Workplace Safety and Insurance Board Statement of Investment Beliefs

Transcription

1 Workplace Safety and Insurance Board Statement of Investment Beliefs Foreword, Purpose, Review and Approval The Workplace Safety and Insurance Board ( WSIB) is responsible for investing the funds of the Insurance, Pension and Loss of Retirement Income Funds (collectively, the Funds ). These responsibilities are carried out through strategic and other investment policies that govern how the Funds are to be invested and how the investment performance and compliance of the Funds is to be monitored and evaluated. The purpose of this Statement of Investment Beliefs is to document the primary beliefs to: a. provide a basis for the investment policies, including those contained in the Statements of Investment Policies and Procedures, and b. provide context for the assessment of potential changes to the WSIB s investment approach. This document will evolve over time based on changes in the circumstances of the Funds and in the investment environment. This Statement of Investment Beliefs shall be reviewed at least annually by the Investment Committee of the Board of Directors and any changes arising from the review will be recommended to the Board of Directors for approval. 1. Governance & strategic decisions Strong governance processes, appropriate delegation and prudence are necessary elements of successful investment programs. The Board of Directors makes those investment policy decisions which most significantly impact the Funds investment risk and total fund return objectives, based on recommendations from the Investment Committee and other information. Other investment decisions are delegated to those who have the requisite skill, knowledge and resources to make those decisions. The Board of Directors is responsible for ensuring there are reporting and control mechanisms which enable timely monitoring and evaluation of investment decisions, whether delegated or not. 2. Investment Risk It is appropriate to take reasonable investment risk for the purpose of generating investment revenues that provide a contribution to servicing the benefit obligations of the Funds. The investment strategy and capital market behaviour expose the Funds to many types of risks. The primary risk for the Insurance and Pension funds is that long-term investment returns together with a reasonable and sustainable level of contributions, are insufficient to meet the financial obligations relevant to each fund over the long term. For the Loss of Retirement Income fund, the primary risk is a failure to achieve the long-term rate of return target established in that fund s Statement of Investment Policies and Procedures. The acceptance of investment risk provides the opportunity to earn higher long-term investment returns which contribute to maintaining a reasonable level of contributions. The amount of investment risk taken is determined by the WSIB s tolerance for short-term volatility in fund returns, the level of the long-term target return and the requirement for shorter-term liquidity. It is not necessary or desirable to eliminate investment risk; rather, the investment program should be developed so that the risk is managed in a prudent manner that maximizes the return relative to the investment risk taken and offers the appropriate level of liquidity relative to the net cash flow needs of the Funds. Workplace Safety and Insurance Board Statement of Investment Beliefs 1

2 3. Expectations for investment returns and risk Capital market projections of return, risk and correlation are critical to the asset allocation process and, although grounded in a belief that markets are generally efficient, these projections require a judicious use of historical information, a critical assessment of current conditions and insight into future trends and possible outcomes. Capital markets are generally efficient and exhibit some predictability over the long term. Based on both theory and historical observations, it is reasonable to expect a higher level of return by assuming a higher level of risk. Historical investment returns assist in estimating relative returns across asset classes; however they have limited power to predict the level of future asset class returns. Historical variability and correlation of asset class returns provide more useful insights into long-run asset class behaviour and interrelationships. Conditioned by the current market environment and appropriate forward looking adjustments, historical variability and correlation are necessary and helpful inputs to determine asset allocation policies. 4. Diversification Diversification is the most powerful tool available to improve riskadjusted investment returns and constraints on diversification should be minimized. The investment program should access diverse sources of investment return to mitigate the risk of exposure to any single return source and to enhance the return per unit of risk for the total Fund. The investment program should span a range of asset classes, geographic regions, industry sectors, company size, currencies, strategies, styles, skills and credit quality. Investments with varying degrees of liquidity also provide the opportunity to generate long-term returns from forgoing shorter-term liquidity. To achieve diversity and cost effectiveness, all methods of implementation should be considered, including physical, derivative, active, passive, segregated, pooled, long, short, public and private. The prudent use of leverage is also appropriate to enlarge the investment opportunity set that can provide diversification benefits to the program. The risks associated with leverage are, in some instances, different from more typical sources of risk, and require additional oversight. When considering any investment strategy, the broadest, global opportunity set is the appropriate one to consider. Diversified sources of return can be created by a policy allocation or by discretionary authority within an active management mandate. A choice to exclude particular types of investments or to constrain the global opportunity set, for example through policy biases towards domestic or large cap securities, should be based on the merits of an investment thesis or strategy or on market structure considerations (for example, when the cost of access or implementation, illiquidity, or governance considerations erode the expected return or diversification benefits to the Funds). However constraints do not improve risk-adjusted returns and therefore should generally be the exception. 5. Active investment management Insightfully selected investment managers applying a cogent active investment philosophy and strategies within a consistently applied investment process can add sufficient value to warrant the added cost of active management. Obtaining excess return from active management is difficult and often resource-intensive. The WSIB s investment governance process and level of skill in the selection of active Workplace Safety and Insurance Board Statement of Investment Beliefs 2

3 investment managers is sufficient to provide, on average, a reasonable expectation of positive risk-adjusted active returns net of fees. Key determinants for positive risk-adjusted active returns are that the manager possesses skill and that the skill is applied to a wide breadth of opportunities with a minimum number of constraints. 6. Investment innovation and risk allocation Modern investment techniques provide a compelling opportunity to improve risk-adjusted returns through employing more diversified sources of return and placing less reliance on the equity risk premium than that suggested by traditional portfolio construction methodologies. Historically the WSIB has relied on a large allocation to public equities to earn both market and active returns to provide a higher return than bonds but with a higher level of volatility. This resulted in the vast majority of total fund return volatility coming from public equities. The equity risk premium in public markets is expected to be lower going forward than it has been historically. In addition, investment techniques now allow the separation of market returns and active returns such that investors are provided the opportunity to access active equity returns without requiring a commensurate allocation to equity markets. Therefore it is not necessary for public equities to dominate the Funds asset allocation. In fact, a more balanced allocation of risk across a broader set of return sources is appropriate in order to meet the return objectives of the Funds. 7. Currency positions Over the long term, investment returns are not materially affected by their inherent currency, however currency hedging does reduce the short term variability of returns that can arise from these positions. There are foreign currency positions inherent in the foreign holdings of the Funds. There is no expected return difference between hedged and unhedged positions over the long term, other than the cost to implement a currency hedge. Although currency positions related to foreign holdings can provide diversification benefits over the long term, the short-term benefits of hedging exceed this potential diversification benefit and the cost to implement the hedge. Reducing short-term return variability through currency hedging provides more stable reporting period returns and asset mix, which in turn facilitates a greater focus by the governance process on the more significant drivers of long-term investment results. The appropriate hedge ratio may vary with time, currency and asset class. Although the evidence is not incontrovertible, and research continues, we believe that hedging provides an appropriate balance of short-term risk management and long-term investment performance. 8. External investment management External investment management is more compatible than internal management with the WSIB s organizational objectives and preference for flexibility within the investment program. Implementation of the investment program through external managers is motivated by the WSIB s desire to focus the organization on its primary mission: to eliminate workplace injuries and illnesses and to provide benefits to injured workers. Also, it would be difficult to attract, retain, and remunerate the most highly qualified internal portfolio management personnel in the competitive market place that prevails. External investment management also provides greater flexibility to employ the best available external managers and to change those managers when conditions warrant. Workplace Safety and Insurance Board Statement of Investment Beliefs 3

4 Section 1 Document No: INV-P-01 Investment Governance Policy Subject Governance OBJECTIVE The objective of this policy is to define the roles and responsibilities for the key decision-making authorities in the investment governance process. It provides guidelines on authorities and delegation to ensure proper investment governance and management. APPLICATION AND SCOPE This policy, administered by the Investment Division, applies to the governance of the Insurance, Pension, Supplementary Pension and Loss of Retirement Income funds (collectively, the Funds ). PRINCIPLES The governance structure of the WSIB investment program consists of the Board of Directors, the Investment Committee and Vice President, Investments and Chief Investment Officer (VP/Chief Investment Officer). Collectively, they are responsible for the administration of the Funds with the support of internal resources and external service providers. ROLES & RESPONSIBILITIES 1. Board of Directors The Board of Directors retains ultimate authority and fiduciary responsibility for the administration of the investments of the Funds ( the Investments ). In that capacity, the Board of Directors: a. Appoints one or more Custodians ( the Custodian(s) ) to hold the investments of the Funds in safekeeping for the account of the Funds, in the name of the Funds or in the Custodian s nominee name(s) or in the name of the Canada Depository for Securities or a nominee thereof, and to record, administer and report on, those investments. b. Appoints members of the Investment Committee; c. At least annually on recommendation of the Investment Committee and the VP/Chief Investment Officer, reviews, amends and approves the Statements of Investment Policies & Procedures ( SIPPs ) which define the policies and procedures governing the selection and deployment of the Investments; d. Monitors, through the Investment Committee and the VP/Chief Investment Officer, the activities and performance of the Funds and all appointed agents on a regular basis; e. Receives and approves reports on the financial status and performance of the Investments. 2. Investment Committee The Committee s roles and responsibilities are set out in the Investment Committee s Mandate included as Exhibit 1 to this Policy. The Committee s mandate provides that the Committee has authority to review and approve or recommend, as applicable, investment policies as required, consistent with the Investment Beliefs and within the provisions of the SIPPs. Such policies and the role of the Investment Committee are as follows: i. Investment Governance Policy (Committee recommends to the Board of Directors for approval) ii. Investment Rebalancing Policy (Committee approves) iii. Investment Derivatives Policy (Committee approves) iv. Investment Currency Hedging Policy (Committee approves) v. Investment Compliance Policy (Committee approves) vi. Investment Benchmarks Policy (Committee approves) vii. Investment Securities Lending Policy (Committee approves) 1

5 Section 1 Document No: INV-P-01 Investment Governance Policy Subject Governance 3. Vice President, Investments and Chief Investment Officer The VP/Chief Investment Officer acts as a resource to the Investment Committee and to the Board of Directors in all matters relating to the investment of the Funds. The VP/Chief Investment Officer directs and monitors the management of the Funds through a team of external investment management firms, other investment service providers and, where determined appropriate, selected employees of the WSIB. Objective The primary objective of the VP/Chief Investment Officer is, through the Investment Managers and the deployment of assets among asset classes and strategies, to optimize the long-term rate of return of each of the Funds, all in accordance with the provisions of their respective Statements of Investment Policies and Procedures. Key Reporting Relationship The VP/Chief Investment Officer reports organizationally to the Chief Financial Officer of the WSIB and, in addition, takes direction from the Investment Committee and Board of Directors. In addition to the foregoing, the VP/Chief Investment Officer provides information to the WSIB s Executive Committee, the Plan Manager of the Pension Fund and any related committees. Laterally, the VP/Chief Investment Officer liaises closely with the WSIB s VP - Human Resources, General Counsel, Chief Actuary and VP, Finance on a regular basis. Key Activities and Accountability a. Review Investment Policies and Beliefs and Recommend Changes The VP/Chief Investment Officer is the catalyst for initiating changes to the investment policies and beliefs which govern the manner in which the assets of the Funds are deployed and which determine the sources and level of the returns on the Funds. In this capacity, the VP/Chief Investment Officer must be current with all relevant legislation and regulation, and evolving industry practices. In addition, the VP/Chief Investment Officer must communicate with the WSIB s Chief Actuary, external actuary, and the Chief Financial Officer in order to be sensitive to changes in the Funds respective liabilities as well as the WSIB s financial condition, both of which may influence the deployment of investment assets. No less frequently than annually, the VP/Chief Investment Officer reviews the SIPP of each of the Funds to ascertain whether changes are warranted as a result of fundamental changes to the Funds respective liabilities and the capital markets or regulations. When appropriate, the VP/Chief Investment Officer recommends changes to the Investment Committee and the Board of Directors. b. Manage Investments Within the provisions of the SIPPs and other relevant policies, the VP/Chief Investment Officer is responsible for recommending to the Investment Committee and the Board of Directors the deployment of funds between active and passive modes of investment management and then formulating teams of external Investment Managers to manage the investments of the Funds on a day-to-day basis. In assembling these teams, the VP/Chief Investment Officer is cognizant not only of the individual strengths and specialties of the Investment Managers, but also their collective characteristics. In combining Investment Managers, the VP/Chief Investment Officer strives to assemble diverse teams that, in aggregate, provide the prospect of optimizing acceptable risk-adjusted returns (both total returns and relative to a passive benchmark where applicable). 2

6 Section 1 Document No: INV-P-01 Investment Governance Policy Subject Governance The VP/Chief Investment Officer initiates searches to identify Investment Managers appropriate to current needs as required using appropriate tools and service providers. The end result of this process is the identification of a short-list of candidates to the Investment Committee for interview and/or consideration, together with the VP/Chief Investment Officer s specific selection recommendation. The VP/Chief Investment Officer develops and documents detailed investment manager mandates specific to the individual manager s style and/or market sector. These mandates contain performance objectives, tailored to the mandate, that measure the manager s value-added effectiveness, consistency and compliance with mandate. The VP/Chief Investment Officer monitors the results and performance of the investment manager teams against their respective and collective mandates and expectations and takes remedial action, including termination of mandate, as warranted. The VP/Chief Investment Officer establishes procedures for and oversees the transition of assets precipitated by the appointment and termination of managers mandates, all to minimize transition impact and cost to the Funds. The VP/Chief Investment Officer defines the parameters for, and monitors and implements the systematic periodic rebalancing of, the Funds asset mix pursuant to the Investment Rebalancing Policy. c. Analyze Capital Markets and Gather Industry Intelligence The VP/Chief Investment Officer must keep apprised of the current outlook for capital markets and global economies to assess their potential to impact the Funds. To this end, the VP/Chief Investment Officer maintains regular contact with a variety of external resources such as investment managers, economists, consultants, peers at other pension funds and institutional investors, and utilizes various data services and software. d. Report Investment Performance and Compliance With the aid of independent asset and performance measurement service provider(s), the VP/Chief Investment Officer reports to the Investment Committee and the Board of Directors on the investment performance of the collective assets and individual Investment Manager portfolios, against benchmarks and performance standards. Through the Custodian and the Investment Administration Unit, the assets and the Investment Managers are monitored for compliance with all applicable laws and regulations, the SIPP and individual manager s mandates, and the VP/Chief Investment Officer reports to the Investment Committee and the Board of Directors accordingly. The VP/Chief Investment Officer coordinates through the Chief Actuary for the Insurance Fund and, in the case of the Pension Fund, the Pension Fund s actuary, the reporting on the status of the relationship between the Funds assets and liabilities to the Investment Committee. e. Select and Recommend Managers and Other Service Providers The VP/Chief Investment Officer identifies, selects and recommends the appointment of consultants and other service providers to aid in any aspect of the foregoing responsibilities. 3

7 Section 1 Document No: INV-P-01 Investment Governance Policy Subject Governance f. Support Investment Administration The day-to-day reporting from the Custodian on the investment transactions generated by the Investment Managers, the collection of income when due, securities lending activities, the financial status of the Fund, and the reconciliation of these reports is conducted by the Investment Administration Unit of the Finance Division of the WSIB, with directional input from the VP/Chief Investment Officer. The Investment Administration Unit monitors the proxy voting of the Investment Managers and/or proxy voting service providers and provides requisite financial reports to the VP/Chief Investment Officer, the Investment Committee and the Board of Directors on the financial status of and income generated by the Funds. AUTHORIZATION This Investment Governance Policy is recommended for approval by the Investment Committee and approved by the Board of Directors. The Investment Division maintains the document and prepares updates for approval when necessary. A summary of decision making authorities is documented in the Authorities Matrix, attached to this Policy. For transaction-related authorizations such as transfers out of the Fund and trade approval, authorized signatures are required to execute the transactions. Reference should be made to relevant documentation maintained by the Investment Administration Unit for detailed signature requirements and authorization structure. The Investment Administration Unit maintains signature records of all authorized personnel, provides a copy to the Custodian, and provides updates regarding any changes. The Investment Division shall notify the Investment Administration Unit immediately about any personnel changes or authorization changes and provide updated signature information as appropriate. DELEGATION OF AUTHORITY In the event that key personnel cannot perform their duties, authority will be delegated to predefined positions. Refer to the Delegation of Authority documentation maintained by the Legal department. REFERENCE Statements of Investment Policies and Procedures ( SIPPs ) Statutory Delegation of Powers Legal Delegation of Authority Legal Signature Requirement Documentation Investment Administration Unit DATE December, 2010 REVISIONS Date Revision Comments Approved By Initial Draft IC review 4

8 Section 1 Document No: INV-P-01 Investment Governance Policy Subject Governance BOD review Board of Directors Policies & delegation Compliance, Currency Hedging Board of Directors & Benchmarks policies added, agent appointment delegated to IC IC review BOD review General editing; move IC Board of Directors mandate to exhibit; add securities lending IC review BOD review 5

9 Section 1 Document No: INV-P-01 Investment Governance Policy Subject Governance Exhibit 1 Workplace Safety and Insurance Board Investment Committee Mandate

10 Workplace Safety and Insurance Board Investment Committee Mandate I. PURPOSE A. Primary responsibility for the prudent investment and oversight of the Insurance Fund, Employees Pension Fund and the Loss of Retirement Income Fund (the Funds) is vested in management and is overseen by the Board of Directors. B. The purpose of the Investment Committee (Committee) is to assist the Board of Directors (BoD) in fulfilling its governance and oversight responsibilities with respect to the Funds. II. AUTHORITY A. The Committee is authorized to approve the appointment of investment managers and the setting of their mandates and performance benchmarks. B. The Committee is authorized to review and approve or recommend, as applicable, investment policies as required, consistent with the WSIB investment beliefs and within the provisions of the Statements of Investment Policies and Procedures for the Funds. III. COMPOSITION A. The Committee shall be comprised of neither less than six, nor more than eight members appointed by the BoD including: Page 1

11 a. Two members of the BoD, neither of whom may be the Chair of the BoD nor the President of the WSIB, one of whom shall be the Chair of the Committee and the other the Vice Chair of the Committee; b. The President; If the office of the President of the WSIB is vacant, or if the President is unable to serve on the Committee for reasons of illness, disability or absence from Ontario, the Chair of the BoD or his or her designate may name an alternate officer of the WSIB to serve on the Committee until the vacancy is filled or the President is again able to serve on the Committee. c. Not less than three nor more than five external expert advisors ( Advisors ). i. The Advisors must be individuals who are recognized and respected in the investment community for their expertise and experience in investment matters. ii. The BoD appoints Advisors based on the recommendations of a Nominating Sub-Committee of the Committee. The Nominating Sub-Committee shall be comprised of the Chair of the Committee and one or more Advisor member(s) of the Committee. Page 2

12 iii. The Advisors are appointed for terms of up to four years, such that not more than two member s terms shall expire within less than six consecutive months of another. Upon expiry of his or her term of office, an Advisor may be re-appointed for a maximum of two additional terms and no Advisor shall serve on the Committee for longer than nine years. If an Advisor resigns, dies, is unable to continue serving for reasons of illness or disability, or has his or her appointment terminated pursuant to the provisions detailed hereinafter, the BoD may appoint another Advisor recommended by the Nominating Sub-Committee of the Committee to complete that Advisor s term. iv. The BoD may terminate the appointment of an Advisor prior to expiration of his or her term for cause, which shall include: 1. Violation of any of the terms of the SIPPs, including adherence to the Conflict of Interest Policy - Investments; 2. Failure to perform the essential duties of a Committee member (e.g. regular attendance at meetings); 3. Ceasing to be recognized or respected in the investment community for his or her expertise in investment matters; 4. Ceasing to be capable of meeting the standards for deliberation and actions as set out in this Mandate. Page 3

13 IV. COMMITTEE MEETINGS A. The Committee will meet not less than four times per calendar year. The Chair of the Committee will fix the dates of meetings. B. The Corporate Secretary shall give notice of all meetings to every member at least two days prior to the meeting. C. Special meetings may be held at any time without formal notice provided all members are present or have waived notice or signified their consent to the meeting being held without formal notice. D. Meetings may be held by teleconference or videoconference provided all members participating in the meeting agree. E. A resolution in writing signed by all members of the Committee is as valid as if it had been passed at a meeting. F. In the absence of the Chair, the Vice Chair will act as Chair. G. The quorum for the transaction of business at meetings is two BoD members and two Advisor members. H. All questions arising at any meeting of the Committee shall be decided by a majority of votes. In the event of a tie vote, the motion is defeated. Page 4

14 I. The Corporate Secretary or her/his delegated representative shall act as Secretary of the Committee and shall record all deliberations, including votes, of the Committee and prepare formal minutes thereof. J. The VP Investments shall usually be invited to attend every meeting of the Committee but may be required to exit any portion of a meeting on the request of the Chair of the Committee. If that position is vacant, or the VP Investments is unable to attend, the President of the WSIB may designate an alternate member of the Investment Division or the Chief Financial Officer to attend the Committee meeting. K. At each meeting, the Investment Committee members shall hold an executive session. V. Standards for Deliberation and Actions A. The Committee as a whole, and each member of it, shall exercise the care, diligence, and skill in fulfilling the Committee s mandate that a person of ordinary prudence would exercise in dealing with the property of another person. B. Each member of the Committee shall use all relevant knowledge and skill that he or she possesses, or ought to possess, by reason of his or her profession, business, calling, or experience. Page 5

15 C. The members of the Committee are subject to the provision of the WSIB s Conflict-of-Interest Policy Investments. D. If a member declares a conflict of interest or the Committee determines that a conflict of interest exists in respect of a member, the member shall absent him/herself from the discussion and decision on the matter. VI. Terms of Reference The responsibilities of the Committee with respect to the investments of the Funds are to: A. Recommend to the BoD a statement of investment beliefs and Statements of Investment Policies and Procedures ( SIPPs ) governing the investments of each of the Funds; B. Annually (or more frequently as required) review the SIPPs in the light of any fundamental changes to the Funds liabilities, capital markets, applicable regulations or other relevant factors and propose amendments to the BoD as warranted; C. Approve the appointment of investment managers and the setting of their mandates and performance benchmarks; Page 6

16 D. Recommend to the BoD the delegation to the VP Investments of such authorities as are warranted for the efficient implementation of the Funds investment programs and reporting; E. Approve the appointment of agents to provide advice and analysis to the Committee and to the BoD; F. Review and approve or recommend, as applicable, investment policies as required, consistent with the investment beliefs and within the provisions of the SIPPs; G. Monitor the investment performance of the collective assets and individual manager portfolios, against their respective benchmarks and performance standards and report to the BoD through the Committee Chair and VP Investments; H. Review management's internal control measures through the VP Investments to ensure the investments and the investment managers comply with applicable laws and regulations, the SIPPs, other applicable policies and the investment managers mandates; I. Report to the BoD on the financial status of the investments of the Funds. VII. Other Duties A. Other responsibilities of the Committee include performing other duties in relation to the investment program delegated or as may be requested by the BoD. Page 7

17 Section 1 Document No: INV-P-01 Investment Governance Policy Subject Governance Exhibit 2 Workplace Safety and Insurance Board Investment Governance Policy Decision making (Authorities) Matrix

18 Section 1 Document No: INV-P-01 Investment Governance Policy Subject Governance Decision-making (Authorities) Matrix for Fund Investments Level Decision-maker (Approves) Recommends Implements Reviewer (Monitors) Board of Investment Beliefs Appointed agents Directors SIPP Investment performance Governance Policy Investment Committee Appoints custodians VP, Investments Appointment of IC members Investment Rebalancing Policy Investment Beliefs SIPP annually Committee ( IC ) Derivatives Policy Compliance Policy SIPP Governance Policy Fund performance Compliance Currency Hedging Policy Appointment of Custodians (in Benchmarks Policy conjunction with the Audit & Appointment of agents, Finance Committee) including Securities Lending Agent Appointment of Investment Managers Manager allocations Nominating IC External Advisors Sub-Committee

19 Section 1 Document No: INV-P-01 Investment Governance Policy Subject Governance Level Decision-maker (Approves) Recommends Implements Reviewer (Monitors) Investment Manager terminations Rebalancing Policy SIPP amendments Investment Beliefs Division (VP/Chief Investment Officer) Rebalancing actions Inter-fund transfers Internal cash investments Securities lending collateral Derivatives Policy Compliance Policy Currency Hedging Policy Benchmarks Policy Rebalancing actions Agent/Service provider searches Asset transitions SIPP Fund & manager performance Rebalancing Securities Lending Policy Compliance Appointment of agents, Performance reporting Contractual terms & including Securities Lending and analytics conditions for agents Agent Appointment of Investment Managers Manager allocations Investment Investment Fund & manager compliance Accounting Unit (Treasury) administration Manager reconciliations Securities lending administration Proxy voting administration Compliance testing Transfers & cash Inter-fund transfers Cash investments

20 Workplace Safety and Insurance Board INSURANCE FUND Statement of Investment Policies and Procedures Effective January 1, 2011

21 Workplace Safety and Insurance Board INSURANCE FUND Statement of Investment Policies and Procedures Section Page 1. Purpose 3 2. Fund characteristics and background 3 3. Regulatory standards 3 4. Governance 4 5. Fund objectives 4 6. Asset mix 5 7. Risk and risk management 6 8. Permitted investments 7 9. Valuation of the investments Lending of the investments Proxy voting Conflicts of interest and related party transactions 11 WSIB Insurance Fund SIPP 2

22 Workplace Safety and Insurance Board INSURANCE FUND Statement of Investment Policies and Procedures This Statement of Investment Policies and Procedures ( SIPP ) is effective as of January 1, 2011 and applies to the assets of the Insurance Fund ( the Fund ) of the Workplace Safety and Insurance Board ( the WSIB ) as continued under the Workplace Safety and Insurance Act ( the Act ) as amended from time to time. The Board of Directors of the WSIB ( the Board of Directors ), the Investment Committee of the Board of Directors ( Investment Committee ), the Investment Managers as hereinafter defined, and any officer, employee, agent or advisor providing services in connection with the investments of the Fund shall accept and adhere to the SIPP. 1. PURPOSE The purpose of the SIPP and related policies is to describe the WSIB s essential investment policies and to define eligible investments that are appropriate to the management of the Fund and consistent with the Act and regulations thereunder, and all other relevant statutory and regulatory requirements. This takes into account the nature of the liabilities, the obligations of the WSIB, and the return prospects and risks of various investment policies and strategies. In addition, the SIPP includes the management structure and procedures which will enable the ongoing management of the Fund in a prudent and effective manner. 2. FUND CHARACTERISTICS & BACKGROUND The Fund is established by the Act for the payment of benefits to eligible injured workers and their survivors all as defined in the Act. The costs of administering the Act as well as any expenses that the WSIB is directed to pay under any other Act are also paid out of the Fund. Employers classified as Schedule 1 employers under the Act make premium payments to the Fund to cover statutory benefits. The level of these employer premiums is related to payroll and workplace-safety-related risk. The amount and timing of premium payments is established by the WSIB in accordance with the provisions of the Act and on the advice of the WSIB s actuary. The premium rates are dependent on many factors, including the actual benefit payment experience and the Fund s investment revenues. Certain other employers (classified under the Act as Schedule 2 employers) pay a fee to the Fund for administrative services calculated as a percentage of their benefit costs. 3. REGULATORY STANDARDS The Act requires that the available funds are allocated to investments that are authorized under the Pension Benefits Act (Ont.) ( Pension Benefits Act ) for the investment of money in pension funds. It further requires that the funds be invested in the same manner as is authorized for those pension funds, that is, with the care, diligence and skill that a person of ordinary prudence would exercise in dealing with the property of another person and using all relevant knowledge and skill that the person may possess or, by reason of their profession, business or calling, ought to possess. WSIB Insurance Fund SIPP 3

23 Pursuant to s. 166 of the Act and the Memorandum of Understanding between the WSIB and the Minister of Labour, the WSIB is required to provide annually a statement of its investment policies and goals to the Ontario Minister of Labour and, to that end, shall annually provide a copy of this SIPP to the Minister. 4. GOVERNANCE 4.1 Administration of the Fund The WSIB, through the Board of Directors, is responsible for the prudent management of the Fund s investments. The Board of Directors has delegated certain aspects of the administration and oversight of the Fund's investments to the Investment Committee and the Vice President, Investments and Chief Investment Officer ( VP and Chief Investment Officer ). The specific roles, responsibilities, and authorities of the Board of Directors, the Investment Committee and the VP and Chief Investment Officer in the administration and oversight of the Fund are documented in the governance policy which is reviewed periodically and amended as required by the Board of Directors. 4.2 Mandate & Authority of the Investment Managers Investment Manager means an external investment management organization that invests and manages Fund assets on behalf of the WSIB. The mandate of each Investment Manager shall be described in a written and executed Investment Management Agreement ( IMA ) between the Investment Manager and the WSIB. Investment Managers shall have full authority, acting as a prudent person within the provisions of this SIPP and such additional restrictions as may be contained in the IMA, to manage all aspects of the investments of the Fund or portions thereof as specified in the IMA. 4.3 Review of the SIPP The SIPP shall be reviewed by the Board of Directors at least annually and amended as required. No less frequently than every four years, this review shall include a detailed review of the WSIB s benefit liabilities and capital market assumptions to ensure that the Policy Asset Mix (defined in section 6.1) and other provisions of the SIPP remain relevant to the prevailing and forecast nature of the Fund s liabilities. 5. FUND OBJECTIVES 5.1 Investment Return Objective a. Absolute Return: The long-term investment return objective is to earn at least 7% per annum. The long-term return objective incorporates an outlook for a low-inflation environment and assumes reasonable success from active investment management and is net of investment management fees. Long term is deemed to be rolling ten to fifteen-year periods. Over shorter periods, WSIB Insurance Fund SIPP 4

24 the Fund s realized rate of return may be significantly above or below this target. b. Benchmark-related: The Fund, its asset strategies and individual portfolios are expected to generate returns over rolling periods of five years, or longer periods as may be appropriate for a particular strategy, which, after the deduction of fees for active investment management, should not be less than the return of the benchmarks set out in the benchmarks policy, and in the relevant IMA. 5.2 Manager Mandates The investment mandates for actively-managed portfolios shall contain specific value-added targets and tolerance ranges relative to defined benchmarks and, where applicable, peer group sample ranking targets appropriate to the nature of the individual investment mandate. Tolerance ranges may be expressed in units of return or return volatility. Benchmarks, and the period over which performance is evaluated, shall be tailored to the nature of the managed assets and the Investment Manager s investment style and, though they may differ in specificity, shall be subordinate to the investment objectives established above. 6. ASSET MIX 6.1 Policy Asset Mix The Policy Asset Mix represents a diversified long-term reference portfolio; it is the most important determinant of the Fund meeting its long-term return objective with an appropriate level of risk acceptable for the WSIB, as measured by the volatility of investment returns or by other measures. The assets of the Fund shall be diversified by combining different sources of return across and within asset classes and investment strategies. The Policy Asset Mix is the desired end state allocation to a diversified set of asset classes and strategies. The Policy Asset Mix is described in the following table. ASSET CLASS / STRATEGY POLICY Target Mix* Public equities 25% Infrastructure 15% Private real estate 15% Total return strategies 15% Fixed income 30% *The Policy Asset Mix is expected to be achieved over a number of years The Policy Asset Mix includes the asset classes and strategies that are described in Section 8 of this SIPP. The Fund s current allocation to real estate, infrastructure and total return WSIB Insurance Fund SIPP 5

25 strategies is below the target allocation for those investment categories. A phased approach will be used to increase the Fund s allocation to those categories over time, with a commensurate reduction in the allocation to public equities and fixed income. This phased approach to achieving the Policy Asset Mix is also to be reflected in the Total Fund composite return benchmark as allocations are implemented. Benchmark definitions and calculations are to be prescribed in the benchmarks policy as approved by the Investment Committee. As the market values of the individual assets of the Fund will move somewhat independently of one another, the actual asset mix of the Fund at any one point in time may deviate from the Policy Asset Mix. Such deviations are addressed in a rebalancing policy approved by the Investment Committee. The above Policy Asset Mix contains an emphasis on diversification. Equity investments, both public and private, are expected to provide a higher long-term return than fixed income investments. However they bring an increased risk of fluctuations in the value of the Fund's assets that can result in significantly reduced returns or declines in the market value of the Fund. The Policy Asset Mix mitigates, but does not eliminate this risk through diversification across asset strategies and strikes a reasonable compromise between achieving the long-term return objective and taking moderate investment risk. 6.2 Policy Benchmark The investment return benchmarks established for the asset class categories are to consist of investment indexes that measure the returns of a diversified portfolio of passively managed public markets securities, or a representative portfolio of private markets investments, that are independently calculated, provided in a timely fashion, and are broadly recognized by the investment industry. The benchmark for the total Fund is a blended benchmark comprised of a composite of the benchmarks for the asset class categories, weighted by the Policy Asset Mix. The specific benchmarks for the asset class categories are specified in the benchmarks policy as approved by the Investment Committee. 6.3 Currency Hedging Currency positions inherent in Fund investments and in investment return benchmarks are to be hedged in accordance with the currency hedging policy approved by the Investment Committee. 7. RISK and RISK MANAGEMENT Risk is inherent in the generating of investment returns in excess of the risk-free rate (i.e., three-month Government of Canada treasury bills) and in each element of the investment decision-making process; therefore risk measurement and risk management are integral to the asset management program. The primary risk is that investment returns, taken together with a reasonable and sustainable level of contributions, are insufficient to meet the long-term obligations for which the Fund is established. This risk would be manifest in the failure to achieve the Investment Return Objective as stated in Section 5.1 of this WSIB Insurance Fund SIPP 6

26 SIPP. The principal way of managing risk is through diversification of investment return sources (market returns and active management returns). The investment program will consider return sources from a broad range of: a. Asset strategies; b. Investment manager strategies; c. Geographic regions; d. Industry sectors; e. Currencies; f. Securities; g. Liquidity; and, h. Investment cycle time horizons. To ensure at least a minimum level of diversification, not more than 5% of the market value of the Fund shall be invested in the securities of a single issuer. This limitation shall also apply on a best efforts basis, to the aggregate holdings of the securities of related issuers, to the extent that it is practical to identify the securities of related issuers. The foregoing limitations do not apply to securities issued or guaranteed by the Government of Canada, a province of Canada, the Treasury of the United States of America, or the securities of a corporation or units of a trust or partnership formed for the express purpose of holding investments permitted in Section 8 of this SIPP (Investment Holding Vehicles). Investment Holding Vehicles may be used to pool the Fund s investments with other investment funds administered by the WSIB to improve operational efficiency while maintaining the beneficial interest of each participating fund in the investments held by such Investment Holding Vehicles. The Fund s investment in securities of a single issuer held within all such Vehicles shall not exceed 5% of the market value of the Fund at the time of acquisition of the said investment. In the case of Investment Holding Vehicles for real estate properties, the Fund s investment in any single real estate property held within such Vehicles shall not exceed 2% of the market value of the Fund at the time of acquisition of the said investment. Measurement, assessment and management of risk will be done using robust and diverse tools and analysis, including: a. Asset-liability studies; b. Measures of active risk (tracking error); c. Measures of total portfolio risk (standard deviation), and d. Sensitivity analysis, and will be made with consideration given to the overall context of the investment portfolio. 8. PERMITTED INVESTMENTS The Fund may be invested in the following asset categories, securities and instruments. These investments may be made directly, or by holding units of WSIB Insurance Fund SIPP 7

27 pooled, segregated or mutual funds, unit trusts or partnerships invested in securities or property. 8.1 Equity Investments a. Common, preferred and other shares or deposit receipts in the capital stock of public or private corporations; b. Income trusts or other entities (including corporate and non-corporate entities) that issue securities which entitle the holder to substantially all of the net cash flows generated by: a) an underlying business owned by the trust or other entity; or b) the income-producing properties owned by the trust or other entity. This includes, but is not limited to, business income trusts, real estate investment trusts, royalty trusts and infrastructure investments; c. Bonds, debentures or other securities that are convertible into common, preferred or other shares, or whose contractual return is linked to equityrelated indices or equity securities. 8.2 Property Investments a. Real estate, either directly or in partnership with others, or through closed- or open-ended pooled funds, or through shares and/or participating bonds or debentures of corporations, units of partnerships or unit trusts formed specifically to invest in real estate, with Cabinet approval if required under the Act, or under the Memorandum of Understanding with the Minister of Labour; b. Natural resource properties or participation rights in natural resources, whether purchased directly or through closed- or open-ended pooled funds, or through shares and/or participating debentures of corporations or partnerships formed specifically to invest in natural resource properties. 8.3 Fixed Income Investments a. Bonds, debentures, loans, notes or other debt instruments; b. Mortgage loans, mortgage-backed securities and other asset-backed securities; c. Guaranteed investment contracts or equivalent financial instruments of insurance companies, trust companies, banks or other eligible issuers; d. Term or demand deposits or similar instruments issued or unconditionally guaranteed by trust companies, banks or other deposit-taking organizations; e. Cash, treasury bills, short-term notes or other money market securities issued or guaranteed by governments, government agencies, or corporations. 8.4 Derivative Investments Financial instruments that derive their value from other financial instruments, economic or financial indicators, including but not limited to derivatives of equity, fixed-income or currency-related investments, futures and/or forward contracts, swaps, options, warrants, depository receipts, rights or other similar instruments are all permitted for any of the following purposes: a. To provide an additional source of return; b. For hedging strategies to manage investment risk; c. To improve liquidity, or WSIB Insurance Fund SIPP 8

28 d. To manage exposures to asset classes or strategies, including, but not limited to, rebalancing. Specific derivative strategies and transactions are governed by a derivatives policy as approved by the Investment Committee. 8.5 Other Investments Annuities, deposit administration contracts or other insurance contracts issued by entities authorized to issue such instruments by the Insurance Companies Act (Canada), or any successor legislation, or comparable provincial laws. 8.6 Short Selling of Securities Short selling is generally undertaken by borrowing a security and selling it, with the obligation that it must be later repurchased and returned. The typical purpose of short selling is to profit by buying the security back at a lower price. Short selling is also a risk management technique to manage risks associated with other security positions in the portfolio. All permitted investments may be sold short, subject to a. Risk and return targets; b. Required levels of diversification; and c. Liquidity requirements. 8.7 Total Return Strategies Permitted Investments described in this section, including short selling, may be combined in discretionary investment mandates investing in securities that include, but are not limited to, derivatives, including commodity derivatives, currencies, fixed income, and equities. These investments seek to provide a diversified source of total return generated from the broad market and from active management. The underlying mandates within Total Return Strategies may include a combination of (i) diversified market strategies which gain passive exposure to a broad range of markets using a risk allocation framework, and (ii) overlay and hedge fund strategies which generate returns from active management and seek to minimize their exposure to the general market. The allocation to asset categories within Total Return Strategies (for example, the allocation between fixed income and equities) may change frequently as determined by the investment manager s strategic and tactical assessment of market conditions and the expected risk-adjusted returns for the asset categories and will be different from the allocation between fixed income and equities in the remainder of the Fund s investments. Allocation between asset categories within Total Return Strategies, as determined within the relevant discretionary mandates, is not subject to the target allocation to such asset categories for the total Fund as specified in the Policy Asset Mix. 9. VALUATION OF THE INVESTMENTS Investments are valued at fair value in accordance with Canadian generally accepted accounting principles. Fair value is considered to be the latest bid WSIB Insurance Fund SIPP 9