS
Fairvalueisthepriceatwhichaninvestmentassetwouldbesoldorinvestmentliabilitytransferredthrough anorderlytransactionbetweenmarketparticipantsatthemeasurementdateundercurrentmarketconditions.
Fairvaluesaredeterminedasfollows:
CATEGORY BASIS OF VALUATION
Money-market securities Costplusaccruedinterestapproximatesfairvalueduetotheshort-term natureofthesesecurities.
Bonds and debentures Closingquotedmarketprice.Wherequotedpricesarenotavailable, estimatedvaluesarecalculatedusingdiscountedcashflowsbasedon currentmarketyieldsforcomparablesecurities.
Public equity Closingquotedmarketprice.Whereamarketpriceisnotavailable, marketvalueisdeterminedusingappropriatevaluationmethods.
Real estate Realestateassetsandliabilitiesarehelddirectlyandthroughlimitedpartnerships. Fairvaluefordirectinvestmentsinrealestatearebasedonestimatedfairvalues usingappropriatevaluationtechniquessuchasdiscountedcashflowsandcomparablepurchasesandsalestransactions.Investmentsheldthroughlimitedpartnershipsare valuedusingcarryingvaluesreportedbythegeneralpartnerusingsimilaracceptedindustryvaluationmethods.
Infrastructure Infrastructureinvestmentsaremadethroughjointventuresofvaryinglegalforms. Fairvalueinformationisprovidedbyinvestmentmanagersusingappropriate valuationtechniques.
Private companies Investmentsinprivatecompaniesareheldthroughlimitedpartnershipsandinvestmentfunds.Fairvalueisdeterminedbasedoncarryingvaluesandotherrelevantinformationreportedbytheinvestmentmanagerusingacceptedvaluationmethods.Inthefirstyear ofownership,costisgenerallyconsideredtobeanappropriateestimateoffairvalue.
Derivatives Marketpricesareusedforexchange-tradedderivativessuchasfutures. Wherequotedmarketpricesarenotavailable,appropriatevaluationtechniques areusedtodeterminefairvalue.
DerivativecontractsenteredintobyATRFeitherdirectlywithcounterpartiesinthe over-the-countermarketoronregulatedexchangesincludeforeignexchangeforwards.Aforeignexchangeforwardcontractisacontractualagreementbetweentwopartiestoexchangeanotionalamountofonecurrencyforanotherataspecifiedpriceforsettlementonapredetermineddateinthefuture.ATRFusesforeign-exchangeforwardcontractstomodifycurrencyexposureforbothhedgingandactivecurrencymanagement.
2013 ANNUAL REPORT 45ALBERTA TEACHERS’ RETIREMENT FUND NOTESTOTHEFINANCIALSTATEMENTS
ii)INCOMERECOGNITION
Investmentincomeincludesinterestanddividends,netincomefromrealestateandprivatecompanyinvestments,andunrealizedgainsandlossesresultingfromchangesinthefairvalueofinvestmentsandundistributedincome.
Incomeisrecognizedasfollows:
c) Fair value disclosures
Allfinancialinstrumentsmeasuredatfairvalue arecategorizedintooneofthefollowingthreehierarchylevels.Eachlevelreflectstheavailability ofobservableinputswhichareusedtodeterminefairvalues:
Level1–inputsareunadjustedquotedprices ofidenticalassetsorliabilitiesinactivemarkets.
Level2–inputsareotherthanquotedpricesincludedinLevel1thatareobservableforthe assetorliability,eitherdirectlyorindirectly.
Level3–oneormoresignificantinputsusedinavaluationtechniqueareunobservableindeterminingfairvaluesoftheassetsorliabilities.
Determinationoffairvalueandtheresultinghierarchyrequirestheuseofobservablemarketdatawheneveravailable.Theclassificationofafinancialinstrumentinthehierarchyisbaseduponthelowestlevelofinputthatissignificanttothemeasurementoffairvalue.
iii)TRANSACTIONCOSTS
Transactioncostsareincrementalcostsattributabletotheacquisition,issueordisposalofinvestmentassets orliabilities.Transactioncostsareexpensedasincurred,oninitialrecognitionofinvestmentsacquired.
d) Foreign currency translation
AssetsandliabilitiesdenominatedinforeigncurrenciesaretranslatedintoCanadiandollars attheexchangeratesprevailingontheyear-enddate.IncomeandexpensesaretranslatedintoCanadiandollarsattheexchangeratesprevailing onthedatesofthetransactions.Therealized gainsandlossesarisingfromthesetranslations areincludedwithinchangeinfairvalueofinvestmentsininvestmentearnings.
e) Contributions
Contributionsfromthemembers,theProvince andtheemployersarerecordedonanaccrualbasis.Cashreceivedfrommembersforcreditedserviceandcashtransfersfromotherpensionplansarerecordedwhenreceived.
CATEGORY BASIS OF RECOGNITION
Interest income Accrualbasis.
Dividend income Accrualbasisontheex-dividenddate.
Net operating income from real estate and private companies
Mostcurrentavailableoperatingincomereportedbytheinvestment manager(whereapplicable,incomeisreportednetofmanagementfees chargedbygeneralpartners).
Realized gains and losses on investments
Differencebetweenproceedsondisposalandtheaveragecost.
Unrealized gains and losses on investments
Changeinthedifferencebetweenestimatedfairvalueandcost.
46 2013 ANNUAL REPORT ALbERTA TEAchERs’ RETiREmENT FUNdNOTESTOTHEFINANCIALSTATEMENTS
f) Benefits
Pensionbenefits,terminationbenefitsandtransferstootherplansarerecordedintheperiodinwhichtheyarepaid.Anybenefitpaymentaccrualsnot paidarereflectedinaccruedpensionbenefits.
g) Accrued pension benefits
Thevalueofaccruedpensionbenefitsandchangesthereinduringtheyeararebasedonanactuarialvaluationpreparedbyanindependentfirmofactuaries.Thevaluationismadeannuallyasat August31.Itusestheprojectedbenefitmethod pro-ratedonserviceandmanagement’sbestestimate,asatthevaluationdate,ofvarious futureevents.
h) Capital assets
Capitalassetsarerecordedatcostandamortized onastraight-linebasisovertheirestimatedusefullives.Costsnetofaccumulatedamortizationareincludedwith‘otherassets’ontheStatements ofFinancialPosition.
i) Use of estimates
Thepreparationoffinancialstatements, inconformitywithCanadianaccountingstandardsforpensionplans,requiresmanagementtomakeestimatesandassumptionsthataffecttheamountsreportedinthefinancialstatements.Actualresultscoulddifferfromthoseestimates.
MeasurementuncertaintyexistsinthecalculationofthePlans’actuarialvalueofaccruedbenefits.UncertaintyarisesbecausethePlans’actualexperiencemaydiffersignificantlyfromassumptionsusedinthecalculationofthePlans’accruedbenefits.
Measurementuncertaintyexistsinthevaluation ofthePlans’privateinvestmentsasvaluesmay differsignificantlyfromthevaluesthatwould havebeenusedhadareadymarketexistedfor theseinvestments.
j) Salaries, incentives and benefits
DetailsofseniorstaffcompensationandBoardmemberremunerationincludedin“salariesandbenefits”(Note7)arepresentedintheCompensationandDiscussionAnalysissectionoftheAnnualReport.
TheBoardparticipatesintheLocalAuthoritiesPensionPlan,adefinedbenefitpublicsectorpensionplan,whichmeetstheaccountingrequirements fortreatmentasadefinedcontributionplan. Theemployercontributionsarerecordedas anexpenseundersalariesandbenefits(Note7).
TheBoardprovidesaSupplementaryEmployeePensionPlan(SEPP)toexecutivesandmanagerswhoseearningsexceedthepensionbenefitlimitundertheIncome Tax Actregulations.Thepensionbenefitisrecordedasanexpenseundersalaries,incentivesandbenefits(Note7)andasaliability(Note4).
2013 ANNUAL REPORT 47ALBERTA TEACHERS’ RETIREMENT FUND NOTESTOTHEFINANCIALSTATEMENTS
NOTE 3INVESTMENTS
ThefollowingschedulesummarizesthecostandfairvalueofthePlans’investmentsbeforeallocatingthemarketexposurerelatedtoderivativefinancialinstruments.
($Thousands) 2013 2012
Fair Value Cost Fair Value Cost
Fixed income
Cash $ 179,724 $ 179,724 $ 100,351 $ 100,351
Money-marketsecurities 293,911 293,911 135,475 135,475
Bondsanddebentures 2,161,553 2,147,640 2,228,620 2,042,681
2,635,188 2,621,275 2,464,446 2,278,507
Public equities
Canadian 1,384,905 1,105,100 1,239,230 1,079,703
Foreign 3,241,787 2,699,951 2,582,536 2,441,481
4,626,692 3,805,051 3,821,766 3,521,184
Private companies 591,673 498,975 358,590 337,806
Infrastructure 278,243 239,964 186,940 177,962
Real estate 446,019 383,843 334,913 319,991
Investment related assets
Accruedincome 11,173 11,173 29,128 29,128
Unrealizedgainsandamounts
receivableonderivativecontracts 1,030,851 238,078 762,757 58,342
2,357,959 1,372,033 1,672,328 923,229
INVESTMENT ASSETS 9,619,839 7,798,359 7,958,540 6,722,920
Investment related liabilities
Unrealizedlossesandamounts
payableonderivativecontracts 1,032,567 238,297 763,294 60,649
Other 7,408 7,408 4,413 4,413
1,039,975 245,705 767,707 65,062
NET INVESTMENTS $ 8,579,864 $ 7,552,654 $ 7,190,833 $ 6,657,858
48 2013 ANNUAL REPORT ALbERTA TEAchERs’ RETiREmENT FUNdNOTESTOTHEFINANCIALSTATEMENTS
a) Fair value hierarchy
FinancialinstrumentsarecategorizedwithinthefairvaluehierarchyasdescribedinNote2(c)asfollows:
ThefollowingtablerepresentsareconciliationoffinancialinstrumentsincludedinLevel3ofthefairvaluehierarchy:
2013 ($Thousands) Level1 Level2 Level3 Total
Fixedincome $ 179,724 $ 2,455,464 $ – $ 2,635,188 Equity 4,626,692 – 591,673 5,218,365
Realestate&infrastructure – – 724,262 724,262
Netinvestment-relatedreceivables – 2,049 – 2,049
Netinvestments $ 4,806,416 $ 2,457,513 $1,315,935 $ 8,579,864
56% 29% 15% 100%
2012 ($Thousands) Level1 Level2 Level3 Total
Fixedincome $ 100,351 $ 2,364,095 $ – $ 2,464,446
Equity 3,821,766 – 358,590 4,180,356
Realestate&infrastructure – – 521,853 521,853
Netinvestment-relatedreceivables – 24,178 – 24,178
Netinvestments $ 3,922,117 $ 2,388,273 $ 880,443 $ 7,190,833
55% 33% 12% 100%
2013 ($Thousands) RealEstate&Infrastructure Equity Total
Balance,beginningofyear $ 521,853 $ 358,590 $ 880,443
Unrealizedgains 69,905 70,998 140,903
Purchases 132,504 162,085 294,589
Balance,endofyear $ 724,262 $ 591,673 $ 1,315,935
2012 ($Thousands) RealEstate&Infrastructure Equity Total
Balance,beginningofyear $ 184,453 $ 277,503 $ 461,956
Unrealizedgains 19,446 11,739 31,185
Purchases 317,954 69,348 387,302
Balance,endofyear $ 521,853 $ 358,590 $ 880,443
2013 ANNUAL REPORT 49ALBERTA TEACHERS’ RETIREMENT FUND NOTESTOTHEFINANCIALSTATEMENTS
2013 2012
Rateofreturnoninvestedassets 7.25% 7.00%
RateofAlbertainflation 2.75% 2.75%
Realwageincreases 1.00% 1.00%
NOTE 5ACCRUED PENSION OBLIGATIONS
a) Valuations and assumptions
AnactuarialvaluationoftheTeachers’PensionPlanforthePost-1992periodandthePrivateSchool Teachers’PensionPlanwasperformedasatAugust31,2013.ValuationsforthePlanswerealsoprepared asatAugust31,2012.Thepresentvalueofaccruedbenefitswasdeterminedusingtheprojectedbenefit methodproratedonservice.Theassumptionsusedinthevaluationsarebasedonmanagement’sbest estimateoffutureevents.
Themajorlong-termeconomicassumptionsusedinthebest-estimatevaluationsare:
b) Sensitivity of changes in major assumptions
Thetablebelowshowstheimpactofchangestomajorassumptions,holdingallotherassumptionsconstant:
Thecurrentservicecost(excluding0.2%foradministrativeexpenses)asapercentoftotalteachersalaries fortheTeachers’PensionPlanwas12.57%andforthePrivateSchoolTeachers’PensionPlanwas12.49%.
NOTE 4ACCOUNTS PAYABLE
($Thousands) 2013 2012
Taxwithholdings $ 8,558 $ 8,193
Long-TermIncentivePlan 4,620 1,443
TradePayables 4,496 2,206
SupplementaryEmployeePensionPlan 1,703 1,457
ContributionsduetotheProvince – 269
Other 485 1,490
$ 19,862 $ 15,058
Teachers’ Pension Plan Private School Teachers’ Pension Plan
0.50%decreasein 0.50%increase 0.50%decreasein 0.50%increase RateofReturnon inRateof RateofReturnon inRateof InvestedAssets Inflation InvestedAssets Inflation
1.27% 0.92% 1.59% 1.07%
$755million $504million $3million $2million
Increaseincurrentservicecosts (%oftotalteachersalaries)
Increaseinaccruedpensionobligations
50 2013 ANNUAL REPORT ALbERTA TEAchERs’ RETiREmENT FUNdNOTESTOTHEFINANCIALSTATEMENTS
c) Results Based on Valuations
ThevaluationforthePost-1992periodoftheTeachers’PensionPlanasatAugust31,2013determinedadeficiencyof$825.59million.ThevaluationforthePrivateSchoolTeachers’PensionPlantoAugust31,2013determinedasurplusof$273thousand.
NOTE 6INVESTMENT EARNINGS
Thefollowingisasummaryofinvestmentearningsbyassetclass:
($Thousands) 2013 2012
Investment Changein Investment Changein Income FairValue1 Total Income FairValue2 Total
Fixedincome
Cashandmoney-marketsecurities $ 4,321 $ – $ 4,321 $ 3,233 $ – $ 3,233
Bondsanddebentures 82,128 (136,821) (54,693) 77,268 117,377 194,645
Publicequity
Canadian 36,221 152,591 188,812 36,972 (17,210) 19,762
Foreign 84,500 664,260 748,760 64,034 192,006 256,040
Privatecompanies 9,851 70,998 80,849 1,186 10,343 11,529
Infrastructure 2 24,066 24,068 3,222 9,155 12,377
Realestate 323 45,824 46,147 1,210 10,933 12,143
Derivatives – (13,712) (13,712) – 2,238 2,238
Total $ 217,346 $ 807,206 $1,024,552 $ 187,125 $ 324,842 $ 511,967
($Thousands) 2013 2012
Teachers’ Private Teachers’ Private PensionPlan Teachers’ Total PensionPlan Teachers’ Total
Netassetsat $ 7,159,011 $ 35,018 $ 7,194,029 $ 6,303,028 $ 32,044 $ 6,335,072 beginningofyear
Netcontributions 680,862 3,519 684,381 629,967 2,911 632,878
Benefits (281,500) (1,828) (283,328) (255,095) (2,383) (257,478)
Investmentearnings 1,019,565 4,987 1,024,552 509,377 2,590 511,967
Administrative (38,419) (188) (38,607) (28,266) (144) (28,410)expense
Netassetsat 8,539,519 41,508 8,581,027 7,159,011 35,018 7,194,029endofyear
Actuarialvalueof (9,365,109) (41,235) (9,406,344) (9,068,324) (40,397) (9,108,721)accruedpensionobligations
(Deficiency)/Surplus $ (825,590) $ 273 $ (825,317) $ (1,909,313) $ (5,379) $ (1,914,692)
1Changeinfairvalueincludesarealizednetgainof$312,989andanunrealizednetgainof$494,217.2Changeinfairvalueincludesarealizednetgainof$33,107andanunrealizednetgainof$291,735.
2013 ANNUAL REPORT 51ALBERTA TEACHERS’ RETIREMENT FUND NOTESTOTHEFINANCIALSTATEMENTS
NOTE 7ADMINISTRATIVE EXPENSES
Investment Member 2013 Operation Service ($Thousands) Expenses Expenses Total Budget
Externalinvestmentmanagementfees $ 19,782 $ – $ 19,782 $ 18,314
Salariesandbenefits 10,010 3,559 13,569 11,037
Custodialandbanking 1,105 36 1,141 1,137
Professionalandconsultingservices 1,042 658 1,700 2,245
Communicationandtravel 541 439 980 1,532
Premisesandequipment 479 457 936 1,185
Boardandcommittee 103 127 230 361
Actuaryfees 14 131 145 120
Other 74 50 124 353
Total $ 33,150 $ 5,457 $ 38,607 $ 36,284
Investment Member 2012 Operation Service ($Thousands) Expenses Expenses Total Budget
Externalinvestmentmanagementfees $ 14,651 $ – $ 14,651 $ 17,033
Salariesandbenefits 5,321 3,344 8,665 9,025
Custodialandbanking 1,110 31 1,141 1,467
Professionalandconsultingservices 995 543 1,538 1,946
Communicationandtravel 503 328 831 1,308
Boardandcommittee 305 135 440 344
Premisesandequipment 276 475 751 1,019
Audit 40 40 80 80
Actuaryfees 10 91 101 110
Other 105 107 212 314
Total $ 23,316 $ 5,094 $ 28,410 $ 32,646
52 2013 ANNUAL REPORT ALbERTA TEAchERs’ RETiREmENT FUNdNOTESTOTHEFINANCIALSTATEMENTS
NOTE 8CONTRIBUTIONS
NOTE 9BENEFiTS PAiD
Duringtheyear$440million(2012:$430million)wasreceivedfromtheProvinceandwasdistributedasbenefitpaymentsrelatingtothePre-1992period.
($Thousands) 2013 2012
Teachers
Currentservice $ 219,685 $ 213,658
Currentserviceadditional10%COLA 13,529 12,615
Pastservice 5,402 6,189
Deficiency 113,933 94,907
352,549 327,369
TheProvince
Currentservice 216,662 211,269
Pastservice 2,195 2,138
Deficiency 105,756 88,425
324,613 301,832
Employers
Currentservice 1,410 1,167
Deficiency 346 291
1,756 1,458
Nettransfersfromotherplans 5,463 2,219
$ 684,381 $ 632,878
($Thousands) 2013 2012
Pensionbenefits $ 249,686 $ 220,853
Terminationbenefits 33,642 36,625
$ 283,328 $ 257,478
2013 ANNUAL REPORT 53ALBERTA TEACHERS’ RETIREMENT FUND NOTESTOTHEFINANCIALSTATEMENTS
NOTE 10RiSK MANAGEMENT
ThePlansareexposedtocertainfinancialrisksasaresultofitsinvestmentactivities.Theserisksincludemarketrisk,creditriskandliquidityrisk.ATRFmanagesfinancialriskthroughtheInvestmentPolicywhichisapprovedbytheBoardatleastonceeveryfiscalyear.ThispolicycontainsrisklimitsandriskmanagementprovisionsthatgoverninvestmentdecisionsandhasbeendesignedtoachievethemandateofATRFwhichistoinvestitsassetstoachievemaximum,risk-controlled,cost-effective,long-terminvestmentreturns.
a) Market risk
Marketriskistheriskthatthefairvalueorfuturecashflowsofaninvestmentassetorinvestmentliabilitywillfluctuatebecauseofchangesinpricesandrates.ATRFmitigatesmarketriskthroughdiversificationofinvestmentsacrossassettypes,geographyandtimehorizons.Marketriskiscomprisedofthefollowing:
Currency risk
ThePlansareexposedtocurrencyriskthroughinvestmentassetsorliabilitieswhichareheldinforeigncurrencies.ChangesintherelativevalueofforeigncurrenciesinreferencetotheCanadiandollarwill resultinachangeinthefairvalueorfuturecashflowsoftheseinvestmentassetsandliabilities. ATRFpermitsportfoliomanagerstousecurrency-forwardcontractstolimitthePlans’foreigncurrency exposure.Foreigninvestmentsinrealestateandinfrastructurearehedgedwiththeaimofremoving allforeigncurrencyexposure.ThePlans’foreigncurrencyexposureisasfollows:
A1%increase/decreaseinthevalueoftheCanadiandollaragainstallcurrencies,withallothervariablesandunderlyingvaluesheldconstant,wouldresultinanapproximatedecrease/increaseinthevalueofnetinvestmentsof$32millionasatAugust31,2013(2012:$24million)
Interest-rate risk
Interestrateriskistheriskthatthefairvalueorfuturecashflowsofaninvestmentwillchangeasaresult ofchangesinmarketinterestrates.Changesininterestratesaffectfairvaluesoffixed-ratesecuritiesand thecashflowsoffloating-ratesecurities.Increasesininterestrateswillgenerallydecreasethefairvalueoffixed-ratesecurities.
ATRFmanagesinterestrateriskforinvestmentsbyestablishingatargetassetmixthatprovidesanappropriatemixbetweeninterest-sensitiveinvestmentsandthosesubjecttootherrisks.Aportionoftheinterest-sensitiveportfolioisactivelymanaged,allowingmanagerstoanticipateinterestratemovementstomitigateortakeadvantageofinterest-ratechanges.Therearealsocertainalternativeinvestmentswhichmayhaveinterest- ratecomponentsmakingthemsubjecttointerest-rateexposure.
($Thousands) 2013 2012
Foreign NetForeign NetForeign Currency Currency Currency CurrencyCurrency Exposure Derivatives Exposure Exposure
UnitedStatesdollar $ 1,801,188 $ (168,506) $ 1,632,682 $ 1,350,297
Euro 493,017 (114,024) 378,993 190,671
Britishpoundsterling 358,152 (7,783) 350,369 200,831
Japaneseyen 283,832 (2,474) 281,358 159,649
Swissfranc 173,518 (2,873) 170,645 147,955
HongKongdollar 84,199 – 84,199 62,242
Other 299,532 (16) 299,516 309,431
$ 3,493,438 (295,676) 3,197,762 $ 2,421,076
54 2013 ANNUAL REPORT ALbERTA TEAchERs’ RETiREmENT FUNdNOTESTOTHEFINANCIALSTATEMENTS
Afterconsideringtheeffectofderivativecontractsa1%increase/decreaseinnominal-interestrates, withallothervariablesheldconstant,wouldresultinanapproximatedecrease/increaseinthevalue ofnetinterestbearinginvestmentsandanunrealizedloss/gainof$202million(2012:$219million).
Equity-price risk
Equity-priceriskistheriskthatthefairvalueorfuturecashflowsofaninvestmentwillfluctuatebecause ofchangesinmarketprices(otherthanthosearisingfrominterest-rateriskorcurrencyrisk),whetherthosechangesarecausedbyfactorsspecifictotheindividualinvestmentorfactorsaffectingallsecuritiestraded inthemarket.ThePlansaresubjecttopriceriskthroughtheirpublicequityinvestmentsand,inadditiontogeographic,industrialsectorandentityspecificanalyses,usesstrategiessuchasdiversificationandtheuse ofderivativeinstrumentstomitigatetheoverallimpactofpricerisk.Aftergivingeffecttoderivativecontracts, atenpercentincrease/decreaseinthevalueofallpublicequity,withallothervariablesheldconstant,wouldresultinanapproximateincrease/decreaseinthevalueofpublic-marketexposureandanunrealizedgain/loss of$458million(2012:$378million).
b) Credit risk
Creditriskisthepotentialoflossshouldacounterpartyfailtomeetitscontractualobligations,orareduction inthevalueofassetsduetodiminishedcreditqualityofthecounterparty,guarantororthecollateral supportingthecreditexposure.ThePlansareexposedtocreditriskthroughinvestmentinsecurities, securitieslending,balancesreceivablefromsponsorsandcounterpartiestoderivativetransactions.
InvestmentrestrictionswithinthePlanshavebeensettolimitthecreditexposuretosecurityissuers. Short-terminvestmentsrequirearatingof“R-1”orequivalent.Bondsordebenturesrequireminimumratings of“CCC”orequivalentintheexternallymanagedportfolioand“BBB”fortheportfoliomanagedinternally. Creditexposuretoanysinglecounterpartyislimitedtomaximumamountsasspecifiedintheinvestment policiesandguidelines.Thecounterpartycreditriskassociatedwithforeign-currencyforwardsismanaged bylimitingthenumberofcounterpartiestoone;havingacreditratingof“AA”.Thefairvalueofthefixed-incomeinvestmentsandover-the-counterderivativesexposedtocreditrisk,bycreditrating,isasfollows:
Thetermtomaturityclassificationsofinterest-bearinginvestments,baseduponthecontractual maturityofthesecuritiesareasfollows:
2013 2012
Investmentgrade(AAAtoBBB-) 94% 95%
Speculativegrade(BB+orlower) 3% 3%
Unrated 3% 2%
($Thousands) 2013 2012
TermtoMaturity
Average Average Within 1to5 Over Effective Effective 1Year Years 5Years Total Yield Total Yield
Money-marketsecurities $293,911 $ – $ – $ 293,911 1.02% $ 135,475 1.07%
Bondsanddebentures 49,797 487,280 1,624,476 2,161,553 3.64% 2,228,620 3.72%
2013 ANNUAL REPORT 55ALBERTA TEACHERS’ RETIREMENT FUND NOTESTOTHEFINANCIALSTATEMENTSc
c) Liquidity risk
LiquidityriskistheriskofthePlansbeingunabletogeneratesufficientcashinatimelyandcost- effectivemannertomeetcommitmentsandexpensesastheybecomedue.Liquidityrequirements ofthePlansaremetthroughincomegeneratedfrominvestments,employeeandemployercontributions, andbyholdingpubliclytradedliquidassetstradedinactivemarketsthatareeasilysoldandconverted tocash.Theseinvestmentsincludemoney-marketsecurities,bondsandpublicly-tradedequities.
Allderivativeandnon-derivativeinvestmentrelatedliabilitiesareduewithinoneyear.
NOTE 11CAPITAL
CapitalisthenetassetsofthePlans.InaccordancewiththeTeachers’PensionPlansAct,theactuarialsurplusordeficitisdeterminedbyanactuarialfundingvaluationperformed,ataminimum,everythreeyears.TheobjectiveistoensurethatthePlansarefullyfundedoverthelongtermthroughthemanagementofinvestmentsandcontributionrates.InvestmentsarebasedonanassetmixthatisdesignedtoenablethePlanstomeettheirlong-termfundingrequirementwithinanacceptablelevelofrisk,consistentwiththePlans’investmentandfundingpolicies,whichareapprovedbytheBoard.
ThePlans’deficiencyisdeterminedonthefair-valuebasisforaccountingpurposes.Howeverforfundingvaluationpurposes,assetvaluesareadjustedforfluctuationsinfairvaluestomoderatetheeffectofmarketvolatilityonthePlans’fundedstatus.
InaccordancewiththeTeachers’ Pension Plans Act,theactuarialdeficienciesasdeterminedbyactuarialfundingvaluationsareexpectedtobefundedbyAugust31,2027.
NOTE 12COMMITMENTS
TheBoardhascommittedtofundcertaininvestmentsoverthenextseveralyearsinaccordancewiththe termsandconditionsagreedto.AsatAugust31,2013,thesumofthesecommitmentsequalled$865million (2012-$726million).
NOTE 13INVESTMENT RETURNS AND RELATED BENCHMARK RETURNS
InvestmentreturnsandrelatedbenchmarkreturnsforthePlansfortheyearsendedAugust31areasfollows:
2013 2012
InvestmentReturn 14.0% 7.8%
BenchmarkReturn 11.5% 6.3%
56 2013 ANNUAL REPORT ALbERTA TEAchERs’ RETiREmENT FUNd11-YEARFINANCIALANDSTATISTICALREVIEW
11-YeAr finAnCiAl AnD stAtistiCAl reVieW(UNAUDITED)
Note:Since2008amountsrelatetotransactionsofthePost-August1992PeriodoftheTPP*andofthePrivateSchoolTPP*.
*Teachers'PensionPlan
FinancialPositionasatAugust31 ($Millions) 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003
InvestmentsEquities Canadian 1,384.9 1,239.2 1,200.9 1,156.8 1,016.2 1,248.5 1,246.2 1,035.6 955.6 795.1 707.8 Global 3,241.8 2,582.6 2,344.4 2,142.0 1,857.5 2,031.1 2,283.1 2,051.0 1,450.3 1,219.8 1,084.3 Private 591.7 358.6 277.5 208.8 127.7 120.6 53.9 22.6 6.8 3.0 2.7Infrastructure 278.2 186.9 123.9 – – – – – – – –RealEstate 446.0 334.9 60.6 – – – – – – – –AccruedIncomeandOther 2.0 24.2 7.8 – – – – – – – –FixedIncome 2,635.2 2,464.4 2,328.2 1,995.2 756.2 777.7 714.2 624.2 913.4 839.0 663.7NetInvestments 8,579.8 7,190.8 6,343.3 5,502.8 3,757.6 4,177.9 4,297.4 3,733.4 3,326.1 2,856.9 2,458.5LoanReceivablefromtheProvince – – – – 1,184.7 944.1 – – – – –ContributionsReceivable 19.4 17.2 12.0 11.3 11.2 9.0 13.7 12.5 11.0 10.2 7.3OtherAssetsandLiabilities (18.2) (14.0) (20.2) 22.9 3.0 6.4 (3.1) 4.5 10.1 (6.4) 2.8NetAssetsAvailableforBenefits 8,581.0 7,194.0 6,335.1 5,537.0 4,956.5 5,137.4 4,308.0 3,750.4 3,347.2 2,860.7 2,468.6ActuarialValueofAccrued PensionObligations 9,406.3 9,108.7 8,294.4 7,467.7 6,861.7 6,321.9 11,316.3 10,702.210,285.5 9,681.6 8,703.2Deficiency 825.3 1,914.7 1,959.3 1,930.7 1,905.2 1,184.5 7,008.3 6,951.8 6,938.3 6,820.9 6,234.6
ActivityduringyearendedAugust31BenefitandInvestmentOperations Investmentearnings 1,024.6 512.0 440.4 274.3 (443.5) (209.4) 440.3 259.0 373.2 287.9 163.0 AmountassumedbytheProvince – – – – – 784.5 – – – – – Netcontributions 650.7 596.3 577.5 499.2 433.7 402.8 600.8 581.0 518.0 481.0 436.5 Pensionbenefits (249.7) (220.9) (194.5) (173.0) (153.0) (130.0) (465.3) (425.0) (394.5) (367.5) (342.7) Administrativeexpenses (38.6) (28.4) (25.3) (20.0) (18.2) (18.5) (18.3) (11.5) (10.2) (9.2) (8.5)IncreaseinNetAssets 1,387.0 859.0 798.1 580.5 (181.0) 829.4 557.5 403.5 486.5 392.2 248.3Increase(Decrease)inAccrued PensionObligations 297.6 814.4 826.7 606.0 539.7 (4,994.3) 614.0 417.0 603.9 978.5 514.1Increase(Decrease)inDeficiency (1,089.4) (44.6) 28.5 25.5 720.7 (5,823.7) 56.5 13.5 117.4 586.3 265.8
Post1992TPP*-yearendedAugust31 Performance 14.0% 7.8% 7.8% 5.6% -8.5% -2.8% 11.3% 7.5% 12.4% 11.4% 6.8% Benchmark 11.5% 6.3% 7.3% 5.4% -6.8% -2.7% 10.9% 8.1% 12.2% 11.2% 9.7% FundingObjective 6.7% 7.1% 7.1% 7.0% 7.6% 7.6% 7.6% 7.5% 7.5% 7.7% 7.7%
FundingShortfall Pre1992TPP* – – – – – – 6,592.0 6,367.0 6,266.1 6,030.0 5,562.1 Post1992TPP* 2,859.0 2,880.0 1,751.0 1,787.0 1,766.0 1,048.0 742.0 742.0 700.4 662.0 434.1 PrivateSchoolTPP* 9.1 8.4 5.6 6.0 5.0 (0.4) 0.1 0.1 (0.2) (0.4) (0.7) 2,868.1 2,888.4 1,756.6 1,793.0 1,771.0 1,047.6 7,334.1 7,109.1 6,966.3 6,691.6 5,995.5PlanMembers Active 38,346 38,336 38,242 38,578 38,422 37,627 37,577 36,640 36,266 34,649 35,278 Inactive 12,295 12,404 12,384 12,119 11,769 11,713 10,852 11,260 10,940 11,937 11,654 RetiredMembers 24,667 23,892 22,989 22,302 21,563 20,796 19,837 18,718 17,718 16,888 16,163
NumberofNewRetiredMembers 1,131 1,234 986 1,056 1,060 1,257 1,419 1,263 1,103 993 968
MemberServiceCosts(permember) $ 87 $ 81 $ 69 $ 69 $ 68 $ 69 $ 68 $ 72 $ 65 $ 65 $ 62Benchmark $ 148 $ 145 $ 155 $ 148 $ 138 $ 132 $ 120 $ 116 $ 117 $ 110 $ 108
InvestmentCosts(per$100ofassets) $ 0.39 $ 0.32 $ 0.33 $0.29 $0.28 $0.38 $0.30 $0.22 $0.20 $0.20 $0.17
AdministrativeExpenses Memberservices 14.1% 17.9% 16.7% 20.9% 23.4% 21.7% 21.4% 34.7% 34.3% 36.3% 37.6% Investments 85.9% 82.1% 83.3% 78.9% 76.6% 78.3% 78.6% 64.3% 65.7% 63.7% 62.4%
2013 ANNUAL REPORT 57CORPORATEDIRECTORY
DirectoryCorporate
From left to right:EmilianGroch,DerekBrodersen,AlbertCopeland,PeggyCorner,MargotHrynyk,MylesNorton.
BOARDGregMeeker,ChairLowellK.Epp,ViceChairHarryBuddleKarenA.ElgertSandraJohnstonGeneWilliams
CORPORATEEmilianV.GrochChiefExecutiveOfficer
DerekM.BrodersenChiefInvestmentOfficer
AlbertCopelandDirector,Informationand TechnologyServices
FINANCE AND PLANNiNGSandraJohnston,ChairHarryBuddle,ViceChair
HUMAN RESOURCES AND COMPENSATIONGeneWilliams,ChairKarenA.Elgert,ViceChairHarryBuddleLowellK.EppSandraJohnstonGregMeeker
PeggyCornerDirector,BenefitInformationServices
MargotM.HrynykDirector,HumanResources andCommunication
MylesNortonDirector,Financial Services
Wewelcomeanycommentsorsuggestionsforthisannualreport,oranyotheraspectsofourcommunicationsprogram.
INVESTMENTLowellK.Epp,ChairHarryBuddle,ViceChairKarenA.ElgertCatherineA.ConnollyRichardFortierRobertMaroneyJaiParihar
AUDiTLowellK.Epp,ChairGregMeeker,ViceChairSandraJohnston
BOARD & CORPORATE COMMITTEES OF THE BOARD
600 BARNETT HOUSE
11010 142 ST NW
EDMONTON, ALBERTA, T5N 2R1
Telephone:780-451-4166
TollFree:1-800-661-9582
Email:[email protected]
Web:www.atrf.com