Pioneer: Claude Lamoureux—Tops In Pension Plans
Tops In Pension Plans
By Sam Phillips
CLAUDE LAMOUREUX recently retired as CEO and president of Ontario Teachers' Pension Plan—one of the most successful pension funds in the world. Read on to learn more about Lamoureux and how he accomplished this great feat.
Q: Please provide a brief background of your actuarial career.
A: My career is probably more a business career than strictly an actuarial one.
In 1966 I took my first job at Metropolitan Life because of one person: Phil Briggs. He also is an actuary and a great businessperson and role model for a young actuary.
Phil wanted to transfer most of the actuarial work done in New York to the Canadian offices in Ottawa.
Hence, after a few years in Ottawa, I worked in New York in order to gain experience in a specific area and bring that work back to Ottawa. That work had to do with putting annual reports together; I also got exposure to income tax work, vis–à–vis the process of changing laws in New York State and their application in a foreign country.
After a few years in Canada I returned to New York to work in the Group Insurance and Pension Department that Phil Briggs headed. There, again, I was impressed by his ability to see what could be, as opposed to what was.
At that point I was in charge of a group of people that eventually grew to more than 100 members. I was involved with budget, expense controls, and providing quotes on the expenses incurred or to be incurred on large group cases. It was exciting and demanding work.
I left to be the head of a line of business known as Small Pension and Individual Annuities. This was the first time I had bottom–line responsibilities.
After a couple of years I came back to Canada and eventually was put in charge of the Canadian operations.
My challenge was to increase our market share in individual insurance and to improve profitability. We accomplished these goals and in addition we started to diversify into financial products other than insurance.
From there I went to the Ontario Teachers' Pension Plan—where we had different challenges as you will see by my comments below.
Q: How did the Ontario Teachers' Pension Plan Board become so influential? Were you part of making it so?
A: Prior to 1990, the OTPP only invested in province of Ontario debt obligation. There was no investment department. The province passed a law creating a new board—the Ontario Teachers' Federation (OTF). The Ontario government recognized this as an opportunity to install a new professional board capable of managing the assets in the best interest of its members.Since then, the board has been composed of people with good business experience. Of the nine board members, currently only one has been a member of the plan.
The board is independent of the government and the OTF, although they each are responsible for naming half of the members of the board.
The challenge in 1990 was to create an investment department where none had existed before. When I was hired as the first CEO, the mission was clear: get good investment results.
The first employee I hired was our CIO Bob Bertram. Together we agreed we would run the fund as a business.
We also decided that we would invest most of the funds in–house. This also meant that if our results were not good, the board knew who was responsible. We could not blame outside managers or consultants.
Fairly early on, we made use of derivatives; we created a private equity department and we emphasized technology.
Today, of the 160 investment professionals, OTPP has some 60 people involved with private equity. We invest in private equity funds, but more than half the portfolio is managed internally. Most of our infrastructure investments are managed in–house. OTPP owns 100 percent of the largest real estate company in Canada.
The advantage in managing the assets on your own is that you can decide when to sell, you can keep the fees down and, more importantly, you can better match the assets to your liabilities.
Having a competent board made a real difference.
Q: How did you improve the OTPP?
A: The existing pension administration service had been deemed to be adequate, but we discovered in a short period of time that this was not the case. The first improvement in the service side was to make a few changes in the leadership. When you are the CEO, you quickly learn that you are only as good as the leadership team you have.
One of the early challenges we faced was the realization that many of the pensions had not been calculated properly and that our demographic data was less than perfect.
In fact, we had to recalculate the pension payments of 50,000 retired teachers and confirm that we had the proper data for the active teachers.
At the peak, we had more than 100 people involved with this work.
While we did this repair work, we also focused on improving our day–to–day service. We had been slow in responding to letters. It was easy to convince employees to provide the kind of service they would like to receive. They all knew that taking months to answer letters is less than acceptable. We eliminated the need for members to navigate their telephone keypad to get a response; this was not the kind of service that a member, with tens of thousands of dollars of assets with us, should get.
We created an index of service quality that summarized how we were doing. We participated in surveys comparing our service and our cost per member with other pension plans around the world.
We made people proud of providing outstanding service. We convinced our unionized people to accept an incentive plan reflecting how we were doing as a team and individually.
For a number of years, the members of the plan have given us a grade of around nine out of 10 for our service.
On the investment side, because we started without any investment employees, it was easier. But, we also spent a lot of time explaining to the members what we were doing.
Every year, we have had an annual meeting with the members of the plan and the union leadership. Teachers are not afraid to ask questions; in fact, the question period can last for more than an hour.
Q: You've been applauded for the "innovative investment program" and "outstanding services" you developed at the OTPP. Without giving your trade secrets away, what sets the program and services steps above other programs and services?
A: Today, the secret of good service at Teachers' is that we listen to employees and implement their suggestions.The organization also believes in continuous improvement. In the last couple of years over 70 percent of the retiring teachers have completed the retirement process online without any help from an employee. In fact, many services can be provided online through our Web site.
Members can use the Web to verify the accuracy of the data we have. They can also get the cash value of the benefits they have accrued. This makes for interesting conversations when interest rates go up and the cash value goes down.
On the other hand, the questions that the service representatives get are also more sophisticated, which makes it very important to continually train them.
Every phone conversation is taped and the manager goes over a sample of these with the service representative to see how he or she can improve.
Comparing with other organizations is also important. You can always learn something new, and the members always judge the service in relation to service they receive elsewhere.
On the investment side, it is important to communicate the strategy being followed and to be candid. I was lucky to retire at the end of 2007. Last year was not a great year, but I know my successor will explain very well what happened and why it is important to be very conscious of the liabilities when investing.
Q: Why is good corporate governance important to you as an actuary?
A: I got interested in corporate governance because at OTPP, we initially invested a lot of our funds in common stock indices. As the saying goes, "If you cannot sell, you must care."
When you are an owner of corporations, you have to make your views known. You cannot remain silent. We started to announce publicly on our Web site how we would vote our proxies.
We have been critical of many compensation consultants who, too often, gave management what they wanted instead of what was good for the shareholders in the long term.
Q: What has been your most memorable achievement both on and off the job?
A: I am very proud of the teams I assembled at MetLife and at OTPP. A number of my associates went on to become presidents of corporations. But, my best achievement was to run a pension fund like a business. Our investment department has generated good long–term results. Our employees provide service that is one of the best among pension funds around the world.
One of the initiatives I started, with a great Canadian investor, Stephen Jarislowsky, is the Canadian Coalition for Good Governance. Today, most Canadian Institutional Investors are members. The C2G2 has been instrumental in obtaining many changes in corporate governance in Canada.
Q: Were there other career paths you explored pursuing before you chose the actuarial field? What made you decide to become an actuary?
A: I wanted to either become an engineer or go to business school. A part–time math teacher at the college I attended was an actuary and introduced me to the idea. I wrote to the Society of Actuaries, looked at the first and second example exams they sent me, and decided that was a good challenge. It seemed it was a good combination of business and engineering.
Q: Would you like to provide any comments on the current financial crisis and how actuarial expertise may help turn things around?
A: The current financial crisis was caused in large part by greed. You do not need sophisticated risk systems to figure out that a financial institution cannot loan more than 100 percent of the value of a house.
Actuaries can help not just by creating sophisticated models, but also by using common sense. The accounting for credit default swap is not consistent with the accounting for insurance. How many actuaries at AIG objected to the inflation in profits and inflation in the value of the stock caused by this accounting? One of my professors at Laval University used to tackle tough problems by general reasoning. The toughest questions to answer are often the simplest, he would say.
Too may actuaries have helped boost the profits of corporations by being unrealistic in their assumptions for valuing pension and other liabilities. Actuaries have to use their skills to help corporations in the long term.
Q: What words of wisdom would you like to share with aspiring/upcoming actuaries?
A: When I became a fellow, the president of the SOA was Ed Lew. He gave the commencement speech to new fellows. He said something that I have repeated in front of many audiences: "When you have to make a decision, always make the one that will let you sleep better, not the one that will let you eat better."
This was good advice then, and is even more appropriate now, when too many executives are driven by greed and not by what is best for the customer and the public.
One of the best things about the actuarial program is that it teaches you to learn on your own and to discover that to get the FSA, you need to work more than nine to five.
Recently, I was reading the book Outliers by Malcolm Gladwell. The lesson from the book is clear. If you want success, if you want to make an impact, you need to work for it.
I failed some actuarial exams. With passing percentages of between 25 percent to 45 percent, it is not hard to see why. But together, the demands of working and studying help you achieve more than you thought possible.
Q: What are your future plans?
A: Presently, I serve on the board of four public corporations and a number of nonprofit organizations. This keeps me busy enough.
I have served on a number of task forces to improve governance in Canada and internationally.
Currently, I am involved with the Canadian Institute of Actuaries and the C.D. Howe Institute to modernize the laws and regulations of Canadian pension plans.
Most actuaries probably would like future generations to enjoy the benefits of DB pension plans. How do employers make reasonable promises and permit assets to be professionally managed? Actuaries all know that sharing risks between generations benefits everyone. But right now, the trend is in the other direction.
I just became a grandfather so I have to continue worrying about the future.
Q: Do you have any hobbies you would like to share with our readership?
A: I used to play a lot of tennis and in the winter I would ski a lot, but since a hip replacement my skiing is now cross–country and I have taken up cycling. Obviously, I still read a lot.
Claude Lamoureux was president and chief executive officer of Ontario Teachers' Pension Plan from its inception in 1990 to his retirement in 2007. He can be contacted at Claude_Lamoureux@otpp.com.
Sam Phillips is a communications associate at the Society of Actuaries. He can be contacted at firstname.lastname@example.org.