DBRS Confirms Cadillac Fairview Finance Trust at AAA, Stable

DBRS has today confirmed the ratings of the Series A, B and C Debentures (the Debentures) of Cadillac Fairview Finance Trust (CFFT) at AAA, all with Stable trends. The ratings are 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. Additional support is provided by the Fund’s solid liquidity position, proficient investment management track record and a low recourse debt level relative to its substantial asset base, although recurring funding deficiencies remain a cause of concern

OTPP generated a robust 13.0% total fund return in 2012, beating the 11.2% gain posted in the prior year. The Fund surpassed its benchmark by 200 basis points, with generally sound performance across all asset classes, except for commodities. Notable outperformance in the private market assets and non-Canadian equities helped drive net assets to $129.5 billion at year-end 2012, up from $117.1 billion in 2011. Despite considerable investment gains, the Plan continues to grapple with persistent funding shortfalls. On a financial statement basis, the Plan recorded a sizable, though improved, $36.5 billion deficit at year-end 2012, or 22% of accrued pension benefits. Total debt with recourse to OTPP stood at 2.0% of adjusted net assets in 2012, which remains low relative to other DBRS-rated pension plans. As there are currently no plans to increase recourse debt over the foreseeable future, recourse leverage is expected to remain notably below the 10% internal limit, which is viewed as adequate and provides considerable resilience to the financial profile.

The Plan sponsors chose to file a revised actuarial valuation in 2012, two years earlier than required, on expectations that interest rates could decline further, pushing accrued pension liabilities higher. The preliminary funding valuation revealed a $9.6 billion deficit, on a going concern basis, as of January 1, 2012. To eliminate the deficiency, the Plan sponsors made key changes to the Plan’s inflation features, including bolstering the conditional inflation protection provision, such that guaranteed inflation protection is now eliminated for pension credits earned after 2013. These changes follow already scheduled contribution rate increases introduced with the 2011 filing. However, despite the increase in net assets and recent plan changes, the preliminary funding valuation as at January 1, 2013, points to a $5.1 billion shortfall, largely due to yet another decline in the discount rate.

A particular challenge for the Plan is its mature demographic profile, marked by a relatively low active member-to-pensioner ratio of 1.5 times and increasing longevity. Compounding these challenges are early retirement provisions which enable teachers to retire much earlier than the general public. OTPP has prudently established a demographic task force to examine the Plan’s unique long-term demographic challenges, address the imbalance between years worked and years on pension and mitigate intergenerational risks posed by the maturity profile. DBRS is encouraged by the strong resolve already shown by the Plan sponsors to stem further erosion in the funded status. DBRS expects future measures to address funding shortfalls will likely focus on reducing benefits, particularly early retirement provisions. Nevertheless the credit profile remains supported by the Fund’s solid liquidity position, global scope and scale, sound risk management practices, superior investment track record, and conservative use of recourse debt practices.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Canadian Public Pension Funds and Related Exclusive Asset Managers (June 2013), which can be found on our website under Methodologies.

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