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Hugh-OReilly“We have asked people to think differently about what they do and to let go of ideas that they would have held as self-evident truths, particularly in our investment activities. For us the goal is no longer to always have the highest return … our goal is to meet the obligations we have to our members, and the promise we have made.” – Hugh O’Reilly

 


Success brings a host of rewards, including accolades, an audience, and a sense of achievement. What it shouldn’t produce, though, says Hugh O’Reilly, is complacency and a tendency to rest on one’s laurels.
When a track record of success is significant, some might ask why change a proven model. The answer, offers O’Reilly, President and CEO of OPTrust, presents itself in recognizing the challenges of tomorrow and asking whether the solutions of the past still measure up.
“Many people would look at our track record and suggest we should just keep doing what we have been doing. But for us, complacency is not, and should never be, an option for an organization that’s pursuing excellence,” he told an audience at the Conference Board of Canada’s Pension Summit 2016.
As measures of success, the plan’s fully funded status, a member-driven satisfaction rating of 9.2 out of ten, an A-plus ranking from the Principles for Responsible Investment (PRI) organization, and other achievements, would seem impressive enough, and indeed do reflect some of the changes made since O’Reilly arrived early in 2015.

“We have been undergoing a significant transformation in our culture and how we think about creating long-term sustainability for our plan members (including) … adopting a member-driven approach to all of our activities,” he says, explaining the approach involves aligning the plan’s activities and investments with the interests of its almost 87,000 members.

To begin and continue that transformation, organizational silos were broken down and replaced with deeper integration between departments and functions, fostering co-operation and movement towards common goals. It also means recognizing that “eternal vigilance” is required to keep the silos from reforming, continues O’Reilly.
Appreciating effort and talent has also been a key part in getting the best from the team, including new ways of considering success.
“We have asked people to think differently about what they do and to let go of ideas that they would have held as self-evident truths, particularly in our investment activities. For us the goal is no longer to always have the highest return … our goal is to meet the obligations we have to our members, and the promise we have made.”
Too much of a focus on annual returns, says O’Reilly, distracts from a pension plan’s core function: remaining fully funded and fulfilling the pension promise to members.
“Many large plans, including us, have been in the habit of thinking of themselves primarily as institutional investors, or asset managers … but I believe it’s a misnomer to call ourselves asset managers. We are pension delivery organizations.”
As organizations in the business of delivering adequate retirement income, pension plans should be focused on the long-term success of investments, he continues, adding that the pension industry needs to think in terms of decades, not years. It doesn’t mean that returns don’t matter, just that the long-term gaze has to be on being fully funded.
“Sounds simple, but it actually represents a significant change in mindset. It redefines the choices we make and the risks we accept.”
So, what are the present and future worries driving that change in mindset? O’Reilly describes them as the most challenging conditions the pension industry has ever witnessed. They include:

• Market volatility, which, he says, has become the new normal.
• Low interest rates that have been here for a prolonged time, “and all indications point to the coming years as ones in which investment returns will also be consistently low.”
• An aging population that will live longer than previous generations, thus drawing on pensions for a longer time.
• A shrinking of the active-to-retired member ratio to pay for those pensions.

All of this “means that the strategies of the past are inadequate for the challenges of the future,” says O’Reilly, adding that pension plans must adapt to survive. Achieving long-term sustainability requires financial planners to redefine traditional measures of success, and adapt strategies to ensure they are aligned with market realities and member interests.
Additionally, it puts responsible investment at the core of investment opportunities, and continuing efforts to “promote the advantages of the DB model.”
When discussing responsible investing (RI), O’Reilly describes the strategy as more than “a nice thing to do” but rather an essential component in the “pursuit of long-term sustainability.” RI consideration is part of “everything we do,” and OPTrust works with a number of leading agencies promoting RI principles, including the Canadian Coalition for Good Governance, and the aforementioned PRI group.
OPTrust, he says, considers environmental, social, governance (ESG) factors into investment decisions and ownership practices across all asset classes.
“We actively engage with companies we own to talk about ESG risks, and we also participate in a variety of initiatives designed to promote stronger governance standards and encourage the development of effective public policy.”
It’s all tied to the alignment of investment activities and investment decisions with the interest of members through the member-driven approach, designed to keep the pension promise.
“DB members don’t have to view their retirement income as an ever dwindling resource that they could outlive. We give members the confidence that they can count on their pensions to be there when they retire and that their contributions and respective benefits will remain” stable.
Not to take the long-term view would mean accepting greater risk for short-term gain, a position O’Reilly calls untenable.
“Taking on more risk simply isn’t aligned with members’ best interests. Sustainability must be paired with stability.” To that end, OPTrust is now mandated to maintain a funded ratio between 95 and 100 per cent.
Prior to becoming a leading expert on pensions, O’Reilly, with an interest in baseball, pursued a career as a scout. He became intrigued, he says, in shaking up the metrics of success from the lessons of the Oakland A’s Billy Beane, whose unique take on analytics was the subject of the book and movie, Moneyball.
“He was able to come up with a new way of achieving success in baseball because he looked at on-base percentages, how many times someone got on base.” When the A’s won 20 games in a row, traditional measures of success in baseball began to be reconsidered.
“I think we need to, as a pension industry, start to determine whether or not we are looking at the right measures of success.”

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