Statement to 1818 Society Annual Meeting,
October 11, 2005 by Stephen Eccles, PFC member
Good afternoon.
You will no doubt be happy to learn that I have nothing
dramatic to report about the financing of your pensions.
In the past full year – September 2004 through August 2005
– financial markets continued recovering. Our welldiversified benchmark indices climbed by 12.4 per cent. The
Pension Fund managed to do considerably better than that,
achieving a 14.1 per cent return over the same period. The
investment staff thus deserve our praise for adding about
$200 million to the value of our portfolio, largely by
selecting better than average investment managers.
If you look only at the first 8 months of this calendar
year, however, markets have been much more difficult. We
will be lucky if our assets grow by 8 percent this year.
Nevertheless, by the end of June, 2005, we passed one
milestone: our total assets have at last reached a new alltime high - $11.55 billion – surpassing their previous high
point before the market bubble collapsed in 1999/2000.
However, future investment prospects do not look
particularly bright. We will do well to keep up with the
growth in fund liabilities – which are the present value of
future pension payments. The fact is that those liabilities
continue their inexorable growth, irrespective of our
investment performance. For example, when our assets were
last $11.5 billion, at the end of 1999, our liabilities
were only $9.4 billion. As I have just said, our assets are
now back at that $11.5 billion level, but in the meantime
our liabilities have risen to $13.2 billion.
The result is that our funded ratio – assets over
liabilities – has been below 1.0 since 2001. It is slowly
recovering, from its low of 0.82 to the present 0.92. There
is thus some way to go before we can be satisfied.
One result of the decline in the funded ratio was the
resumption of annual payments by the Bank Group into the
pension fund. In May this year, the Pension Finance
Committee required the Bank Group to make payments totaling
$245 million in the current budget year. Payments of
similar amounts will almost certainly be needed in the
years immediately ahead.
In closing this overview, I should re-emphasize that the
funded ratio used above is far more conservative than those
used by most commercial entities. If we used commercial
definitions, our funded ratio would be well above 1.0. In
somewhat over-simplistic and catastrophic terms, this means
that – even if the Bank were to cease operations, or for
any reason decided to terminate the pension plan – there
would be enough funds already put aside in our pension
trust fund to fully pay for all our pensions.
This is a totally different situation than that faced by
the many large commercial pension funds that we seem to be
reading about in the press every day and which – judging by
the e-mails I receive – cause pensioners to seek reassurance on this point.
I suggest that we leave any questions until after the
pension staff has presented more details.
Thank you.