Canadian CFOs And The Prince of Wales’s A4S Project Join Forces On Sustainability
Authored By: Pamela Steer | Publish Date: 03/31/2017
Authored By: Pamela Steer | Publish Date: 03/31/2017
CFOs from all industries are asking the same questions: How do we achieve sustainability in a way that is financially viable over the short and long-term? And, more importantly, how do we do this without compromising operational performance or the value we provide to our customers, pensioners, and other stakeholders?
I know these are questions on my mind in my capacity as CFO of the Workplace Safety and Insurance Board (WSIB). Similar to a pension plan, the WSIB has many long-term liabilities. We provide workplace injury insurance for more than five million workers and 300,000 employers making us one of the largest insurance organizations in North America.
As a CFO, it is good to know that other CFOs grapple with finding the right answers to these questions. On March 27, 2017, the Prince of Wales’s Accounting for Sustainability Project (A4S) launched a Canadian Chapter of its CFO Leadership Network.
This network provides a CFO-led forum where we can join together and talk about how to make sustainable practices normal practices and how can we find solutions to common issues we face.
The founding members of the Canadian Chapter include the CFOs from the following organizations: British Columbia Investment Management Corporation, Brookfield Asset Management, The Co-operators Group Ltd, City of Vancouver, Manulife, Metrolinx, Ontario Municipal Employees Retirement System (OMERS), and me, from the WSIB.
To paint a clearer picture about what A4S will actually do, I think it is best to point to some of its accomplishments in Europe, where the CFO Leadership Network was established in 2013.
In Europe, the CFOs have worked, or are working, on projects like developing guidance to help understand, measure, and incorporate future uncertainty into decision making, CAPEX, which is a practical guide to embed sustainability into capital investment appraisal, a practical guide for investor relations teams to engage on the drivers of sustainable value and a practical guidance to engage debt investors on the drivers of sustainable value.
These are tangible projects identified and championed by the CFOs as a team and it is great news that CFOs in Canada will now have a forum to undertake similar initiatives.
I know at the WSIB we have already made sustainability a top priority. Similar to a pension plan, we have long-term obligations to provide compensation to workers and their survivors. In 2011, we found ourselves in a dire financial situation.
In 2011, the WSIB’s financial situation reached a crisis point with our unfunded liability at a high of $14.2 billion (The unfunded liability or UFL represents the shortfall between the money needed to pay the future benefits to workers for all established claims and the money that is in the accident fund). It was very clear that we needed to make serious and strategic decisions to achieve more sustainable footing.
In response to our financial position, the government passed legislation that the WSIB needed to eliminate the unfunded liability by 2027.
We responded and developed a sufficiency plan to meet this goal. This is where the concept of the ‘Sufficiency Ratio’ was born. The Sufficiency Ratio is a metric unique to the WSIB, but analogous to other long-term corporate funding measures. The Sufficiency Ratio requires us to be funded on a going-concern basis (in a term most analogous to pension plans), with asset smoothing over a five-year basis to reflect the long-term nature of our operations.
We designed the Sufficiency Ratio in a way that it can be audited by a third-party and which we report publicly.
We are now aiming to eliminate the unfunded liability completely and achieve a surplus position reflected by a Sufficiency Ratio between 115 per cent and 125 per cent. This will allow us to weather volatility down the road and continue to provide benefits to injured workers and premium rate stability to employers – long-term sustainability.
While we are not out of the woods yet, over the past four years the outcomes on the road to sustainability have been strong. The WSIB ended the third quarter of 2016 at $4.8 billion on a sufficiency basis and expect the year-end results to improve further, such that we will retire the UFL several years ahead of government requirements.
We owe this improvement to a combination of efforts ‒ firstly, we maintained premium rates until recently (this year we announced the first reduction to the average premium rate for employers since 2001). We increased upfront investment in healthcare and return to work which has already paid off. For instance, in 2009 our benefit payments were $3.2 billion and this year they were $2.3 billion. This is an annual savings of almost $1 billion, while at the same time maintaining and, in some cases, improving benefits for injured workers.
Other significant factors that have contributed to the reduction of the UFL include better than expected investment performance and safer work environments.
Our work towards sustainability has not stopped. On the investment front, we recently announced that the WSIB will be one of the founding members of the Investment Management Corporation of Ontario (IMCO), which we expect to operationalize this year and which we expect will bring long-term benefits to our assets.
IMCO will allow for pooling of assets with broader public sector pension and other investment funds. We expect enhanced risk management while enabling access to a broader spectrum of international investment opportunities such as infrastructure and real estate with a goal to provide for total portfolio returns with less volatility.
We are all facing similar challenges, so why should we continue moving forward in isolation? Working together offers CFOs the opportunity to provide direction, share ideas and explore new opportunities.
Pamela Steer is CFO of the Workplace Safety and Insurance Board and a Member of the A4S Global Advisory Committee.