The expected elimination of the loan to the Pre-1992 Period from the plan’s asset mix, which represented about 24% of all plan assets as at August 31, 2009 was the key consideration in our re-examination of the investment policies under the plan. Two additional key elements in this re-examination were the funding policy outlined above and the fact that the Post-1992 Period plan has relatively immature liabilities and will have positive cash flow for about the next 15 years.
We undertook a wide-ranging asset-liability study of the plan. The objective of this study was to establish a new optimal policy asset mix that would maximize the funded ratio of the plan while minimizing the volatility of the total funding contribution rates. Management worked with the plan’s actuary, external investment specialists, the Investment Committee and the Board to complete the study and to recommend a revised policy asset mix to the Board.
We assessed other available asset classes that were not currently part of the policy asset mix and selected three new asset classes for the fund: long-term bonds, real estate and infrastructure. Long-term bonds were selected for their liability-matching attributes. Real estate and infrastructure were selected as they have some inflation-sensitive characteristics that provide a partial match to the inflation-related elements of the benefits under the plan. The long-term target policy asset mix in the following chart was adopted by the Board.
The change to the above long-term target policy mix is significant and will be gradually implemented over the next few years. In particular, the investment into the illiquid, inflation-sensitive asset classes of real estate and infrastructure, and the increased allocation to private equity will take considerable time to fully implement. Management intends to pursue strategic partnerships with external managers and like-minded investors to manage these illiquid asset classes.
This means developing relationships with investment managers that are capable of customizing an asset management solution in the near term that is sufficiently flexible to accommodate the changing needs of ATRF over the long term. It may also mean collaborating with other Canadian pension plans and institutional investors. Using this approach ATRF can progressively acquire the requisite knowledge, experience and relationships required to internally manage certain asset classes more cost-effectively.