Management Employees Pension Board

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Mission Statement:

To provide prudent governance of the Management Employees Pension Plan and Fund

Management Employees Pension

Board

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Management Employees Pension Board 5103 Windermere Blvd. SW

Edmonton, AB T6W 0S9

Telephone: 780-391-3693 Toll free: 1-800-661-8198 Fax: 780-391-3774 Web site: www.mepp.ca

Email: board@mepp.ca

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Governance Statement

The President of Treasury Board and Minister of Finance (the Minister) is the statutory administrator of the Management Employees Pension Plan (MEPP or “the Plan”) and holds all assets of the Plan in trust to provide benefits pursuant to the Plan and to meet Plan costs.

The Public Sector Pension Plans Act (PSPPA) sets out the main objectives of the Board with respect to funding, administration, investments and amending the Plan.

The Government of Alberta has given the Management Employees Pension Board (MEPB or “the Board”) the following responsibilities, as outlined in the PSPPA:

• advise the Minister on any pension matter that is of interest to those entitled to benefits under the MEPP

• consult with the Minister with respect to:

o amending or repealing and replacing Plan rules, including adjusting contribution rates to ensure the Pension Plan is funded

o conducting an actuarial valuation with respect to the MEPP and the Public Service Management Closed Plan (Closed Plan)

o proposed changes to the PSPP (Legislative Provisions) Regulation; and

o the costs to be charged for the administration of the MEPP and the Closed Plan

• review MEPP and Closed Plan member appeals of administrative decisions provided to them by the Plan’s Administrator, Alberta Pensions Services Corporation (APS), in accordance with the delegation from the Minister, set out inMinisterial Authorizations 05/94 and 01/95 established pursuant to the PSPPA

• set general policy guidelines such as the Investment Policy on the investment and management of the MEPP fund that it considers should be followed; and

• set general policy guidelines on the administration of the MEPP that it considers should be followed

The responsibility of the Board’s Investment Committee is to review the investment results of the Plan’s Fund with Alberta Investment Management Corporation (AIMCo) with the assistance of the Board’s Investment Consultant. The Investment Committee also reviews the MEPP Investment Policy (IP) on an annual basis and makes recommendations to the Board on changes it believes are required to prudently manage the Plan.

In keeping with good governance practices, the Board has its own Code of Conduct and Ethics Policy and Board Charter to guide Board members.

AIMCo provides investment management services to the Plan under an investment management agreement with the Minister. AIMCo invests the Plan’s assets for the benefit of Plan members and pensioners, subject to legislation and the MEPP IP, set by the Board.

APS provides pension related services to the Plan under a delegation from the Minister. APS provides benefit administration for members, pensioners and employers, including receiving and reconciling pension plan contributions, maintaining membership records, paying pensions, and providing information to members, pensioners and employers.

Management Employees Pension Board

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Board Vision

That Plan members and employers have a pension plan that is affordable and sustainable.

Board Mission

To provide prudent governance of the Plan and Fund.

Significant Opportunities and Challenges

There are a number of opportunities and challenges currently being monitored by the Board including:

• Governance of the Plan is a complex and multi-layered system. A properly governed plan is monitored for risk and has mechanisms to diligently and effectively act on changes or requirements that the Plan and its Fund require. Additionally, sustainability and proper governance go hand in hand. The Board believes that this can be achieved by removing multi-layer reporting and improving clarity on roles and responsibilities to assist with the goals and objectives set by the Plan’s Administrator. The Board was established to provide the Minister with independent advice and expertise on the Plan, independent of the

Department, Alberta Pensions Services (APS) and Alberta Investment Management Corp (AIMCo).

• In 2013–14, the Office of the Auditor General of Alberta (OAG) completed a review of the Public Sector Pension Plans in Alberta and identified the need for an Enterprise Risk Management Framework (ERM). The OAG noted the lack of an ERM for the Pension Plans as a key risk in 2014 Reports of the Auditor General. At the request of the Minister, the Board provided their recommendations on Plan risks in December 2014. Alberta Treasury Board and Finance (ATBF) was tasked with establishing an ERM Framework for the Plans.

• The Supplementary Retirement Plan for Public Service Managers (MSRP) was established in 1999 to provide benefits to public service managers who participate in MEPP and whose annual salary exceeds the maximum yearly pensionable earnings allowed by MEPP. Legislation identifies that the Minister may ask the MEPB for advice on the MSRP Plan, act as a governing body for the MSRP Plan or establish an Advisory Committee to monitor the Plan. An Advisory Committee was established in 2003 to monitor the MSRP. The

Committee is comprised of ATBF staff and one member from the Public Service

Commissioner’s Office. The MEPB believes that to prudently govern all of the plans linked to the MEPP, they should be governed under one Board. The MEPB has recommended that the governance and fiduciary responsibilities for the MSRP be moved to the MEPB’s oversight. This recommendation was made for cost effectiveness, and to remove

duplication and any perceived bias. The Board is prepared to work with ATBF to transition the governance of the MSRP to be under the MEPP Board.

• The overall sustainability of the Plan requires continuous oversight and monitoring. The Board’s philosophy on sustainability is that sustainability shouldn’t be a special project that arises in times of perceived crisis, but an ongoing challenge and permanent agenda item of the governors and agents of a properly functioning pension plan. The Board values the long-term sustainability of the Plan and will continue to diligently monitor the Plan and Fund, and provide recommendations to the Minister on the best interest of the Plan.

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• The MEPB has been given authority through the PSPPA, Schedule 5 (MEPP), Sections 3(2)(d) and 10, and Section 10 of Schedule 6 (Public Service Management (PSM) Closed) to hear MEPP and PSM Closed Plan member appeals of Administrative Decisions provided to members by the Plan’s Administrator, APS. The Minister has executed this delegation through Ministerial Authorizations (05/1994 and 01/1995). The Board intends to continue ongoing education through the Foundation of Administrative Justice to further its knowledge and expertise in Administrative Law.

• In 2015, the Board completed an Asset Liability (AL) Study and implemented a new Asset Policy Mix and enhanced MEPP Investment Policy (IP). The new policy was effective October 1, 2015. The Board will work with AIMCo on the implementation of the new policy and regularly monitor transition to the new asset mix. The purpose of this review is to better understand the investment and funding needs of the Plan and to ensure that these needs are current and accurately reflected in the IP.

• AIMCo hired a new Chief Executive Officer in 2015. The Board looks forward to working collaboratively with AIMCo, utilizing its resources to generate the best possible return for the Plan.

• With recent changes to AIMCo staff, AIMCo’s Compliance team now reports to AIMCo’s Legal Counsel and Vice President of Client Relations. Best Investment Governance practice postulates that Compliance reports directly the Board or Audit Committee versus the CEO or alternate staff. The head of Compliance should also be meeting with the Board or Audit Committee separate from the CEO. The Board will monitor this change and report any concerns to the Minister.

• APS is implementing a new enterprise pension management and payroll system: Next Generation IT system. APS has delayed implementation of the new system to May 2016. The Board will continue to monitor the progress of the project and budget.

• The Plan Board Secretariat at APS recently went through a transition; therefore the services previously provided to the Board have changed. The Plan Boards sought more autonomy from APS to remove conflicts of interest and to allow for prudent governance and oversight of the administration of the Plan. The Board is working with APS and ATBF on a Memorandum of Understanding (MOU) or Secondment agreement for Board staff. The Board will continue to monitor the services and agreements and consult with the Minister.

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To gain returns in today’s investment market, the Plan must take on some risk. As a result,

the sophistication and complexity on investments continues to increase and increased monitoring is required. The Board is working with AIMCo to gain a better understanding of their overlay strategies and has requested that AIMCo provide risk reporting on a regular basis.

• Volatile geopolitical activity impacted the markets in 2015. The Board believes that AIMCo is diligently watching the investment activity and markets and taking the proper steps to mitigate risks to the Plan Fund. Equities, including global equities, are the largest asset allocation for the Plan and volatile by their nature. These assets can be subject to

prolonged periods of underperformance. The Board will monitor these risks with AIMCo.

• The Board annually assesses its competency and skills matrix and monitors new and existing courses and seminars. The Board has identified, and will be focusing its attention on the overarching priorities of funding and investments, Plan costs and governance.

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Strategic Priorities 2016–2018

1. Sustainability Linkage: Goals 1 - 4

• To ensure that the Plan is affordable and sustainable for members and employers, the Board will monitor the areas that contribute to a sustainable pension plan, make

appropriate recommendations, and take action on areas that need attention. This includes governance, plan costs, member costs, and the funding and investment needs.

2. Plan Funding and Investment Management

Linkage: Goals 2 & 3

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Make recommendations on and set general investment policy guidelines (for example, the Investment Policy and Funding Policy) that are designed to help ensure the Plan and its assets are managed effectively and efficiently so that benefits will be paid.

3. Fiscal Management

Linkage: Goals 2 & 4

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Make recommendations on and set general administrative policies that the Board might deem necessary. Monitor decisions made in respect of the management of the Plan and its Fund and assess whether they are financially prudent for maintaining the overall financial health of the Plan.

4. Governance

Linkage: Goals 1–4

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Ensure governance of the Board and the Plan is consistent with industry best practice standards and the governing legislation and related agreements.

5. Communication Linkage: Goals 1–4

• Take a proactive approach to communication with

stakeholders by notifying Plan members on any changes to the Plan, encouraging and offering feedback on areas of concern through regular semi-annual newsletters, ad-hoc newsletters and updates as needed. Through the Board’s ongoing communications to the members, employers, and other key stakeholders, all parties will increasingly

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Core Business, Goals, Strategies and Performance

Measures

Core Business One: Governance

Goal One

The Board operates in an effective and efficient manner and in accordance with governance standards and applicable legislation.

What it means

• That there is a clear understanding between the Minister and the Board regarding their respective roles and responsibilities as outlined in the PSPPAand the Alberta Public Agencies Governance Act (APAGA).

• The roles of the Trustee and Sponsor are clearly defined.

• The Board, ATBF, AIMCo and APS understand each other’s roles and objectives, and enhance Board autonomy and independence.

• Monitor that the agreements between the Minister, ATBF, AIMCo, and APS are reviewed regularly.

• Board policies are appropriately developed and maintained, and are reviewed at least once every three years. (Code of Conduct and Ethics Policy, Charter, Conflict of Interest and Investment Policies are reviewed annually.)

• Board members, staff and consultants conduct their affairs in accordance with fairness, impartiality, integrity, and the highest ethical standards, and in compliance with any applicable laws.

• Board members, staff and consultants’ knowledge is sufficient to carry out their fiduciary role.

• The Board is satisfied with the manner in which it carries out its objectives and fiduciary obligations.

• That Members have a sound appeal process to hear appeals of Administrative Decisions.

Annual Activities

• Monitor the Enterprise Risk Management (ERM) Framework for the Plan and the Board.

• Review one third of the Board policies each year and update, if required.

• Require each Board member to individually attest to his or her adherence to the Board’s Code of Conduct and Ethics Policy and the Board’s Charter (this is done at each meeting and also annually by a signed declaration).

• Conduct a self-assessment of the Board and individual Board and Committee members.

• Continue to develop Board members’ and staff’s knowledge and skills through continuing education.

• Plan for succession of Board members.

• Meet with the Office of the Auditor General regarding the audit of the Plan.

• Publish the Plan’s Annual Report electronically on the Plan website.

• Provide a semi-annual newsletter and ad-hoc newsletters and updates to stakeholders, including Plan employers and members.

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2016–2018 Action Plan

• Establish, implement and monitor an ERM Framework for the Plan and the Board.

• Assist the Department of ATBF with transitioning the governance of the MRSP under the MEPP Board.

• Develop a clear understanding between the Minister and the Board regarding their respective roles and responsibilities of the Board as the governing body for the MEPP, as outlined in APAGAand the PSPPA.

• Work with APS on agreements to provide the Board with enhanced autonomy and clear direct reporting to the Board for its staff.

• Assess the need to complete additional research on best practices in Plan and Board governance and provide it to the Minister and stakeholders as necessary.

• Annually review the MEPB Mandate and Roles Document.

• Annually review the Board’s Governance/Reference Manual and update as necessary.

• Annually review the Plan’s Investment and Funding Policies.

• Annually review the Board’s Governance Calendar and monitor the Board’s compliance with the Alberta Public Agencies Act.

• Assess Board and Committee self-evaluation process, and analyze for multi-year trends.

• Continue to develop and update documentation on Board processes and procedures.

• Continue assessing the member appeal process and continued education on Administrative Justice and Law for Board members.

• Provide a semi-annual newsletter and ad-hoc newsletters and updates to stakeholders, including Plan members and pensioners.

• Meet with stakeholders when necessary.

Core Business Two: Plan Funding

Goal Two

The Plan is effectively funded, or an appropriate amortization schedule is in place to address any unfunded liability (on a going-concern basis).

What it means

• The Plan is funded in accordance with governing legislation.

• Statutory reporting of the Plan is performed through actuarial valuations and annual extrapolations.

• A Funding Policy is in place to guide the Plan’s funding and investment processes.

• Valuation assumptions reflect an appropriate view of expected experience and the future investment environment.

• Funding rates and investment returns are balanced and sufficient to meet pension obligations, costs associated with the administration of the MEPP, and investments of the MEPP Fund.

• Contribution rate volatility is minimized.

• Monitor the financial health of the Plan and provide advice to the Minister.

• Provide feedback on Plan design cost savings as requested by the Minister.

• Annually review the MEPP Funding and Investment Policies.

• Assess the need to complete an interim valuation annually.

• Review the annual extrapolation of the Plan.

• Assess that the funding needs of the Plan properly align with the Plan’s investments through an annual review of required cash flow projections for the liability proxy.

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2016 – 2018 Action Plan

• Complete annual reviews of the MEPP Investment and Funding policies.

• Annually conduct an extrapolation of the prior funding valuation of the MEPP, which may be used for financial reporting purposes.

• Annually assess the need to complete an interim valuation of the Plan.

• Complete the triennial Actuarial Valuation for funding purposes as at December 31, 2015 and filing with Canada Revenue Agency.

• Communicate with stakeholders, including employers and Plan members regarding Plan sustainability and recommendations for the Plan.

• Complete an annual review of the Plan’s required cash flow projections and liability proxy needs.

• Work with AIMCo, the Plan’s Actuary, and Investment Consultant to assess and monitor the Plan’s investment, liquidity and funding needs.

Core Business Three: Investment Management

Goal Three The return on investments is maximized while balancing the risk and return profile of the Plan.

What it means

• The Fund is invested in accordance with governing legislation.

• The investment management of the Fund is in compliance with the MEPP IP and aligned with the Plan’s risk tolerance and risk budgeting.

• The Fund’s annual return objective and the Plan’s long-term investment objective are achieved.

• Prudent investment opportunities are investigated in order to provide the greatest positive impact to the Plan.

• Regularly monitor AIMCo’s investment performance and overall management of the MEPP Fund.

• Regularly monitor AIMCo’s internal audit reports.

• Review the MEPP IP and the Statement of Investment Beliefs (SIB), and amend if necessary.

• Complete an annual review of the Plan’s projected cash flow needs and establish the liability cash flow proxy.

• Review the Fund’s annual performance objective to ensure it reflects the risk tolerance of the Plan.

• Complete annual stress testing of various asset scenarios.

• Assess new investment opportunities and strategies as identified by AIMCo or the Board’s Investment Consultant.

2016 – 2018 Action Plans

• Continue consultations with AIMCo regarding the implementation of risk-based reporting and monitoring in relation to the MEPP Fund investments. Continue ongoing assessment of AIMCo’s risk system, impact to the fund, analyzing comparability of risk reports and

assessing how AIMCo is incorporating risk budgeting into its investment programs.

• Annually complete a review of projected cash flow requirements and establish the liability cash flow proxy.

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• Annually assess the MEPP asset mix to assist with achieving the investment returns required to meet funding needs.

• Annually review the MEPP IP and Statement of Investment Beliefs (SIB) to ensure that it properly reflects the funding and investment needs of the Plan and aligns with the Board’s investment philosophies.

• Review MEPP’s annual performance objective to ensure it reflects the risk tolerance of the Plan.

• Assess AIMCo’s use of overlays and its associated implications to MEPP.

• Continue dialogue with AIMCo and monitor AIMCo’s progress in transitioning MEPP investments to the new asset mix policy and new investment policy.

• In consultation with ATBF and AIMCo, review a new Investment Management Agreement (IMA), to consider the implications to the overall governance of the Plan.

• Upon review of the IMA, if the Board deems it necessary, provide additional feedback to the Minister.

Core Business Four: Fiscal Management

Goal Four Costs related to investments and Plan administration is managed fairly, efficiently and effectively.

What it means

• Monitor services provided by APS and AIMCo and report to the Minister.

• Consult with the Minister with respect to Plan administration and investment management cost to members and the Plan.

• The average cost of administration and investment management services are reasonable and allocated efficiently and effectively within the family of Alberta Public Sector Pension Plans.

• The cost per member and cost allocation formulas is reviewed periodically.

• Prudent fiscal management of the Board’s operating costs, including monthly and quarterly reviews of the Board’s budget.

• Maintaining diligent spending of Plan costs, including Board related expenses.

• Meet with and provide feedback to AIMCo and APS regarding their business plans and budgets.

• Review APS’ services as stipulated in the agreement between APS, the Minister and the Board.

• Ensure that Plan costs, both administrative and investment, are within industry benchmarks.

• Monitor Board spending on a monthly, quarterly and annual basis.

2016 – 2018 Action Plans

• Continue to review and document reporting requirements with AIMCo and APS.

• When complete, review the proposed IMA and Pension Services Agreement and cross reference the current governing document for pension administration services and make recommendations on required updates and amendments.

• Meet with AIMCo and APS to receive updates on the implementation of their new IT systems, including monitoring risks, system costs and budget expectations.

Management Employees Pension Board

Mission Statement:

To provide prudent governance of the Management Employees Pension Plan and Fund