LAPP Update

1

• LAPP Update
• to the
• City of Edmonton Management Association (CEMA)
• Ron Liteplo, CEO
• May 20, 2009

2
Todays Agenda

• Review LAPPs current financial performance
• LAPPs plan to address the current financial
  situation
• Questions/discussion

3
LAPP Membership (Dec. 31, 2008)

• 411 employers
• 56 unions
• 189,149 members (2007 179,188)
• 131,003 active (2007 122,569)
• 18,131 inactive (2007 18,757)
• 40,015 retirees (2007 37,862)

4
Canadian Headlines

• Sharp losses for pension plans (Montreal Gazette)
• Ontario Teachers and government address funding
  challenges with change in cost-of-living
  provision. (OTF website)
• Market sinks Canadian pension plans in third
  quarter (Mercer News)
• Since 1920 the TSX Composite has had worse price
  returns in only one other year, 1931. (Gary
  Smith, AIMCo.)

5
In Canada

• Worst performance for Canadian pension plans in
  30 years
• Median return -16.5
• 90 of Canadian pension plans now underfunded

6
Investment Performance Summary (as of April 30,
2009)
Assets under management 13.5 billion
7
2008 Financial Results

• LAPP Assets 2007 15.5 billion
• LAPP Assets 2008 13.6 billion
• Asset gain (loss) ( 1.9 billion)
• LAPP Liabilities (estimated) 18.0 billion
• LAPP Assets 13.6
  billion
• Unfunded liability (estimated) 4.4 billion

8
Actuarial Funding - History
9
The hard truth

• LAPP assets decreased from 15.5 billion to 13.6
  billion (-12)
• Funded status now estimated at 75 funded, down
  from 86
• Interest rates at historical all-time lows

10

• Moving Forward
• LAPPs plan to recover from the current financial
  crises

11
Wait and hope?

• This recession is global much worse than other
  recessions in past 40 years
• Not optimistic about a quick or dramatic market
  recovery
• Waiting and hoping is not a strategy

12
The plan, going forward

• 4 possible strategies to improve pension funding
• Reduce benefit costs
• Change investment mix (asset allocation)
• Increase contribution rates
• Reduce operating costs

13
Strategy 1 Benefit costs

• No plans to reduce benefits or benefit cost at
  this time
• Benefit costs have been identified as an area for
  review by the Boards Stakeholder Consultation
  Group

14
Strategy 2 Change the investment mix

• Asset/Liability study recently completed
• Detailed look at LAPPs asset allocation for the
  next 7 - 10 years

15
A/L Study

• What did we learn?
• Two conclusions
• Old asset mix served us very well
• Consistently outperformed all other Alberta
  public sector pensions over past 5 years
• LAPP was AIMCos best-performing client
• Greater returns and lower risk available with a
  new mix

16
Why is this important?

• A/L study determines our asset allocation or
  mix of investments
• This mix is the key factor in how successful our
  investments are.
• Most of variability of returns depends on the
  asset mix.

17
Economic Stimulus Packages

• Over 1 trillion in new spending worldwide
• Predictable result inflation
• LAPP response move to inflation-protected
  assets (e.g. infrastructure, real estate)

18
Asset Mix Changes
19
Expected results

• Slightly less risk than current asset mix
• Expected long term return is 7.3
• LAPP requires 6.3 /year
• In 2017, with expected returns on average, LAPP
  will be 104 funded (based on A/L study
  projections)

20
Strategy 3 Contribution Rates

• Increased in 2009 by 1.57 per 100 of payroll
  (divided between employee, employer)
• Slow way to improve plan finances
• Not welcomed by members, employers, Board
• Minimal feedback on the 2009 rate increase
• 2010 increase? Will be determined by the Board
  this summer.

21
Strategy 4 Cut expenses

• Biggest expense is pooled fund management
  (including external investment manager fees) 59
  million in 2007
• External management significantly more expensive
  than internal
• By 2011, 12 of assets will shift from external
  to internal
• Using CEM to monitor cost efficiency of AIMCO and
  APA
• Modest cuts in ALAPP operations

22
2008 Plan Expenses(unaudited)

• Administration and Governance - 115/member
  (2007 101)
• APA costs - 18.6 million (2007 15.4 million)
• Governance expenses - 2.5 million (2007 2.0
  million)
• Investment Costs - 361/member (2007
  332/member)
• AIMCo - 7.5 million (2007 6.5 million)
• Fund management 59 million (2007 51.1 million)
• Total costs are approximately 0.64 of the fund
  (2007 0.48)

23
Will this work?

• Previous asset mix kept us ahead of other public
  sector pensions for several years
• Confident we have the right mix, going forward
• No guarantees
• Contribution rates could rise in long term
• Waiting and hoping is not a strategy

24

• Questions