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

DBRS Limited (DBRS) confirmed the Issuer Rating of the Ontario Teachers’ Pension Plan Board (OTPP or the Plan) at AAA. DBRS also confirmed Cadillac Fairview Finance Trust’s (CFFT) Debentures rating at AAA and Ontario Teachers’ Finance Trust’s (OTFT) Long-Term Notes, Canadian Short-Term Promissory Notes and U.S. Commercial Paper Notes ratings at AAA, R-1 (high) and R-1 (high), respectively. 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 net return of 9.7% in 2017, outperforming its benchmark (BM) by 150 basis points. Equities (both public and private) and infrastructure saw strong returns, and natural resources also performed well compared with its BM. As a result of the positive investment results, net assets rose by $13.9 billion to $189.5 billion. In 2017, the Plan’s deficit on a financial statement basis increased to $14.8 billion. On a going-concern basis, the 2018 funding surplus was $10.3 billion, $4.9 billion higher than the $5.4 billion funding surplus filed in 2017. The recent funding surpluses have enabled Plan sponsors to fully restore inflation protection for post-2009 pension credits. With the decision to file the valuation in 2017, Plan sponsors also reduced the contribution rate for the Plan’s active members by 1.1%, effective January 1, 2018, ending the 1.1% special contributions that were introduced in 2011 and that had been scheduled to finish in 2026. As a result, the average contribution rate decreased to 11% from 12%. Plan sponsors also decided to file the January 1, 2018, valuation and fully allocated the $10.3 billion surplus to a contingency reserve.

Debt with recourse to OTPP rose in 2017 to $12.5 billion, or 6.2% of adjusted net assets, with an issuance by OTFT of its inaugural USD Senior Notes of USD 1.75 billion, maturing in September 2022. Subsequent to year-end 2017, CFFT’s Series C Debentures were repaid in May 2018 and OTFT issued additional USD Senior Notes of USD 2.0 billion in April 2018, maturing in April 2021. Recourse debt remains well below OTPP’s internal limit of 10%, providing considerable room for cyclical fluctuations in asset values. DBRS notes that OTPP meets the DBRS criteria for commercial paper 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.” 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 commercial paper program limit, which is consistent with DBRS’s policy on backup liquidity support for pension plans and provides considerable short-term financial flexibility.

In 2017, OTPP continued to implement the OneTeachers’ investment strategy, focusing on total fund returns, value-added returns and volatility management.

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 2017, 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. To help mitigate the risk of its declining active-to-retired ratio, OTPP introduced conditional inflation protection in the Plan in 2010, which allows inflation protection to vary based on the financial health of the Plan. Conditional inflation protection, if fully invoked, is currently capable of absorbing an asset loss of $34 billion, as estimated by OTPP.

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 under Related Documents 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 for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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