Subject: Investment Policies and Goals for the Pension Plan for Non-Academic Employees
Group: Non-Academic Employees
Approved by: The Executive Committee
Approval date: April 8, 2005
Effective date: April 8, 2005
Revised: March 31, 2006; April 13, 2007; April 23, 2010; April 27, 2011; February 10, 2012; May 14, 2013; May 17, 2016
Administered by: Vice-President (Administration)

1 — PURPOSE

1.1 Mount Allison University (the "University") provides pension benefits to eligible employees through the Pension Plan for Non-Academic Employees of Mount Allison University (the "Plan"). The primary goal of the Plan is to provide Plan members with the stipulated level of retirement income at a reasonable cost to the University. The prudent and effective management of the Plan's assets (the "Fund") will have a direct impact on the achievement of this goal.

1.2 This statement of investment policies and goals (the "Statement") addresses the manner in which the Fund shall be invested. The University has prepared the Statement to ensure continued prudent and effective management of the Fund so that the Plan can be maintained at a reasonable cost to the University and so that there will be sufficient amounts to meet the obligations of the Plan as they come due. Investments shall be selected in accordance with the criteria and limitations set forth herein and in accordance with all relevant legislation. The Statement also defines the management structure and other procedures adopted for the ongoing operation of the Fund. The Statement complies with all relevant legislation.

2 — FUND GOVERNANCE

2.1 The University is the legal administrator of the Plan and is responsible for its overall management. The University acts through its Board of Regents (the "Board") in discharging its duties. The Board has delegated tasks to its Investment Committee, to its senior Administration ("the Administration") and to various agents to assist it in carrying out its duties in respect of the Fund. The Administration, in turn, delegates tasks to various agents to assist it in carrying out its duties and is further assisted in carrying out its duties through recommendations that are provided from consultants and from the Non-Academic Pension Plan Advisory Committee. The Board, however, retains overall responsibility for the Fund. The Board has allocated its responsibilities in respect of the Fund as set out below.

Executive Committee
2.2 The Executive Committee of the Board of Regents shall approve the Statement and amend it from time to time as required; and authorize the appointment of managers to invest the Fund's assets and custodians to hold those assets.

Investment Committee
2.3
The Investment Committee shall recommend to the Executive Committee amendments to the Statement; review the Statement periodically and advise the Executive Committee of the results of
these reviews; review the Fund's performance at least annually and advise the Executive Committee of the results of these reviews; recommend to the Executive Committee the appointment of managers and custodians for the Fund; and review the performance of managers and custodians periodically and advise the Executive Committee of the results of these reviews.

The Administration
2.4
The Administration shall assist the Investment Committee in its work; review the Statement at least once every three years, and recommend to the Investment Committee required amendments;
following each review of the Statement by the Executive Committee of the Board of Regents, file with the New Brunswick Superintendent of Pensions any amendments made to the Statement or a confirmation that no amendments have been made; delegate tasks relating to the overall management of the Fund to selected employees of the University and/or to selected agents retained for that purpose; ensure that instructions to custodians are made by authorized University signing officers and are in accordance with University policy and decision s of the Board of Regents; recommend to the Investment Committee the appointment of managers and custodians for the Fund; where there is more than one Manager, manage the distribution of fund assets between managers in accordance with this Statement; and in general administer this Statement.

The Managers
2.5
The Managers shall manage the Fund according to their respective investment mandates, subject to all relevant legislation and the constraints and directives contained in the Statement and in any supplementary documents provided by the Administration; with respect to any actively managed mandates, meet with the Investment Committee, as that Committee should determine necessary, to present its analysis of the investment performance and to describe its current and future investment strategies regarding its specific investment mandates; prepare quarterly written reports of investment performance results; identify to the Administration provisions in the Statement that may need to be revised due to new investment strategies or changes in the capital markets; and
be governed by the Code of Ethics and Standards of Professional Conduct of the CFA Institute.

The Custodian
2.6
The Custodian shall perform the regular duties required of a custodian bylaw; perform the duties required of the Custodian pursuant to agreements entered into from time to time with the University; and provide the University with monthly reports of all assets of the Fund and monthly reports of all transactions during the period.

3 — PLAN OVERVIEW AND INVESTMENT IMPLICATIONS

Plan Overview
3.1
The Plan is a registered, contributory, defined benefit pension plan. Benefits are based on a formula utilising pensionable service and final average earnings. The University contributes to the Fund in accordance with the funding policy described in section 3.2 below. The University's contributions may include special payments towards any
unfunded liability and/or solvency deficiency. Under this pension financing arrangement,
the University bears most of the investment risk.

3.2 Subject to the applicable legislation, the University contributes to the Plan in accordance with its “Funding of the Pension Plan for Non-Academic Employees Policy”, as amended from time to time. Under that Policy, as it now provides, the University contributes the current service cost as determined by the Plan’s actuary, plus any special payments that may be required, if either

  • a) the University’s cumulative current service contributions on or after January 1, 2015, are less than 125% of members’ cumulative contributions, or
  • b) the Plan’s surplus on a going-concern basis is less than 5% of liabilities or
  • c) the University is otherwise required to contribute under pension legislation (e.g. currently employer contributions related to prior solvency deficits are required when the Plan has a solvency deficit).

The Pension Advisory Committee must monitor the cumulative current service contributions and projected cumulative current service contributions, and recommend from time to time increases or decreases to the employee contribution rate in order to pursue the 125% target cost sharing ratio.

 

If there are surplus assets in the Plan above 5% of liabilities, the Policy provides a process according to which Plan amendments can be made to be funded by that excess surplus. Finally, if there are surplus assets above 5% of liabilities, and the University’s cumulative current service contributions are more than 125% of members’ contributions, the Policy provides that University contributions will cease until the University’s contributions are equal to 125% of members’ contributions, at which point the University will contribute 125% of members’ contributions.

3.3 Key financial statistics arising out of the actuarial valuation as of September 30, 2015, are as follows:

Assets and Liabilities

Market value of Fund: $35,573,000
Actuarial liabilities (funding basis): $34,184,000
% of actuarial liabilities for inactive members: 36%
Funded ratio (funding basis): 104%
Funded ratio (solvency basis): 81%
Estimated total annual contributions: $1,909,000
Estimated annual pension payments (not including terminations): $1,100,000

As of September 30, 2015, the Fund covered 247 active members, 118 pensioners and survivors, and 16 deferred pensioners.

Investment Implications
3.4 The pension liabilities for the active members will tend to grow with the growth of their salaries. Equity investments, which have historically provided long-term growth in excess of the rate of inflation, is expected to be a reasonable match for the active liabilities over the long term.

3.5 Pensions-in-pay are fixed amounts. The pension liabilities for the retired members will be affected by long-term interest rates. Bonds will be a reasonable match for the retired liabilities because changes in long-term interest rates affect bond values and pension liabilities similarly.

3.6 The Fund generally experiences annual net inflows of cash, indicating little need to hold cash on a long-term basis.

4 — FUND OBJECTIVES, BELIEFS, AND BENCHMARK

Fund Objectives
4.1
The University recognizes that the liabilities of the Plan' are independent of the value of the Fund, although the Fund provides security that benefit entitlements will be paid, and that reasonable investment returns on the Fund are needed to finance benefit payments under the Plan.

4.2 The University shall manage the Fund on a going concern basis, with the primary
objective of providing reasonable rates of return, consistent with available market
opportunities, a quality standard of investment, and moderate levels of risk.

4.3 The University expects the Fund to earn a 4.5% real return net of investment management fees over the long term (20+ years). In any one year, however, the annual
real return may be significantly above or below 4.5%.

Investment Beliefs
4.4
The University has from time to time reviewed and confirmed its investment beliefs.
Currently, the University believes

  • i. that equity investments will provide greater long-term returns than fixed income
  • investments, although with greater short-term volatility;
  • ii. that it is prudent to diversify the Fund across the major asset classes, and that alternative asset classes may further improve diversification, reducing volatility risk and improving the efficiency of the risk budget;
  • iii. that an allocation to foreign equities increases portfolio diversification thereby
  • decreasing portfolio risk;
  • iv. that active management of Canadian Bonds and, to a lesser extent, US Equities has a low potential to add value (net of fees) relative to index returns over the long term;
  • v. that currency hedging reduces the level of the Fund's diversification and should only be used if there is a reasonable expectation that there will be a significant adjustment in currency values; and
  • vi. that those investment manager(s) with active mandates can reduce portfolio risk below market risk and potentially add value through security selection strategies.

Benchmark Portfolio
4.5
The University believes that a portfolio (the "Benchmark Portfolio") invested in the following asset mix (based on market value) can, over the long term, achieve the stated
investment objectives:

Asset Class: Canadian Bonds (1)
Benchmark Index: FTSE TMX Long Bond
Benchmark Portfolio: 33%

Asset Class: Canadian Equities
Benchmark Index: S&P/TSX Capped (2)
Benchmark Portfolio: 19%

Asset Class: US Equities
Benchmark Index: S&P 500
Benchmark Portfolio: 8%

Asset Class: Non-North American Equities
Benchmark Index: MSCI EAFE
Benchmark Portfolio: 8%

Asset Class: Global Small Cap Equities
Benchmark Index: MSCI World Small Cap
Benchmark Portfolio: 5%

Asset Class: Global Low Volatility Equities
Benchmark Index: MSCI World
Benchmark Portfolio: 6%

Asset Class: Emerging Markets Equities
Benchmark Index: MSCI Emerging Markets
Benchmark Portfolio: 6%

 

Asset Class: Global Infrastructure

Benchmark Index: MSCI Global Quarterly Infrastructure Asset
Benchmark Portfolio: 10%

 

Asset Class: Managed Futures / Global Macro
Benchmark Index: US 3-Month T-Bills
Benchmark Portfolio: 5%

Total: 100%

(1) Cash used as part of a bond duration strategy shall be deemed to be bonds for asset mix purposes.
(2) Prior to October 1, 2012, the benchmark was the S&P/TSX Equity index.

Since asset classes provide different returns, the actual asset mix at any time may deviate from the above. Section 6 defines the limits for such deviations.

Liability Benchmark
4.6
The Liability Benchmark, also known as a minimum risk portfolio is defined as a portfolio (of fixed income investments) that have similar sensitivities to changes in long term interest rates and expected inflation as the Plan’s going-concern liabilities.

The Liability Benchmark has two purposes. The first is to define the low risk investment portfolio, with risk being defined as the volatility of the Plan financial position. The Liability Benchmark portfolio, determined as at September 30, 2015, consisted of 95% of the FTSE TMX Long Bond Index plus 5% of the FTSE TMX Universe Bond Index.

The second purpose is to provide a comparator for the Benchmark Portfolio defined in this Section. A Fund return in excess of the Liability Benchmark return will contribute towards an improvement in the Plan’s financial position. Any such excess return will be due to two factors, the excess of the Benchmark Portfolio return over the Liability Benchmark return and any added-value through active management of the Fund.

Risk Budget
4.7
The decisions to use a Benchmark Portfolio other than the Liability Benchmark and to actively manage portions of the Fund each involve a level of risk as described below. As at March 31, 2016, the expected excess return of the target asset mix over the Liability Benchmark is 2.9% p.a. The expected volatility of the difference in returns of these two portfolios is 11.2% p.a. This volatility measure, known as the Beta Risk Budget is useful in estimating the portion of the expected annual volatility in the Plan’s financial position attributable to the chosen Benchmark Portfolio and underlying liability characteristics.

Given the active mandates in place at March 31, 2016, the expected tracking error or volatility of the added value from active management is estimated to be less than 1% p.a. This volatility measure is known as the Alpha Risk Budget. Given the performance objectives in Section 5.2, the total expected added-value over the long term is 0.6% p.a. (before fees).

Due to low correlations in these two risk budgets, the total risk for this Fund structure was determined to be 11.2% p.a. The total expected long-term reward from this Fund structure is 3.5% p.a. (before fees).

5 — MANAGER STRUCTURE AND EVALUATION

Fund Manager Structure
5.1
It has been decided that the Fund shall be invested in pooled funds (the "Pooled Funds"). Copies of the Managers' investment policy statements for these Pooled Funds are attached as Appendix A, and the University adopts the guidelines of those statements.

One manager was selected to manage Canadian equities on an active basis, and US equities and Canadian bonds on a passive basis. Specialist active investment managers were selected to manage Non-North American large-cap equities, global small-cap equities, emerging market equities, and low-volatility equities. This structure was chosen based on the University's stated investment beliefs and to allow for effective ongoing governance of the investment management of the Fund. It is recognized that the relatively small size of the Fund can make effective governance more difficult to accomplish efficiently in a typical actively managed structure.
  

Quantitative Evaluation
5.2
The performance objective for the Managers shall be to manage each of the Pooled Funds so that their respective rates of return meet the objectives shown below:

Pooled Fund: Canadian Bonds (index fund)
Benchmark Index: FTSE TMX Long Bond
Objective: ±0.10%

Pooled Fund: Canadian Equities
Benchmark Index: S&P/TSX Capped*
Objective: +1.00%

Pooled Fund: US Equity (index fund)
Benchmark Index: S&P 500
Objective: ±0.3%

Pooled Fund: Non-North American Equity
Benchmark Index: MSCI EAFE
Objective: +1.00%

Pooled Fund: Global Small Cap Equity
Benchmark Index: MSCI World Small Cap
Objective: +1.00%

Pooled Fund: Global Low Volatility Equity
Benchmark Index: MSCI World
Objective: See below

Pooled Fund: Emerging Markets Equity
Benchmark Index: MSCI Emerging Markets
Objective: +1.00%

 

Pooled Fund: Global Infrastructure
Benchmark Index: MSCI Global Quarterly Infrastructure Asset
Objective: Net return over 10 years of at least 8% p.a.

 

Pooled Fund: Managed Futures / Global Macro
Benchmark Index: US 3-Month T-Bills
Objective: Volatility less than MSCI World Index; Strong positive returns in strong down equity markets; ±2.0% over MSCI World Index over 8 year rolling periods

  
* Prior to October 1, 2012, the benchmark was the S&P/TSX Equity index.

The purpose of the global low-volatility strategy is to reduce volatility of the growth portfolio. It is expected that over longer term periods this strategy will provide returns near the MSCI World index with substantially less volatility than the index. Accordingly, the primary objective for this fund is to provide a reduction in total volatility of 20% in comparison with the MSCI World index over 4-year rolling periods. Secondarily, the strategy should provide returns within ±1% of the MSCI World index over 8-year rolling periods.

5.3 For the purpose of measuring rates of return of the Fund, all returns shall be measured before investment management fees, but after transaction costs, and over rolling four-year periods in the case of actively managed funds and over one-year rolling periods in the case of index mandates. All index returns shall be total returns. All foreign index
returns shall be Canadian dollar returns.

5.4 At the end of each quarter the Administration will report to the members of the Investment Committee the returns on the Fund by manager and asset class, comparing those returns to the benchmark returns, and comparing the market value of each asset class to the market value assigned to that asset class by this policy.

5.5 Each year the Administration will have a consultant prepare for the Investment Committee analytical charts on the performance of the University’s managers.

Qualitative Evaluation
5.6 Every two years the Administration will engage consultants to report on any concerns that they may have about specific investment managers employed by the University or employed by the University’s managers, and to report on any style offsets that are being used in multi-manager funds.

5.7 Each year the Administration shall report to the Investment Committee on the Managers using the following criteria, as may be appropriate for specific managers:

  • the criteria used for their appointment;
  • overall adherence by the Managers to this Statement;
  • consistency of the Managers' respective portfolio activities, style and philosophy with their stated style and strategy;
  • retention of the Managers' professional staff; replacement of the Managers' staff lost by retirement, resignation, etc.;
  • quality of the Managers' communication with the University;
  • competitiveness of fees;
  • characteristics of the Managers' (e.g., ownership, growth in assets under management, client retention/loss, etc.); and
  • Consistency of key personnel and their role in the investment decision.


6 — ASSET MIX AND REBALANCING POLICIES

Asset Mix Policy
6.1 The market values of the individual asset class components of the Fund shall be within the following minimum and maximum aggregate investment limits:

Asset Class: Canadian Long Bonds
Minimum (% of Fund): 31
Benchmark (% of Fund): 33
Maximum (% of Fund): 35

Asset Class: Canadian Equities
Minimum (% of Fund): 17
Benchmark (% of Fund): 19
Maximum (% of Fund): 21

Asset Class: US Equities
Minimum (% of Fund): 6
Benchmark (% of Fund): 8
Maximum (% of Fund): 10

Asset Class: Non-North American Equities (EAFE)
Minimum (% of Fund): 6
Benchmark (% of Fund): 8
Maximum (% of Fund): 10

Asset Class: Global Small Cap
Minimum (% of Fund): 3
Benchmark (% of Fund): 5
Maximum (% of Fund): 7

Asset Class: Global Low Volatility
Minimum (% of Fund): 4
Benchmark (% of Fund): 6
Maximum (% of Fund): 8

Asset Class: Emerging Markets
Minimum (% of Fund): 4
Benchmark (% of Fund): 6
Maximum (% of Fund): 8

Asset Class: Global Infrastructure
Minimum (% of Fund): 0
Benchmark (% of Fund): 10
Maximum (% of Fund): 15

Asset Class: Managed Futures / Global Macro
Minimum (% of Fund): 3
Benchmark (% of Fund): 5
Maximum (% of Fund): 7

 
6.2 Notwithstanding the asset mix ranges shown above, the Administration may authorize temporary asset mix positions outside those ranges to accommodate a Fund restructuring, funding of any private market investments (e.g. the global infrastructure mandate), a Manager restructuring, or a Manager request submitted in writing and providing the rationale for the request. When such authorizations are given, they will be reported to the Investment Committee at its next meeting.
 
Rebalancing Policy
6.3
Managers responsible for more than one asset class will use cash flows to maintain the asset exposure as close as possible to the Benchmark for their portion of the Fund. In addition, these Managers shall review the asset mix of their mandates at the end of each quarter. In any quarter that the asset mix is outside of the permissible asset mix limits set for their Benchmark, these Managers will be responsible for rebalancing their mandates to their Benchmark asset mix at the quarter end valuation date. In so doing they will not be responsible for considering assets not under their management.
The Administration shall review the asset mix between Managers at the end of each quarter. In any quarter that the allocation between Managers is outside of the permissible asset mix limits, the Administration will be responsible for rebalancing between the Managers to the Benchmark asset mix.

7 — CONFLICT OF INTEREST POLICY

Individuals or other Bodies governed by the Guidelines
7.1
The guidelines apply to the University; members of the Board, University Committees and the Administration; the Manager; the Custodian; and any employee, agent, or third party retained by any of the foregoing to provide services to the Plan.

Conflict of Interest
7.2
No person listed above may exercise his powers in his own interest or in the interest of a third person, nor may he place himself in a situation of conflict or potential conflict between his personal interest and his duties with regard to the investment of the Fund.

7.3 Any person listed above shall disclose any direct or indirect association or material interest or involvement that would result in any actual, potential or perceived conflict of interest with regard to the investments of the Fund. Without limiting the generality of the foregoing, this would include material benefit from any asset held in the Fund, or any significant holding, or the membership on the boards of other corporations, or any actual or proposed contracts with the issuer of any securities which are or will be included in the Fund.

Procedure on Disclosure
7.4
An individual listed above shall disclose in writing the nature and extent of his interest to the University immediately upon first becoming aware of the conflict. The disclosure must be made orally if the knowledge of the conflict arises in the course of discussion at a meeting.

7.5 If the party disclosing the conflict has the capacity to participate in or to make decisions affecting the investment of the Fund, the party may only continue to participate with the approval of the University. The party may elect not to participate with respect to the issue in conflict. If the person disclosing the conflict has voting powers, he may continue to participate with respect to the issue only with the unanimous approval of the other participants with voting rights. His notification shall be considered a continuing disclosure on that issue for purposes of the obligations outlined by these guidelines.

8 — MISCELLANEOUS LENDING OF CASH OR SECURITIES

8.1 The Fund itself may not enter into securities lending agreements, although the Pooled Funds may do so if their policies so permit. The Fund may not lend cash except through eligible debt securities.

Derivatives
8.2
The Fund itself may not invest directly in derivatives, although the Pooled Funds may do so if their policies so permit.

Liquidity
8.3
Except for the global infrastructure investment, the Pooled Funds are valued daily and are highly liquid. The global infrastructure fund is a private investment, valued at least twice per year, and capital is expected to be liquidated in 10-14 years.

Voting Rights
8.4
The trustees of the Pooled Funds exercise all voting rights acquired through the investments of the Pooled Funds.

Valuation of Investments
8.5
The trustees of the Pooled Funds shall value the Pooled Fund units.

9 — STATEMENT REVIEW

9.1 The Administration shall review the Statement at least once every three years taking into account whether any developments such as the following have occurred:
 
1) governance changes;
2) changing investment beliefs;
3) changing risk tolerance;
4) changes to benefits provided by the Plan;
5) changes to the Plan's membership demographics and liability distributions;
6) changes to the Plan's cash flows and surplus/deficit positions;
7) changed expectations for the long term risk/return trade-offs of the capital markets;
8) new investment products;
9) changes to legislation; and
10) any practical issues that arise from the application of the Statement.