DBRS Confirms Cadillac Fairview Finance Trust at AAA

DBRS has today confirmed the ratings on the Series A, B and C Debentures (the Debentures) of Cadillac Fairview Finance Trust (CFFT) at AAA, based on the unconditional and irrevocable 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. CFFT is a special purpose trust, the undertaking of which is limited to the borrowing of funds primarily for OTPP’s real estate activities. The trends on all ratings remain Stable supported by proficient investment management, a solid liquidity position and net assets that continue to substantially exceed recourse debt, although persisting funding deficiencies remain a source of concern.

Investment returns amounted to 11.2% in 2011, driven by strong growth in private market assets and fixed income, which overcame negative returns in public equities. The performance exceeded the benchmark portfolio by 140 basis points, solidifying the Fund’s position of providing overall value-added returns since its inception. Net assets reached $117.1 billion in 2011, up from $107.5 billion in 2010 as investment income of $11.7 billion far exceeded net outflows for benefit payouts.

However, the impact of declining interest rates on the discount rate led to a notable year-over-year increase in accrued pension benefits, resulting in further deterioration in the Plan’s shortfall to $45.5 billion on a financial statement basis. On a funding basis, a preliminary valuation as of January 1, 2012, demonstrated that the Plan was again in a projected deficit position, estimated at $9.6 billion, despite corrective actions taken last year as a part of actuarial valuation filing. The shortfall was largely caused by a further decline in the real interest rate in 2011, although the impact was mitigated by the continued smoothing of the real rate of return assumption over a trailing three-year period.

Although the funding deficiency is sizeable, DBRS notes that a change of only one percentage point in the real interest rate assumption changes the funding deficit by approximately $25 billion, which would put the Plan back in a sound surplus position. However, fragile global economic conditions driven largely by ongoing volatility in the euro zone will likely keep interest rates at historically low levels for some time, a sentiment recently echoed by the Bank of Canada. Furthermore, the relatively more mature demographic profile of the Plan’s membership indicates that investment growth and a change in contribution rates alone will not be sufficient to address the Plan’s long-term funding challenges. As such, further benefit changes are likely to be required to protect the sustainability of the Plan. Recourse debt, which was 2.2% of net assets at year-end 2011, is likely to increase moderately over the short to medium term, but should remain well below OTPP’s internal limit of 10% of net assets, which is viewed as adequate for the AAA rating and provides resilience to the credit profile.

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

The applicable methodology is Rating Canadian Public Pension Funds and Related Exclusive Asset Managers (May 2012), which can be found on our website under Methodologies.