DBRS Confirms Ontario Teachers’ Pension Plan Board at AAA, CFFT at AAA and OTFT at R-1 (high)

DBRS Limited (DBRS) has today confirmed the Issuer Rating of the Ontario Teachers’ Pension Plan Board (the Plan or OTPP) at AAA. DBRS has also confirmed the ratings on Cadillac Fairview Finance Trust’s (CFFT) Debentures at AAA and the short-term ratings on Ontario Teachers’ Finance Trust’s (OTFT) Canadian Short-Term Promissory Notes and U.S. Commercial Paper Notes at R-1 (high). All trends remain Stable. The ratings are supported by the strong legislative and governance frameworks that create a highly captive asset base, require plan sponsors to be responsive to deteriorations in the funding status and impose high standards of care and prudence on OTPP’s board and management. The ratings are further supported by the Plan’s improving funding status, substantial net assets and liquidity, strong investment returns and low recourse debt burden.

OTPP achieved a total return of 13.0% in 2015, outperforming its benchmark by 290 basis points. Most asset classes performed well, but the overall result was driven by particularly strong earnings in non-Canadian and private equities, real estate and infrastructure. As expected, the Canadian equity and natural resources portfolios performed poorly. With the strong investment result, net assets rose by $16.9 billion to $171.4 billion. At the same time, the Plan’s funding status continued to improve with only a modest $1.8 billion deficit on a financial statement basis and more substantial $13.2 billion preliminary funding surplus on a going concern basis. The recent improvements in the funding status have enabled the Plan sponsors to partially restore inflation protection for post-2009 pension credits.

Debt with recourse to the Fund rose in 2015 to $5.8 billion, or 3.3% of adjusted net assets, with the introduction of OTFT’s short-term borrowing programs. Subsequent to year end, CFFT’s Series A Debentures matured and OTFT increased the amounts outstanding under its short-term borrowing programs. DBRS estimates that recourse debt has risen to approximately 5.6% of adjusted net assets, which remains well below OTPP’s internal limit of 10% and consistent with the AAA rating. OTPP has ample liquidity in the form of highly liquid assets to back-stop its short-term borrowing programs and maintains a robust treasury management function.

OTPP’s primary challenge continues to be the Plan’s demographics. The ratio of active-to-retired members has continued to track lower reaching 1.4 times (x) in 2015 and is expected to fall to about 1.3x in 2020 and eventually stabilize around 1.0x. The aging demographics result in growing net pension payments and reduced ability to equitably offset significant investment losses through contribution increases.

DBRS expects the ratings to remain stable, but a negative rating action could be possible if the Plan’s funding status were to deteriorate significantly.

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 methodologies are Rating Canadian Public Pension Funds & Related Exclusive Asset Managers, Commercial Paper Liquidity Support for Non-Bank Issuers and Guarantees and Other Forms of Support, which can be found on our website under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.