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 rating on Cadillac Fairview Finance Trust’s 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 (CP) 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 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 recent funding surplus on a going-concern basis, substantial net assets and liquidity, strong investment returns and low recourse debt burden.

OTPP achieved a total return of 4.2% in 2016, outperforming its benchmark (BM) by 70 basis points. Most asset classes performed well, but the overall result was negatively affected by foreign currency exposure as the Canadian dollar strengthened. Canadian equities saw strong returns, and real estate, infrastructure and natural resources also performed well compared with their respective BMs. As a result of the positive investment results, net assets rose by $4.1 billion to $175.6 billion. In 2016, the Plan’s deficit on a financial statement basis increased to $13.8 billion. On a going-concern basis, the 2017 preliminary funding surplus was $11.5 billion, which is $7.0 billion higher than the $4.5 billion funding surplus filed in 2016. The recent funding surpluses have enabled Plan sponsors to largely restore inflation protection for post-2009 pension credits.

Debt with recourse to OTPP rose in 2016 to $10.6 billion, or 5.7% of adjusted net assets, with an increase in OTFT’s short-term borrowing programs. Recourse debt remains well below OTPP’s internal limit of 10% and consistent with the AAA rating. DBRS notes that OTPP meets the DBRS criteria for CP liquidity support, as outlined in the appendix to the “Rating Canadian Public Pension Funds & Related Exclusive Asset Managers” methodology entitled “Self-Liquidity for Canadian Public Pension Funds and Related Exclusive Asset Managers’ Commercial Paper Programs” (published in May 2017). OTPP’s liquidity position remains sound, with sufficient same-day available funds equal to at least five business days of upcoming liabilities and discounted assets equal to the remaining maximum authorized CP program limit, which is consistent with DBRS’s policy on backup liquidity support for pension plans and provides considerable short-term financial flexibility.

In 2016, OTPP began to implement the new OneTeacher investment strategy. The new strategy focuses on total fund returns, value-added returns and volatility management. As part of the updated strategy, certain investment teams were reorganized and new groups were created, including the Portfolio Construction Group. Additionally, a new risk-management system was put in place and a centralized treasury group was created within the Capital Markets team to support OTPP’s liquidity-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 1.3 times (x) in 2016, and is expected to fall to about 1.2x in 2020 before eventually stabilizing at 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 occur if the Plan’s funding status deteriorates 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 principal methodologies are Rating Canadian Public Pension Funds & Related Exclusive Asset Managers and Structured Finance Flow-Through Ratings, which can be found on dbrs.com under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.