The University of Toronto Faculty Association (UTFA) is voicing concern with the University of Toronto’s management of pension funds. The UTFA estimated that, in 2011, the total accrued liability in the university’s pension plan was nearly $2 billion. Sixty-two per cent of the total accrued liability in the pension plan is for the 6,000 faculty and librarians who are members of the pension plan.
The UTFA is currently in the midst of re-examining the Memorandum of Agreement prescribing the UTFA’s role. The memorandum was developed in the late 1970s to deal with the determination of minimum compensation for faculty and librarians.
The university established the University of Toronto Asset Management Corporation (UTAM) in May 2000 as a not-for-profit corporation. It is a wholly owned subsidiary of the university, managing its pension funds, its endowment, and other short and long-term investments. UTAM’s assets under management increased 14.3 per cent in 2013 to $6.6 billion, of which the assets of the University of Toronto Pension Plan makes up $3.2 billion.
ANN SHENG/THE VARSITY
UTAM will present its portfolio performance review to the Business Board on Monday.
Prior to 2000, a volunteer in-house investment committee managed the university’s various investment pools. At that time, university administration looked at the investment fund structures of top universities in the United States, many of whom had professionally managed investment offices.
UTAM’s endowment model is similar to that of the University of British Columbia (UBC), Harvard University, and Yale University.
Over the past decade, American endowment funds delivered better results than Canadian endowment funds. This is largely due to the undervalued Canadian dollar versus the American dollar, and the technology bubble that drove up the value of American stock markets relative to Canadian stock markets.
Yale’s endowment portfolio, which is valued at $20.8 billion, delivered annual investment returns of 10.8 per cent over the past ten years, exceeding its benchmark performance and outpacing institutional fund indices.
In contrast, UBC’s investment portfolios, which have about $2.6 billion in assets under management, had an actual annual return of 6.1 per cent over the past 10 years. Over the last 10 years, UTAM’s actual annual return was about 4.5 per cent in its endowment fund, and 4.4 per cent in its pension fund.
Over the 10-year period, UTAM’s endowment fund and pension fund underperformed versus their benchmark portfolios, and were unable to meet the university target.
Since UTAM was established, the UTFA, which represents faculty, librarians, and research associates at U of T, has sparred regularly with UTAM over the university’s management of pension funds.
In December 2009, the President’s Committee on Investment Policies, Structures, Strategies and Execution, established to review U of T investments and UTAM, presented a number of conclusions to university administration. Among these, the committee suggested that the CEO of UTAM should become the Chief Investment Officer of the university with a direct reporting line to the president, that the pension and endowment funds should be invested primarily in publicly traded stocks and bonds, and that the governance and investment oversight functions should be separated.
UTAM “proved to be a disaster for our pension plan,” said Paul Downes, vice-president, salary, benefits, and pensions at the UTFA and associate professor of English.
“Despite the higher fees that UTAM charged, our pension plan performed dismally under UTAM’s management when compared to other pension funds… For over a decade, UTFA has repeatedly tried to direct the university’s attention to the looming crisis in the pension plan and the implications of this crisis for everyone at U of T,” he added. Downes also objected to continued demands for higher pension contributions from its members.
According to a 2011 UTFA information report, which was presented to the pension committee of the Governing Council in June 2011 by George Luste, past-president of UTFA, UTAM is underperforming other pension plans. In the report, the UTFA objected to UTAM’s investment outcomes. The UTFA also said that transparency was necessary, as well as an understanding of the complexity of its investments.
According to the report, the annualized return of the pension plan investments from 1985 to 1999 was 11.7 per cent. From 2000 to 2010, the average return for U of T’s pension plan was just 2.7 per cent per year, 1.3 per cent below the university’s stated goal of 4 per cent per year. Over the same time period, the report said, the RBC DEXIA pension plan universe — a pension plan benchmark published in the Canadian Institute of Actuaries Annual Report— had a median annual return of 5.6 per cent.
The report further claimed that, had UTAM been able to realize the median returns of other pension plans during that time period, there would be an additional $1 billion in the U of T pension plan today.
William Moriarty, president and CEO of UTAM, took issue with the report. “That’s a misleading, biased comparison,” he said, adding, “The market environment was completely different.” Moriarty said that UTAM has added value to the university’s investment funds. Last year, the return on the university’s main portfolios exceeded the target return of 5.2 per cent by about 10 per cent. UTAM estimated that three per cent of the extra return was contributed by active management decisions.
The university aims for a four per cent rate of return in its funds, after inflation and with all costs added in, over a ten year period.
“That’s what we measure ourselves against. If I can’t outperform that, after all costs, then we shouldn’t be doing active management, or we have the wrong people,” said Moriarty, adding: “My objective every year is to outperform the policy portfolio by [0.5 per cent], after all costs.”
In the past, the UTFA has also raised concerns over UTAM’s management fees. “Annual investing cost is an extreme long-term killer,” said Luste. At present, Luste estimated, UTAM pays out more that $40 million every year for management of the pension plan and the endowment plan. Globally, higher costs raise the bar on required returns.
In 2013, Moriarty had the highest salary at an Ontario university, at $772,547, and the fourth-highest salary of any public sector employee in Ontario.
However, Moriarty emphasized that a higher level of cost can be justified if it leads to an improvement in value-added. “It all depends on how much value-add you provide… If [we] didn’t spend the money, [we] wouldn’t have earned an extra $130 million last year or $50 million the year before. People focus on costs, but [should] focus on what is your after-cost, incremental return,” he said.
Moriarty joined UTAM in April 2008. Since 2008, UTAM’s valued added from active management has steadily improved each year. 2013 also represented UTAM’s fifth straight year of improved performance of the pension and endowment portfolios compared to their respective benchmark portfolios.
Moriarty further claimed that he has reduced UTAM’s all-in costs since joining. In 2008, UTAM’s all-in costs were over one per cent. Today, he said, UTAM’s all-in costs are about 0.8 per cent.
Downes also questioned the university’s decision to pool pension funds with endowment funds. According to the university, the return objective and risk tolerance are the same for the endowment and pension funds.
Moriarty contended that the funds are not pooled. Instead, he said, the funds just have the same asset mix. “If I have a good manager for the endowment, why wouldn’t you add the pension fund,” he said, adding: “What we did do is we created a structure to reduce cost.”
However, Moriarty conceded that the risk tolerance is not the same for both pension funds and endowment funds. He said that UTAM plans to analyze whether current risk levels in the funds are appropriate.
On top of that work, Moriarty said, UTAM has implemented a number of other major changes over the past few years, including changes to the governance structure, improved analytics tools, and a better risk analysis system.
Moriarty also emphasized his work to better align investment performance with UTAM’s incentive compensation. “If we don’t provide the value-add, [we] don’t get the incentive [compensation],” he said.
“It’s very easy, with the benefit of hindsight, to say ‘you should have done this. You should have done that.’ It’s very different to be forward-looking and choose the right path,” he said.
Despite these assurances, Luste is still not convinced that UTAM provides a net benefit to the university. “[T]he university probably should not be messing around with managing money. They ought to be focused on education and research,” Luste said.