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 rating 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 substantial net assets and liquidity and low debt burden.

OPB earned a total return of 1.8% in 2018, equaling its benchmark, compared with 10.8% in 2017. The reduction in the total return is mainly due to significant declines in the public equity markets. OPB recorded an overall negative return in 2018 of 1.1% for public markets, consisting of a positive return of 1.9% from fixed income and a negative return of 3.5% from public equities. Investments in private markets performed better with an average overall return of 8.5% on a currency-hedged basis. Investor demand continued to propel valuations in infrastructure and private equity, resulting in returns of 14.3% and 19.5%, respectively. Notwithstanding the low return in 2018, the past five years have delivered strong investment returns of 7.0% compounded annually. Net assets increased by 0.3% to $26.6 billion as at December 31, 2018.

The Plan’s deficit increased to $1,888 million, or 6.6% of the accrued pension obligation, on a financial-statement basis. While the investment returns achieved in 2018 were still positive, they were below the 5.6% return required to maintain the Plan’s funded status, leading to a deterioration in the funding status to an estimated 93% on a going-concern basis, compared with 97% at the end of 2017. OPB decreased the discount rate to 5.6% from 5.7% in 2017 to reflect future investment return expectations and updated mortality assumptions to reflect that pensioners are living longer. The rate was maintained at the same level of 5.6% in 2018. The Plan's sponsor, the Province of Ontario (rated AA (low) with a Stable trend by DBRS), 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 increased another 0.5% in April 2019. Both increases have been matched by the employers.

The Plan continues to have a weaker demographic profile than other rated plans, with an active-to-retired membership ratio of 1.18 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 increased back to 1.18 times at the end of 2018.

Debt with recourse to the Plan reduced slightly in 2018 to $2.3 billion, or 8.0% of adjusted net assets. 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. During its first full calendar year of operation in 2018, IMCO continued the strategic shift of OPB assets from public to private markets, building its asset management and client servicing capabilities and enhancing its risk and performance reporting. 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 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 & Criteria.

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 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada