Introduction

Background

1. The Public Sector Pension Investment Board is a Crown corporation created in 1999 under the Public Sector Pension Investment Board Act. It invests and manages contributions from the pension plans of the public service, the Canadian Armed Forces, the Royal Canadian Mounted Police (RCMP), and the Reserve Force. As outlined in the Public Sector Pension Investment Board Act, the corporation is responsible for

• managing the contributions that are transferred to it from the pension plans in the best interests of the contributors and beneficiaries
• investing its assets with a view to achieving a maximum rate of return, without undue risk of loss, considering the funding, policies, and requirements of the pension plans and the ability of those plans to meet their financial obligations

2. The Treasury Board of Canada Secretariat oversees the government’s relationship with the corporation. In the 2018–19 fiscal year, the secretariat worked with the corporation and other pension plan stakeholders to implement a funding policy that aligned with the government’s funding risk tolerance. The secretariat also created the Asset Liability Committee, which included departmental officials representing each of the plans, and other significant stakeholders, including officials of the corporation. This committee provides a forum for the review and discussion of the funding risks, and supports the secretariat’s role in ensuring that these risks remain within the established funding levels. During our audit, the secretariat communicated the government’s funding risk tolerance and long-term real rate-of-return objective for the pension assets that the corporation managed.

3. To develop its investment portfolio and investment management strategies, the corporation uses the government’s funding risk tolerance level, long-term real rate-of-return objective, and inflation expectations. In the 2019–20 fiscal year, the government’s real rate-of-return objective was 3.6% for the following 10 years and 4.0% thereafter. The corporation’s objective is to establish a long-term investment strategy that achieves an expected real rate of return that is at least equal to the government’s rate-of-return objective, without assuming undue risk of loss. The corporation developed an actively managed investment portfolio aimed at outperforming, at a lower or equal level of pension funding risk, a passively managed portfolio over a 10‑year period.

4. As of 31 March 2020, the total fund 1‑year net portfolio return^{Definition 1} was −0.6%. This rate of return was affected by the market conditions brought about by the coronavirus disease (COVID‑19) pandemic. The 5‑year and 10‑year net annualized returns^{Definition 2} were 5.8% and 8.5% respectively.

5. The corporation is one of Canada’s largest pension investment managers. As of 31 March 2020, it was managing $169.8 billion in assets. These assets were invested in 6 asset classes (Exhibit 1), in more than 100 sectors and industries across 85 countries. The corporation also held investments in 147 subsidiaries around the world, including 6 wholly owned operating subsidiaries. The subsidiaries are companies the corporation controls as part of its investment portfolio.

6. The corporation has 888 employees in 5 offices around the world. Its head office is in Ottawa, while its main business offices are in Montréal, New York, London, and Hong Kong. The offices in New York, London, and Hong Kong opened in the past 5 years. The corporation has grown significantly since our last special examination in 2011, particularly over the past 5 years (Exhibit 2).

7. In the 2020–21 fiscal year, after the implementation of the Funding Policy for the Public Sector Pension Plans, the Treasury Board of Canada Secretariat communicated to the corporation the government’s funding risk tolerance by providing a portfolio breakdown of investment types (equity and fixed income) in line with this funding risk tolerance level. This practice replaced the communication of a long-term real rate-of-return objective.

Focus of the audit

8. Our objective for this audit was to determine whether the systems and practices we selected for examination at the Public Sector Pension Investment Board were providing the corporation with reasonable assurance that its assets were safeguarded and controlled, its resources were managed economically and efficiently, and its operations were carried out effectively, as required by section 138 of the Financial Administration Act.

9. In addition, section 139 of the Financial Administration Act requires that we state an opinion, with respect to the criteria established, on whether there was reasonable assurance that there were no significant deficiencies in the systems and practices we examined. We define and report significant deficiencies when, in our opinion, the corporation could be prevented from having reasonable assurance that its assets are safeguarded and controlled, its resources are managed economically and efficiently, and its operations are carried out effectively.

10. On the basis of our risk assessment, we selected systems and practices in the following areas:

• corporate management practices
• investments and operations management

The selected systems and practices, and the criteria used to assess them, are found in the exhibits throughout the report.

11. More details about the audit objective, scope, approach, and sources of criteria are in About the Audit at the end of this report.

Findings, Recommendations, and Responses

Corporate management practices

The corporation had good corporate management practices in some areas and opportunities for improvement in others

12. We found that the corporation had good corporate management practices. However, improvements were needed in performance measurement, performance monitoring and reporting, risk mitigation, and risk monitoring and reporting.

13. The analysis supporting this finding discusses the following topics:

• Corporate governance
• Strategic planning
• Corporate risk management

14. For additional information, see Subsequent Event at the end of the report.

15. The corporation is governed by a Board of Directors composed of 11 members, including the Chair, who are appointed by the Governor in Council^{Definition 3} upon recommendation from the President of the Treasury Board.

16. The board oversees the corporation and is accountable to Parliament for the fulfillment of its duties. It reports through the President of the Treasury Board, as well as the ministers of National Defence and of Public Safety and Emergency Preparedness, in fulfilling its duties as pension investment manager.

17. The board is supported by an Investment and Risk Committee, Audit Committee, Governance Committee, and Human Resources and Compensation Committee.

18. The corporation is exempt from certain sections of Part X of the Financial Administration Act. As a result, it does not have to submit an annual corporate plan or an operating and capital budget for government approval.

19. To achieve its mandate, the corporation sets out strategic objectives in its strategic plan. It also develops performance indicators to measure its progress toward these objectives. Performance indicators are a means of measuring an output or outcome, to gauge the performance of a program, policy, or initiative. Along with the indicators, the corporation uses targets to specify the success levels or goals it must reach to achieve strategic objectives. For the 2016–21 period, the corporation identified 5 strategic objectives:

• Cultivate One public sector pensionPSP (encourage a total fund view across the corporation)
• improve its brand both locally and internationally
• increase its global footprint
• increase scalability and efficiency
• develop its people

At the time of our audit, the corporation was developing its 2021–26 strategic plan.

20. The corporation uses a risk management framework (Exhibit 3) that includes risk governance, a risk appetite statement, risk management and related policies, and risk identification and assessment:

• Risk governance refers to processes by which decisions about risks are made and implemented.
• A risk appetite statement specifies the level and types of risk that a corporation is willing to take to meet its strategic objectives. It sets the basic goals, parameters, and limits for the risks an organization is assuming. At the corporation, the board reviews and approves the risk appetite statement annually.
• Risk management policies outline the guiding principles governing a corporation’s overall values and approach to managing risk. The corporation uses risk management policies to mitigate investment and non-investment risks (Exhibit 4).
• Risk identification and assessment refers to the process in which risks are identified, categorized, and assessed, on the basis of their potential impact and likelihood of occurrence. The corporation conducts an annual, enterprise-wide risk and control self-assessment exercise to identify and evaluate significant risks, and assess the effectiveness of its risk mitigation activities. This exercise supports the corporation’s business planning process and ensures that risks are factored into its overall strategy. The board participates in this process through an annual risk-identification survey.

21. Our recommendations in this area of examination appear at paragraphs 26, 32, 33, 34, and 37.

22. Analysis. We found that the corporation had good systems and practices for corporate governance (Exhibit 5).

23. Analysis. We found that the corporation had good systems and practices for strategic planning. However, improvements were needed in performance measurement and in performance monitoring and reporting (Exhibit 6).

24. Weaknesses—Performance measurement, monitoring, and reporting. In our 2011 special examination report, we noted that the corporation had reported on the execution of tasks, rather than on outcomes. In the current audit, we found that the corporation had improved in this area. It established performance indicators for its 2016–21 strategic objectives. It also monitored and reported on the completion of strategic initiatives, and on its performance indicators and targets related to investment management. However, we found that some of its non-investment performance indicators did not have specific targets. We also found that the corporation did not report on all of its non-investment performance indicators consistently to the board. For example:

• For the strategic objective related to branding itself as a global pension investment manager, the corporation had performance indicators, but no specific targets to measure whether the objective would be achieved.
• For the strategic objective related to talent and the prioritization of inclusion and diversity, the corporation had performance indicators, but no specific targets to measure whether the objective would be achieved.

25. This weakness matters because monitoring progress against performance indicators and targets would help the corporation assess its progress toward its strategic objectives. Without this information, it cannot take timely action if it is at risk of not achieving them. The weakness also matters because if the corporation does not consistently report on all its performance indicators and targets, the board cannot fully monitor its performance.

26. Recommendation. The corporation should ensure that its strategic objectives are supported by performance indicators with targets that are specific and measurable. It should also regularly and consistently monitor and report on its performance against these indicators.

The corporation’s response. Agreed. In support of its next 5‑year strategic plan, the corporation is developing performance indicators to monitor the achievement of its strategic objectives. In the course of the 2021–22 fiscal year, the corporation will set targets for the indicators and will regularly monitor and report on progress against these indicators. The corporation will complete these by the end of 2021–22.

27. Analysis. We found that while the corporation had good systems and practices for corporate risk management, improvements were needed in some areas (Exhibit 7).

28. Weaknesses—Risk mitigation. In our 2011 special examination report, we found that the corporation had not defined its risk tolerance for non-investment risks. We found that during this audit period, the corporation had improved in this area. It established a board-approved risk appetite statement to set risk appetite for investment and non-investment risks. It also set risk appetite metrics, with thresholds or limits, for its investment risks. However, as also noted in a 2019 internal audit report, it did not set metrics and thresholds or limits, when applicable, for some of its significant non-investment risks. The thresholds or limits would set the degree of risk that the corporation is prepared to accept in pursuing its objectives. Because it did not set these parameters, management was left to make decisions without clear guidance on how much risk the corporation would accept before responding with mitigation measures.

29. We also found that the corporation had not fully implemented a risk-based compliance program. At the time of our audit, it was in the process of completing compliance risk assessments, using a risk-based approach that would evaluate how its business units were complying with the regulations relevant to its operations.

30. The corporation used models for valuing financial instruments and measuring risk. It adopted a model validation procedure that assessed models as critical or non-critical, and set requirements for model documentation, validation, and oversight. However, as also noted in a 2019 internal audit report, the model validation procedure did not outline a methodology for model risk assessment, or procedures for model development, ownership, maintenance, independent validation, monitoring, or reporting.

31. These weaknesses matter because without risk appetite thresholds and limits for significant non-investment risks, the corporation cannot ensure that its decision making aligns with the board-approved risk appetite statement. Furthermore, completing compliance risk assessments for laws and regulations relevant to its operations would ensure that the corporation does not inadvertently contravene a law or regulation, exposing it to financial and reputational risk. Finally, a complete model risk validation procedure would provide consistency in model governance and model risk management activities. This would also allow the corporation to communicate its expectations of model risk management throughout all its departments.

32. Recommendation. The corporation should set risk appetite metrics and thresholds or limits for significant non-investment risks.

The corporation’s response. Agreed. The corporation is establishing tolerances or thresholds for non-investment risks, as an initiative to provide additional assurance on its management and monitoring of key non-investment risks for management and the board, as appropriate. The corporation will identify the appropriate tolerances or thresholds for the significant non-investment risks, recognizing that these may in some cases be best expressed qualitatively. The corporation will complete these matters by the end of the 2021–22 fiscal year.

33. Recommendation. The corporation should complete compliance risk assessments, using a risk-based approach, to evaluate its adherence to the regulations relevant to its operations.

The corporation’s response. Agreed. The corporation intends to continue to complete compliance risk assessments of its business units in accordance with its internal schedule and before the end of the 2021–22 fiscal year.

34. Recommendation. The corporation should develop and apply, enterprise-wide, a model risk management framework comprising model governance, a model risk assessment methodology, a model validation methodology, and model risk management activities. The corporation could leverage and expand its current model validation procedure to develop this framework.

The corporation’s response. Agreed. During the 2020–21 fiscal year, the corporation reviewed and enhanced its model governance framework with an emphasis on the framework ownership, roles and responsibilities, and scope of the framework—including model definition, model inventory and materiality assessment linked to the review cycle, model documentation, and validation requirements. In 2021–22, the corporation will determine priority areas to expand the application of the framework, based on materiality.

35. Weakness—Risk monitoring and reporting. The corporation provided risk monitoring information to senior management and the board through its Enterprise Risk Management Quarterly Report and the Risk and Control Self-Assessment Report. The latter report described the corporation’s significant investment and non-investment risks, and identified mitigation measures for each of them. However, the corporation provided this report only once a year and did not include timelines and deliverables for every mitigation measure. The report also did not consistently include updates of the corporation’s progress toward implementing those measures.

36. This weakness matters because without timelines and deliverables for each mitigation measure, the corporation cannot effectively track its progress toward implementing them. Also, without regular reporting to the board on risk mitigation measures, the board cannot effectively monitor the corporation’s progress in implementing these measures.

37. Recommendation. The corporation should continue to enhance its reporting to the board on implementation of mitigation measures, to identify clear timelines and deliverables, and provide a periodic update on progress and completion as part of its risk and control self-assessment process.

The corporation’s response. Agreed. The corporation prioritizes the continued enhancement of its reporting to the board, to ensure that the information is effective, streamlined, and appropriate. The corporation will consider augmenting its periodic board updates with regard to progress and completion of key mitigation measures, where relevant. The corporation will complete these matters by the end of the 2021–22 fiscal year.

Investments and operations management

The corporation had good practices for investments and operations management

38. We found that the corporation had good systems and practices for managing its investments and operations.

39. The analysis supporting this finding discusses the following topic:

• Investments and operations management

40. The corporation’s business units and departments manage its assets to achieve its mandate. The corporation also has a team of investment professionals that designs investment strategies aligned with its investment objectives and Statement of Investment Policies, Standards and Procedures. This team also manages risks and investment performance.

41. As a global pension investment manager with a long-term view, the corporation integrates environmental, social, and governance factors within its investment decision making.

42. We made no recommendations in this area of examination.

43. Analysis. We found that the corporation had good systems and practices for investments and operations management (Exhibit 8).

Commentary on the United Nations’ Sustainable Development Goals

44. In 2015, Canada and other United Nations member states adopted the 2030 Agenda for Sustainable Development, a vision for partnership, peace, and prosperity for all people and the planet. The 2030 Agenda outlined 17 Sustainable Development Goals that aimed to address current and future social, economic, and environmental challenges. At the national level, the Government of Canada reiterated its commitment to implementing these goals.

45. The federal government recently established formal expectations for the integration of the Sustainable Development Goals by federal departments and agencies. Similar expectations were not established for Crown corporations.

46. As part of its Sustainable Development Strategy, the Office of the Auditor General of Canada has committed to reporting on progress toward these goals as part of its audit work. As a result, we asked the corporation’s senior management about whether the corporation had integrated these goals into its investment operations.

47. Senior management told us that the corporation was aware of the Sustainable Development Goals and was monitoring how its peers were integrating and reporting against them. It had not systematically integrated these goals into its investment operations. However, its investment operations and the activities of its Responsible Investment group, as reported in its 2019 Responsible Investment Report, indirectly addressed 3 of the goals:

• gender equality (Goal 5)
• affordable and clean energy (Goal 7)
• responsible consumption and production (Goal 12)

48. The 2019 Responsible Investment Report did not explicitly link the corporation’s activities to the Sustainable Development Goals. Because its investment operations and the activities of the Responsible Investment group contributed to aspects of the Sustainable Development Goals, there is an opportunity for the corporation to enhance its reporting on the sustainability impact of its investment activities. It could also consider reporting on its contributions to support the government’s commitment to the Sustainable Development Goals.

49. In our view, the Sustainable Development Goals offer a framework for organizations, including Crown corporations, to identify and contribute to social, economic, and environmental impacts through their activities and to report on results. We encourage Crown corporations, including the Public Sector Pension Investment Board, to consider and integrate these goals as a means of embedding sustainability considerations into their operations, while supporting the government in this important initiative.

Conclusion

50. In our opinion, on the basis of the criteria established, there was reasonable assurance that there were no significant deficiencies in the corporation’s systems and practices we examined. We concluded that the Public Sector Pension Investment Board maintained its systems and practices during the period covered by the audit in a manner that provided the reasonable assurance required under section 138 of the Financial Administration Act.

Subsequent Event

51. The corporate governance section of this report discusses the board appointments for the Public Sector Pension Investment Board. At the end of our examination, 4 of the 11 board members’ terms had expired. As of 1 February 2021, 3 positions were filled and 1 position was vacant.