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

DBRS Limited (DBRS) 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 10.8% in 2017, outperforming its benchmark by 0.4%. Most asset classes performed well, with the overall result driven by strong returns from Equities. Tactical Asset Allocation further contributed to overall performance. The Real Estate portfolio detracted slightly from returns, underperforming its benchmark due to an unrealized valuation write-down from the Sears Canada bankruptcy. With the strong investment result, net assets rose by $2.1 billion to $26.5 billion.

The Plan’s deficit decreased slightly to $738 million, or 2.7% of the accrued pension obligation, on a financial statement basis, as OPB largely used strong investment experience gains in 2017 to strengthen actuarial assumptions. OPB decreased the discount rate to 5.6% from 5.7% to reflect future investment return expectations and updated mortality assumptions to reflect that pensioners are living longer. The changes in actuarial assumptions increased the accrued pension obligation by $778 million. The Plan's sponsor, the Province of Ontario, also approved a contribution rate increase based on OPB's recommendation following a long-term funding study in 2016. The contribution rate increased by 0.5% in April 2018 and will increase another 0.5% in April 2019. Both increases will be matched by the employers. The latest actuarial valuation as at the end of 2017 estimated a deficit of $777 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 1.16 times; however, this ratio has leveled off in recent years with the exception of a temporary decrease in 2016. The active-to-retired membership ratio declined to 1.10 times at the end of 2016, as a large number of members retired before changes to post-retirement insured benefits took effect in 2017. However, as expected, the decline was temporary and the ratio subsequently increased back to 1.16 times at the end of 2017.

Debt with recourse to the Plan rose in 2017 to $2.4 billion, or 8.2% of adjusted net assets, following OPB Finance Trust’s issuance of $750 million Series F Debentures in January 2017. The recourse debt ratio remains below OPB’s internal 10.0% limit on all debt and 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. In July 2017, the Investment Management Corporation of Ontario (IMCO) was launched and became operational resulting in OPB’s asset management along with its investment and investment finance functions being transferred to IMCO. OPB continues to own its assets and strategic asset mix and be responsible for its pension and guaranteed debt obligations through OPB Finance Trust. DBRS believes that the launch of IMCO and the associated benefits of asset pooling are modestly positive for OPB’s credit profile.

DBRS expects the ratings to remain stable for the foreseeable future, though 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.