DBRS Confirms Ontario Pension Board and OPB Finance Trust at AA (high)

DBRS Limited (DBRS) has today confirmed the Issuer Rating of Ontario Pension Board (OPB or the Plan) at AA (high) and the ratings on OPB Finance Trust’s Debentures at AA (high). All trends remain Stable. The ratings are supported by strong legislative and governance frameworks that create a highly captive asset base, require the Plan’s sponsor to be responsive to deteriorations in the funding status and impose high standards of care and prudent decision making on OPB’s board and management. The ratings are further supported by the Plan’s nearly fully funded status, substantial net assets and liquidity and low debt burden.

OPB achieved a total return of 8.1% in 2016, outperforming its benchmark by 1.5%. Most asset classes performed well, though the overall result was driven by strong returns from Canadian Equities, Real Estate and Tactical Asset Allocation . With the strong investment result, net assets rose by $1.3 billion to $24.4 billion.

The Plan’s deficit increased slightly to $796 million, or 3.2% of the accrued pension obligation, on a financial statement basis, largely because of changes in actuarial assumptions. OPB decreased the discount rate to 5.70% from 5.95% following a long-term funding study in 2016 to assess the health of the Plan and the adequacy of current contribution rates in light of a continuing low interest rate environment and changing membership, longevity and retirement patterns. The decrease in the discount rate increased the accrued pension obligation by $517 million. Also as a result of the funding study, OPB indicated the likelihood that it would be recommending a modest contribution rate increase. The latest actuarial valuation as at the end of 2015 estimated a deficit of $667 million on a going concern basis.

The Plan continues to have a weaker demographic profile than other rated plans, with an active-to-retired membership ratio of 1.10 times. As expected, this ratio decreased from 1.16 times at the end of 2015, as a large number of members retired before changes to post-retirement insured benefits took effect in 2017. However, the decrease is expected to be temporary because a large number of the retirees are expected to be replaced, and retirements will be lower over the next few years.

Debt with recourse to the Plan rose in 2016 to $1.6 billion, or 6.1% of adjusted net assets. Subsequent to year-end 2016, OPB Finance Trust issued $750 million Series F Debentures, which increased the recourse debt ratio to 8.7% (as a percentage of adjusted net assets as of December 31, 2016), though this remains below OPB’s internal 10.0% limit on all debt. OPB has no immediate plans to issue further term debt.

The governance and management framework for the Plan as well as management’s investment strategy are expected to remain stable over the near term. However, the establishment of the Investment Management Corporation of Ontario (IMCO) will result in OPB’s asset management being transferred to the new entity along with its investment and investment finance functions. OPB will continue to own its assets and strategic asset mix and be responsible for its pension and guaranteed debt obligations through OPB Finance Trust. Notwithstanding the implementation risk associated with IMCO, DBRS believes that the establishment of IMCO and the associated benefits of asset pooling could be modestly positive for OPB’s credit profile. The operational launch of IMCO is expected to occur in July 2017.

DBRS expects the ratings to remain stable for the foreseeable future, though continued erosion in the Plan’s demographic profile over the longer term could eventually put pressure on the ratings.

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 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.

DBRS will publish a full report shortly providing additional analytical detail on these ratings. If you are interested in receiving this report, contact us at info@dbrs.com.