DBRS Confirms Ontrea Inc.’s Guaranteed Debentures at AAA

DBRS has today confirmed the ratings on the Series A Debentures and Series B Debentures of Ontrea Inc. at AAA. The trends are Stable. The strong ratings reflect the unconditional guarantee provided on the debentures by the Ontario Teachers’ Pension Plan Board (OTPP or the Fund), which maintains a track record of solid investment performance and a very high level of assets available to meet potential guarantee obligations. Also positive are the contribution rate increases to be introduced over a three-year period (2007 to 2009), which should help keep the plan on a sustainable path. Nonetheless, the plan continues to face a shortfall on a financial statement basis as well as on a funding basis according to preliminary estimates, albeit markedly lower than a year ago. If a deficit were present in the January 1, 2008, funding valuation, the date of the next required filing, further changes would then be required by the co-sponsors according to the Pension Benefits Act.

Investment returns remained strong in 2006, at 13.2%, or 380 basis points above the benchmark, supported by solid performances in all major asset classes except commodities and real return bonds, which were dragged by softening energy prices and slightly higher real interest rates. This was the seventh consecutive year that the Fund exceeded its benchmark. Consistent with its asset-mix policy approved at the end of 2004, the Fund continued to slowly reduce its exposure to public equities in 2006 in favour of non-traditional investments such as hedge funds and infrastructure. Combined with modest revisions in discount-rate and salary-escalation assumptions, the strong returns of recent years helped boost net assets by 10.3% in 2006 and reduce OTPP’s shortfall by 28% to $15.6 billion on a financial statement basis, or 14.2% of accrued benefits. The plan also saw a sharp improvement in its status on a funding basis, which incorporates expected future contributions and benefit accruals in addition to current assets and liabilities, mainly reflecting the higher contribution rates approved last year by the co-sponsors.

OTPP continues to anticipate moderating returns from public fixed income and equities going forward, reflecting general expectations of stable inflation and excess liquidity in public markets. As a result, the Fund’s focus is likely to remain on new active management strategies and less liquid investments in an effort to optimize value added.

Note:
All figures are in Canadian dollars unless otherwise noted.