DBRS Confirms Ontrea Inc. at AAA

DBRS has today confirmed the ratings on the Series A Debentures and Series B Debentures of Ontrea Inc. (Ontrea) at AAA based on the unconditional guarantees provided by the Ontario Teachers’ Pension Plan Board (OTPP or the Fund), which manages the defined benefit pension plan (the Plan) of Ontario teachers. The trends on the ratings remain Stable despite the erosion in OTPP’s financial position as a result of the sizeable investment losses recorded in 2008, as DBRS believes that a return to more normal investment performance and corrective measures likely to be required at the next actuarial valuation will slowly restore the Fund’s balance. Moreover, substantial net assets continue to significantly exceed OTPP’s low level of recourse debt.

Investment returns amounted to negative 18% in 2008, down from a gain of 4.5% the prior year. The Fund missed its benchmark by 840 basis points, the largest benchmark deviation among its DBRS-rated peers, suggesting that the portfolio risk level was likely much greater than that of its benchmark portfolio. However, OTPP’s ten-year average return remains sound at 180 basis points above its benchmark. The meagre 2008 results were primarily caused by the rapid weakening of global economies and the sharp decline in investment markets, which caused material losses in most asset classes. Fixed income put a particularly significant damper on results with a negative return of 43.6%, which was principally caused by losses on structured credit products. Real return bonds and infrastructure, however, performed reasonably well and mildly offset the losses.

Despite the considerable losses, the funding deficit of the Plan on a financial statement basis only modestly worsened to $11.2 billion in 2008, as a result of the actuarial valuation adjustment reserve, through which any deviation from the assumed investment return is amortized over five years. By year-end, the reserve contained roughly $19.5 billion in losses which will put notable pressure on the Plan’s funding deficit over the next four years. Total debt with recourse to OTPP remained unchanged in 2008, at a low 1.4% of net assets available for benefits. The Fund does not have plans to increase recourse debt in the foreseeable future.

The Fund expects to alleviate some of the deficit pressure by achieving investment returns in excess of the actuarial assumption. However, the global economy continues to show weakness and achieving sizable investment gains will likely remain challenging over the near term. As such, DBRS expects that the next actuarial valuation due by September 30, 2011, will most likely require increased contribution rates and/or reduced benefits in order to deal with the funding deficiency, consistent with the Pension Benefits Act, which should continue to ensure the long-term sustainability of the Plan.

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

DBRS ratings on public pension funds and pension fund asset managers are primarily based on the funding status, membership fundamentals and cash flow outlook of the public pension plan or pension plan depositors, the net asset and liquidity position of the fund in relation to outstanding recourse debt, the fund’s investment track record and portfolio management strategy as well as the financial strength of plan contributors.

This is a Corporate (Public Finance) rating.