Vestcor's record bonuses, modest returns again provoke call for review by auditor general

Record bonus payments at Vestcor and lingering questions about the organization's record of posting below average investment returns has New Brunswick Liberals renewing a call for the Auditor General's Office to be given authority to audit the organization.

"While Vestcor is not a Crown Corporation, they are responsible for handling the pension fund for Government of New Brunswick employees and therefore need to be held accountable," Rob McKee, the Liberal finance and treasury board critic, said in a statement Monday.

The Moncton Centre MLA was reacting to news Vestcor created a new incentive plan for its employees in 2021 but without fully cancelling the plan it replaces. Instead, both operated simultaneously in 2021, rewarding employees for the same achievements twice in many cases.   

The new incentive program was fully functional in 2021 and employees earned $5.9 million in bonuses from its operation.

Bonus from two programs

That  was a new bonus record for Vestcor on its own, but employees were then paid another $2.7 million from the old incentive program that is being left partially operational until 2023.  

"The exorbitant amounts of bonus pay given to senior employees is a major reason why the Auditor General should have the authority to analyze Vestcor's operations," said McKee's statement.

"As most of what they do is manage the pensions of Government of New Brunswick employees, they are responsible for handling a large sum of taxpayer dollars, which makes transparency and accountability that much more important."

Vestcor is headquartered in Fredericton and was set up in the 1990s to manage what has become $21 billion in New Brunswick government employee pension and other funds, including about $900 million in N.B. Power nuclear waste and decommissioning funds.

It was originally a Crown agency but was reconfigured, renamed and given its independence in 2016.

It's now jointly owned by the province's two largest public pension plans serving New Brunswick civil servants and teachers.

Although Vestcor is not owned by government, two New Brunswick auditor generals have argued "the significant amount of funds from public sources Vestcor manages" and its "extensive government-entity client base" make its operations a public interest concern.

Most of the bonus payments awarded to Vestcor employees in 2021 were generated by investment returns that exceeded Vestcor's own internal targets but which were otherwise below industry averages, according to at least one measure.

According to Vestcor's annual reports, earnings on the funds it manages have totalled $5.5 billion over the last four years covering 2018 to 2021.  

The amount exceeded the organization's benchmark investment targets for the periods by $652 million after covering the organization's expenses. That includes $452 million in returns above Vestcor's benchmarks in 2021 alone.

That's the source of most of the bonus payments — the difference between Vestcor's 2021 investment returns of 9.46 per cent and its overall target in 2021 of 7.23 per cent.

"Investment returns relative to our client's investment policy benchmarks reached a record high due to the strong active management performance from each of our four investment teams," Vestcor's annual report said.

But according to data compiled by LifeWorks, a Canadian pension and benefits administrator that monitors the performance of pension managers and which Vestcor has used for comparisons in the past, a 9.46 per cent investment return in 2021 would rank it among the bottom five per cent of results among pension managers with diversified pooled funds.  

The median return among funds for the year, according to LifeWorks, was 13.83 per cent. 

It is a similar story for Vestcor's four-year annualized return of 7.5 per cent. It is also well above its own benchmark target of 6.52 per cent over those years but below the 8.8 per cent LifeWorks calculates to be the median return of diversified pension funds.

Every one per cent difference in investment returns is worth about $200 million per year to Vestcor's holdings.

In February 2021, then New Brunswick auditor general Kim Adair, formerly Adair-MacPherson, told MLAs her office had an interest in reviewing Vestcor's investment targets and benchmarks to evaluate the difficulty in exceeding them.

"There is a lot of content in their annual report about benchmarks and achieving benchmarks and other targets," said Adair.

"These are the areas if we had the ability to do performance audits we would examine whether the benchmarks are, for example, stretch targets or are they easy to achieve benchmarks."  

Adair said she was concerned about how bonus payments at Vestcor had been escalating without, in her view, an independent measure of whether the returns being earned justify the payments or are as strong as Vestcor claims relative to industry standards.   

"Are they adding the value that they indicate in their public reports?" she asked.

"Essentially there's no third-party independent assessment of this, and they are managing significant New Brunswick public sector funds." 

Vestcor president John Sinclair has regularly defended the organization's record of posting lower earnings than industry averages. He said it is byproduct of a conservative, low-risk investment strategy required to manage the province shared-risk pension plans that will show its true worth when markets slump.  

Vestcor says its costs are lower

He also contends costs at Vestcor are substantially lower than at other pension management firms, and this makes up for some of the earning shortfalls.

"The idea has been to provide that protection to our members," Sinclair told MLAs last September. "Our pension plans should do better in weaker market environments. But to be able to do that, they're going to probably not do as well in stronger market environments."

New Brunswick Liberals say they would like to see all of those issues evaluated by the Auditor General's Office, but in an email on Monday, the Department of Finance said that won't happen.

"Vestcor is not an agent of the Crown and was established to operate independently of government," wrote Erika Jutras, the department's communications director. 

"There is no plan to change the legislation."