A government audit of one of Ontario’s largest public-sector pension funds calls for greater scrutiny of board appointees and raises questions about pay levels, undocumented employee expenses and “significant” bonuses.
The year-long examination of the $15-billion OPSEU Pension Trust (OPTrust) also uncovered failures to follow rules on procurement and advisers and found gaps in risk management and whistle-blowing policies.
This is the first time the Ontario government has audited business and management practices at OPTrust, to which the province contributed $258-million last year. The review was launched in May, 2012, the same month former CEO Stephen Griggs filed a scathing wrongful-dismissal lawsuit.
Mr. Griggs alleged he was fired for attempting to rein in the “powers and financial largesse” of the pension fund’s private equity investment team, which includes John Walsh, the president of the Conservative Party of Canada. Mr. Griggs accused Mr. Walsh of improperly charging the provincial government’s employees’ pension plan for lavish dinners with prominent Conservatives, including Prime Minister Stephen Harper. OPTrust called the claim “patently false” in court documents.
Michael Patton, a spokesman with the Ministry of Government Services, did not specify whether Mr. Griggs’s departure triggered the audit, but noted: “We were made aware of some irregularities.” None of the province’s other public-sector pension funds was targeted for review.
The audit of OPTrust, which has almost 84,000 members and paid out $745-million in benefits last year, adds another dimension to the government’s struggles to contain the rising costs of its employee retirement plans. Faced with an aging population, sluggish investment returns and a multibillion-dollar deficit, the province has in the past year reached deals to freeze government and member pension contributions for five years for civil servants, teachers, health-care workers and community-college employees. Alberta, meanwhile, is planning to legislate – rather than negotiate – significant changes to four public-sector pension plans, including a moratorium on benefit improvements until 2021 and lowering cost-of-living adjustments.
The OPTrust review, done by the Ministry of Finance’s internal audit division and not an outside firm, resulted in 18 recommendations. It includes several proposals for changing the fund’s board that could spark a battle with the Ontario Public Service Employees Union (OPSEU).
The probe also zeroed in on OPTrust’s private markets group – which Mr. Griggs singled out is his lawsuit. The government audit found the group’s employees received substantial incentive payments, with a majority significantly exceeding performance ratings in 2011, compared with a small percentage of employees in the rest of the organization.
The review noted the group’s compensation was benchmarked against U.S. investment firms, such as Goldman Sachs and Bank of America Capital Investors, instead of other Canadian pension funds. The pay structure had not been updated since 2008, the audit added.
“In the absence of relative peer comparators … the current compensation design for PMG [the private markets group] may not be appropriate and may not be in line with OPTrust’s compensation philosophy,” the 43-page audit report states.
OPTrust is acting on many of the audit’s recommendations. While no changes have been made to pay levels of the private equity investment team, new CEO Bill Hatanaka said in an interview in September that all compensation programs will be reviewed next year.
“From my perspective, reviewing compensation on a relatively regular basis is important,” said Mr. Hatanaka, a former Toronto-Dominion Bank executive who joined OPTrust in December. “That doesn’t necessarily mean that anything would automatically change. It just means that as the new CEO coming in, I think it’s important to do my own assessment.”
Mr. Griggs, now CEO of Smoothwater Capital, a newly formed activist investment firm, declined to comment on the audit of OPTrust because he reached a legal settlement with the pension fund manager in June. The terms of the deal are confidential.
His dispute had depicted a picture of turmoil at the pension fund, the 10th largest in Canada. Hired in June, 2011, to be the fund’s first CEO, Mr. Griggs was ousted in April, 2012, less than a year into the job.
Mr. Griggs had previously been head of the Canadian Coalition for Good Governance, a powerful association of the country’s largest institutional investors focused on improving board governance practices at large companies. He claimed he was fired for attempting to reform OPTrust’s private markets group.
He accused the group of spending millions of dollars annually on travel and entertainment and alleged the group’s chief lawyer, Mr. Walsh – an OPTrust employee who is also Conservative Party president – had billed expensive dinners with Mr. Harper, federal Finance Minister Jim Flaherty and Ontario Conservative Leader Tim Hudak to the provincial government’s employees’ pension plan.
Mr. Griggs’ claims were never tested in court. Mr. Hatanaka said he could not comment on the allegations because of the settlement’s confidentiality conditions.
OPTrust denied Mr. Griggs’ claims in its statement of defence. The pension fund manager called allegations Mr. Walsh expensed political dinners “patently false” and noted his expenses were approved by three levels of authority. It accused Mr. Griggs of incompetence and of holding “personal vendettas” against the private-equity team.
A document filed with the Ontario Superior Court of Justice in January reveals Mr. Griggs’s legal team had wanted OPTrust to turn over numerous documents as part of the civil suit, including consultant reports, documents from closed-door board meetings, and a Deloitte review of the private market group’s expenses. A court document filed in October shows Mr. Griggs had also sought Mr. Walsh’s expense and travel records for the one-year period before he was elected Conservative Party president in December, 2009, and for the years after his election.
It’s unclear whether Mr. Walsh’s expenses were part of the government audit. When asked, Mr. Patton of the Ministry of Government Services said in an e-mail that a random sample of expenses was examined from across the organization.
Auditors looked at 55 expense reports with travel and entertainment claims. They found 16 reports (29 per cent) lacked receipts or a detailed breakdown of costs. No dollar figure for the undocumented expenses is being released, neither is the nature of the expenses. Mr. Patton described the transgressions as “minor irregularities.”
OPTrust has revamped its expense reimbursement policy, requiring more detailed documentation for claims, said Karen Danylak, director of communications for the pension-fund manager. Other changes recommended in the government review were put in motion before the audit was finalized in May, 2013, Mr. Hatanaka added. The ability to perform internal audits was introduced this year; an executive succession plan and a training program for trustees are being developed.
Several of the audit’s recommendations are directed at OPTrust’s board of trustees. The government review found competency requirements, training and performance evaluation were lacking at the jointly sponsored plan.
The Ontario government and OPSEU each appoint five members to the 10-member body. Proposals for altering the board – including establishing selection criteria, term limits and a process for removing ineffective trustees – could trigger a tussle between the province and the union. Although the union is still reviewing the audit’s proposals, OPSEU president Warren Thomas sounded a note of caution to the government.
“They don’t get to tell us who our trustees are, how we appoint them,” he said.
The government plans to discuss the audit’s recommendations with the union at their next joint-sponsors meeting. Mr. Patton said the province believes the audit’s recommendations, when fully implemented, will improve OPTrust’s accountability to its members. The fund earned a gross investment return of 10.1 per cent last year, surpassing its 6.5 per cent target.