CEO explains how risk and liability awareness has helped lead to fully funded status while acknowledging the challenges that lie ahead for pensions
One of Canada’s largest defined benefit pension plans just announced its sixteenth consecutive year of fully funded status. The OPSEU Pension Plan Trust Fund (OPTrust) manages over $26 billion with an investment return of 9.6 per cent in the past year. Despite performance that some might describe as ‘enviable’ Peter Lindley isn’t patting himself on the back.
Lindley is the President and CEO of OPTrust. He explained how the fund achieved this consistent funded status, some of the challenges his team have had to navigate, and what other pension fund managers can take from his team’s approach.
The fund’s strategy, as Lindley explained, is rooted in strict risk awareness and budgeting as well as liability matching all underpinned by a diversified portfolio designed to perform across market cycles.
“Sixteen years… it sounds like it’s easy but it's not,” he said. “We just take the amount of risk we need to generate the returns we need to pay our pension. As a mature pension plan, which we are, the amount of risk that we can take is probably less than a younger plan,” he explained. “We have to be very risk aware in everything that we do.”
Lindley also highlighted that OPTrust’s member-driven investing strategy is rooted in liability awareness and built around a total portfolio approach. He shot down any assumption that consistent performance comes from outsized bets or aggressive positioning.
Instead, the focus is on matching liabilities through careful diversification.
“That's really just saying we consistently take care of our benchmark, which is paying our liabilities,” he said.
While diversification is hardly a novel concept in institutional investing, OPTrust tailors allocation across private equity, infrastructure, and real estate. He elaborated where the benefits are in each of the sectors.
“Real estate has maybe a bit more exposure to interest rates, infrastructure may give you a little bit more inflation hedging capabilities and private equity is more return generating,” he noted. “The combination of those three is really core.”
While each sector plays a different role, Lindley acknowledged private equity and infrastructure have held firm. Meanwhile, real estate has taken a few hits.
“There’s challenges being faced in that space,” he said, pointing to higher interest rates, cost inflation, delayed or slowed construction projects and shifting office demand, particularly due to the pandemic. “On top of that, you’ve got the issue around fewer people working in the office, especially in Canada.”
Lindley remains confident. However, he underscored his belief that the approach works across market cycles because of its flexibility. If private allocations are concentrated in a specific geography or sector, public market exposures are adjusted to compensate.
But real estate woes are only one part of the broader challenge. As geopolitical tensions flare, particularly trade uncertainty, OPTrust is preparing for slower global growth.
“We’re definitely concerned about it but all you can do as an investor is to be more diversified and try to find the spots where we will be able to ride out the storm,” he said.
That ability to “ride it out” doesn’t come by accident as Lindley emphasized the importance of starting from a strong position in the first place.
“If you start off as a fully funded pension plan with a relatively conservative discount rate, your ability to ride out the storm has significantly improved,” he added.
While the Plan doesn’t make short-term tactical calls, OPTrust has adapted over multi-year periods. Between 2020-2023, they reduced their liability-hedging portfolio when rates were low because “owning bonds at very low interest rates in yields didn’t make a lot of sense,” Lindley explained. As interest rates normalized and reflected current levels, OPTrust increased their liability hedging allocation back to prior levels.
He added while many pension peers may post strong one-year returns, risk posture and maturity levels vary widely across plans as some are less mature and able to take on more risk. For OPTrust, a 9.6 per cent return in 2023 and a 10-year average of 7 per cent is less important than meeting future obligations.
“From a benchmark point of view, all we care about is our liabilities,” asserted Lindley.
The long-term sustainability of OPTrust hinges on more than just investment performance as Lindley emphasized about closely aligning investments with future obligations, like sustainability studies.
“We do sustainability studies regularly as an organization,” Lindley noted, acknowledging the Plan has an internal actuarial team and public policy team along with external actuaries who help look at their liability.
Beyond markets, OPTrust is also leaning into growth of membership, not just returns. He highlighted expansion in OPTrust Select, which now includes over 4,600 members, mostly in Ontario’s non-profit sector.
“There’s people doing great work and they typically don’t get the benefits of a pension,” said Lindley.
He emphasized the sector is heavily represented with women, who are typically again underserved in retirement security and pointed to recent research with HOOPP and UPP that showcased the economic contribution of defined benefit pensions in Ontario.
“We found that it's significant because they generate more than $16 billion in labour income,” he explained. “Every dollar that we pay out is $1.43 in economic output. It’s a multiplier effect of the benefits that we pay back into creating an economic output for Ontario, which make a significant contribution to the GDP of Ontario.”
Lindley ultimately sees a demographic reckoning ahead for all pension plans.
“There's growing awareness that large parts of society are not prepared for retirement,” he said. “Pensions are going to become increasingly important and have a higher profile over the coming years and we want to avoid people having to retire into poverty.”
