May 1, 2018

The State Of Integrated Reporting In Pension Organizations: The Cases Of California Teachers' And Ontario Teachers'

“The IIRC’s Integrated Reporting Framework was published in December 2013 and since then, organizations have been using it to communicate a clear, concise, integrated story that explains how all of their resources are creating value.”

The International Integrated Reporting Council (IIRC), 2018


The IIRC Initiative and Pension Organizations

The IIRC was formed in 2010 to build a globally-accepted framework to produce clear, comparable information about how organizations create value over time. As the IIRC noted above, after years of collaborative effort, this led to the introduction of the <IR> Framework in December 2013. Today, the Framework is widely supported by leaders in the international investment, accounting, regulatory, and academic communities, and is being used as a template by a growing number of corporations around the world.

The <IR> Framework was the subject of our August 2014 Letter titled “Pension Funds and Integrated  Reporting: A Progress Report”. The Letter argued that the Framework was not just helpful in understanding how the corporations that pension funds invest in are creating value, but that it would also be a useful tool for pension organizations themselves “to communicate a clear, concise, integrated story that explains how all of their resources are creating value”.  We concluded at that time that initial efforts by pension funds could be materially improved in a number of ways.

With many new developments in the integrated reporting space in the last four years (e.g., the work of SASB, A4S, and FSB’s TCFD), this sequel Letter offers an update of the state of integrated reporting in pension organizations. We use the 2017 Annual Reports of the California Teachers’ (CalSTRS) and the  Ontario Teachers’ (OTPP) as the basis for this new case study.i      

The International <IR> Framework – Principles and Content

The <IR> Framework sets out seven Guiding Principles in the creation of an Integrated Report: Strategic Focus, Information Connectivity, Stakeholder Relationships, Materiality, Conciseness, Reliability/Completeness, and Consistency/Comparability. These Guiding Principles lead to seven Content Elements:     

  1. Organizational Overview and External Environment: what does the organization do, and what are its context and circumstances?
  2. Governance: how does the organization’s governance structure support value creation over time?
  3. Business Model: how does the organization create stakeholder value over time?
  4. Performance: what did the organization achieve over the period in the context of its strategic objectives, and what were the impacts on capital resources?
  5. Risks and Opportunities: what are the key risks and opportunities and how are they addressed by the organization?
  6. Strategy and Resource Allocation: where does the organization want to go, and how is it going to get there?
  7. Outlook: what challenges and uncertainties does the organization face in achieving its strategic objectives? What are the implications for its business model and future performance?

How closely do CalSTRS and OTPP follow these <IR> Guiding Principles and Content Elements in their 2017 Annual Reports?

Organizational Overview and External Environment

An immediate problem surfaced in answering the question: CalSTRS 2017 Comprehensive Annual Financial Report titled “Sustainability for the Future” did not cover all seven content elements. However, some of the missing content was found in other CalSTRS reports. OTPP’s 2017 Annual Report with a similar title “Plan Sustainability” did cover the seven elements. Here is how the two organizations addressed the first content question of what they do, their contexts, and their circumstances:

  • CalSTRS’ role is to secure the financial future and sustain the trust of California’s educators, mainly through a DB Plan with guaranteed pension benefits. With the Plan currently 64% funded, this is a challenge. However, there is a funding plan to achieve full funding by 2046 through material contribution rate increases (mainly on the employer/tax payer side) and earning a projected long-term net investment return of 7%.
  • OTPP defines ‘sustainability’ as delivering retirement security to current and future generations of Ontario’s teachers in an intergenerationally-fair manner. Three keys to achieving this goal are: 1. Conditional inflation protection, which means that the growing  number of pensioners would share some of the financial pain if the Plan was underfunded., 2. A target asset cushion to absorb asset volatility shocks, and 3. A conservative long-term net investment return projection grounded in current financial markets conditions. With a discount rate of 4.8%, the Plan is 105% funded.  

These material differences in the retirement security status of the two pension plans logically lead to the next Integrated Report content element: organizational governance.

Organizational Governance

The <IR> Framework document asks: how does the organization’s governance structure support value creation over time? The CalSTRS Report does not address this question. However, some Board information was gleaned from a separate “Teachers’ Retirement Board” document. In contrast, a statement from OTPP’s Board Chair opens its Annual Report. Also, almost 1/3rd of the content of the OTPP Report relates in some way to board governance.   

  • CalSTRS has a 12-member Board partially elected by plan members, partially appointed by the Governor, and partially ‘ex officio’ (e.g., the State Treasurer, Comptroller, and Director of Finance). There was no reference to an ideal set of collective skills and experiences the Board should possess. The Board approves investment policies and rules, ensures benefits are paid according to the law, and hires the CEO and CIO. There are six Board committees: Appeals, Audit and Risk, Benefits and Services, Governance, Investment, and Compensation.
  • OTPP has an 11-member Board appointed jointly by the Ontario Teachers Federation and by the Ontario Government. Key attributes in searching for Board members and in Board composition are expertise and experience in accounting, actuarial practices, banking, business management, economics, education, information technology, and investment management. There are six committees: Audit/Actuarial, Benefits Adjudication, Governance, HR/Compensation, Operational Risks, and Investment. The Board as a whole acts as the Investment Committee, and approves investment limits. It also controls funding resukts by taking full responsibility for the economic and actuarial assumptions that drive asset and liability projections. As a professional board, OTPP’s sponsors believe board members should be compensated.ii

What business models have these Boards approved? That is the next question.

CalSTRS and OTPP Business Models

In addition to designing and implementing a sustainable funding model, pension organizations perform two functions: benefit administration and investment management. Both organizations report on these functions in their Annual Reports:

  • CalSTRS provides benefit administration services for 933K members. Projects are underway to “drive operational excellence and enhance services to members and employers”. On the investment side, the goal is to generate the 7% long-term net return needed to make the long-term funding plan work on current assets of $209B. This means a diversified investment policy across equities, bonds, and alternatives. Both active and passive strategies are used, as well as insourced and outsourced implementation platforms. All of these activities are supported by a long list of external consultants and advisors. Little information is provided on the organization’s insourced investment structure, size, and activities. Exceptions are the organization’s admirable ESG-related activities and the management of its $6B Corporate Governance Portfolio. On the compensation side, the only disclosure we could find was that CalSTRS' executives, senior managers, and professionals were paid a collective $15.6M (83%) in base compensation and $2.6M (17%) in variable compensation.
  • OTPP provides benefit administration services for 323K members. Projects are underway to enhance member services quality. On the investment side, the goal is to generate a net long term return well above the 4.8% discount rate embedded in the funding plan on assets of C$190B. This is to be accomplished through an investment plan that integrates across geography, asset classes, public and private markets, and within a Board-approved risk budget which includes an option to use a modest amount of leverage. It will be largely implemented by internal OTPP resources (e.g., investment assets are managed 80% internally). The Report provides detailed organization design and compensation information. For example, the five top Named Executive Officers collectively earned C$2.0M (12%) in base compensation and C$14.6M (88%) in variable compensation in 2017.

How has the organization performed in its benefit administration and investment management services over relevant measurement periods?

Organizational Performance

The key here is to set the actual business performances in a relevant context:

  • CalSTRS surveyed its member base on the perceived quality of its suite of member services. It found that 74% were ‘highly satisfied’ with the services rendered. However, no reference benchmark was provided. On the investment side, one of CalSTRS’ consultants reported a 10yr net fund return of 5.0% versus a comparable benchmark return of 5.9%.
  • OTPP has used an outside provider for many years to monitor the quality of its benefit administration services. Its score was 8.8 out of a possible 10. It also participates in an international benchmarking service where its score was 94 out of a possible 100. This score was the second highest in a universe of 70 pension organizations around the world. On the investment side, OTPP’s 10yr net return was 7.6% versus a comparable benchmark return of 6.9%.

Looking ahead, what risks, opportunities, strategies, and resource allocation opportunities do the two organizations see?

Risks, Opportunities, Strategies, Resource Allocation, and Outlook

Not surprisingly, given the purpose of both organizations, the major risk they see is underfunding and its consequences for possible future benefit cuts and/or contribution rate increases. Opportunities, strategies, and resource allocations are different matters.

  • CalSTRS noted that even with a funding policy to deal with its current sizable unfunded liability in place, “significant risk remains” due to aging of its membership and investment markets volatility. However, there was no direct mention of the material probability that the 7% long-term return target will not be met.iii The Report did note that these projections were made by their consultants but provided no detailed explanation how their consultants arrived at the 7% number. There was also no explicit mention of which stakeholders are bearing the 7%           underperformance risk. Are future California tax payers bearing this risk? If that is the case, should it not be fully disclosed, including an explanation how this meets a reasonable intergenerational fairness  test?iv On the opportunity side, the Report makes much of CalSTRS’ active ESG activities. However, given its focus on the $6B Corporate Governance Portfolio, it is difficult to see how these activities materially move the needle in a $209B fund.
  • OTPP has initiated an enterprise risk management oversight protocol based on identifying the sources of reputational risk for the organization. It identified four risk sources: investment, strategic, governance, and operational. The Board and Management use this structure as the basis of regular risk assessments and reporting. This framework has also been extended into the organization’s compensation structures, and is being actively monitored by an internal Strategy and Risk Group. On the opportunity side, the organization’s conservative funding policy, global reach (offices in Toronto, London, and Hong Kong), extensive international network, ESG focus across the entire portfolio, and strong internal governance and implementation capabilities create major competitive advantages for the organization in the years ahead.

The Value of Integrated Reporting

This updated case study once again demonstrates the value of integrated reporting for not only corporations, but also for pension organizations. Pension organizations too need to explain what they do, and how they are creating current and future value in a clear, complete, concise manner. How well is your pension organization doing this?

Keith Ambachtsheer



  1. OTPP was the first pension fund designed and managed with Peter Drucker Principles, later called ‘The Canada Model’. CalSTRS is globally known as an active investor with strong corporate governance beliefs. Both serve large populations of educators. 
  2. The OTPP Chair’s 2017 compensation was C$190K, board members were paid between C$110K and C$90K depending on their responsibilities.
  3. For example, we used the Gordon Model in our April Letter to estimate a long term real equity return range of 3.5%-4.5% today and noted that the long TIPS yield is still under 1%. It is difficult to reconcile these sound theory and evidence-based projections with CalSTRS’ implied long-term net real return projection for the total fund in the 4%-5% range. It looks optimistic. 
  4. The fiduciary duty of impartiality requires this.

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The information herein has been obtained from sources which we believe to be reliable, but do not guarantee its accuracy or completeness. 

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