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 on the debentures provided by the Ontario Teachers’ Pension Plan Board (OTPP or the Fund), which manages the contributory defined benefit pension plan (the plan) of Ontario teachers. The plan one of Canada’s largest pension funds, with a record of solid investment performance and a very high level of unencumbered net assets totalling $108.5 billion.

The plan’s status has improved on a financial statement basis since the 2005 valuation filing, helped by increased contributions and robust investment performance over the past several years. However, a sizable funding basis deficit of $12.7 billion remains, according to the preliminary valuation at January 1, 2008. An updated funding valuation must be filed by September 30, 2008, and may contain revised actuarial assumptions as well as new measures to address any remaining shortfall over 15 years, as required by the Pension Benefits Act (PBA). This time, the sponsors’ measures may include benefit changes and/or contribution increases given the maturity of the plan (1.6 working teachers for each pensioner) and the relatively high contribution rates already faced by members. In fact, members have been pre-emptively surveyed for their preferences on potential solutions, which revealed that they would tolerate contribution increases of up to 1.3 to 1.6 percentage points above the 2009 level, still manageable for OTPP’s strong sponsors, including the Province of Ontario (rated AA by DBRS).

Total fund returns of 4.5% in 2007 beat the benchmark of 2.3%, driven by Canadian equities, real estate and commodities. All asset classes, except fixed-income and real-return bonds, beat benchmarks, but the greatest value added came from real estate, infrastructure investments and Canadian equities, three asset classes that OTPP has excelled in over the past several years. Nevertheless, total return was down considerably from recent years due to a challenging global investment environment beginning halfway through 2007. The rise in the Canadian dollar also hurt international investment returns, which, outside the United States, were only covered by a 50% currency hedge for most of the year.

A softer global economic outlook and volatility in financial markets point to the continuation of challenging investment conditions for 2008. In recent years, the Fund has increased its focus on inflation-sensitive investments, which has contributed substantial value added to the portfolio and helped mitigate the volatility of public markets; OTPP is likely to continue to do so in the coming years. As a result, OTPP’s strong investment management expertise, combined with the requirements under the PBA to take actions to eliminate any shortfall, should help ensure the long-term sustainability of the plan and the continuation of a strong credit profile.

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