DBRS Confirms Ontrea Inc.’s Guaranteed Debentures at AAA

Dominion Bond Rating Service (DBRS) has today confirmed the ratings on the Series A and Series B Debentures of Ontrea Inc. (Ontrea) at AAA. The trends remain Stable. The strong ratings primarily reflect the unconditional guarantee provided by the Ontario Teachers’ Pension Plan Board (OTPP or the Fund) on outstanding Ontrea debentures, as well as the high level of assets available to meet potential guarantee obligations, and the measures recently adopted to eliminate its funding shortfall.

The Fund maintained its track record of solid investment performance in 2005, with returns of 17.2%, although the deficit on a financial statement basis continued to grow. At December 31, 2005, the shortfall stood at $21.8 billion, up $7.9 billion from the year before and in sharp contrast with the $2.2 billion surplus recorded in 2002 mainly due to downward revisions to the real interest rate assumption in recent years. From 4.4% in 2001, real interest rates have gradually moved downward to 2% in 2005, with every 1% adjustment increasing benefit liabilities by approximately 17%.

However, the new funding valuation filed with pension regulators in June 2006 dramatically improved the status of the plan on a funding basis, which incorporates future expected contributions and benefit accruals in addition to current assets and liabilities. Measures were introduced to address the preliminary shortfall of $19.4 billion estimated as of January 1, 2005, which is the valuation date permitted under pension regulations for filing purposes. Accordingly, contribution rates will rise gradually over the next three years from the current average of 8% of base earnings to 11% in 2009. This will increase annual contributions by nearly 40%, which remains manageable for OTPP’s strong sponsors (including the Province of Ontario rated AA by DBRS). The discount rate used for funding valuation purposes was also revised upward notably to a level more consistent with (though still lower than) most other large pension plans.

As a result, the funding shortfall as of January 1, 2005, has been eliminated. The measures will have little effect on the deficit on a financial statement basis, although the increase observed in recent months in real interest rates should provide notable relief.

Notes:
The Series A and Series B Debentures of Ontrea Inc. are unconditionally guaranteed by the Ontario Teachers’ Pension Plan Board.
All figures in Canadian dollars.