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

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of the Ontario Pension Board (OPB or the Plan) at AA (high) and the rating on OPB Finance Trust’s Debentures at AA (high). All trends are 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 7.0% (net of all expenses) in 2020, compared with 10.2% in 2019. The return exceeded its benchmark of 6.5% and the discount rate of 5.25%. Total Plan performance was driven primarily by strong results in the public and private equity portfolios, while the Plan’s real estate portfolio and Canadian equities underperformed. Emerging equities and private equities had returns of 17.0% and 36.0%, respectively, improved from 14.9% and 12.9%, respectively, in the prior year. Performance of foreign developed equities and Canadian equities deteriorated in 2020 to 16.5% and 2.9%, respectively, from 20.1% and 15.6%, respectively, in 2019. In 2020, OPB introduced a new asset class, the Global Credit portfolio, which consists of a globally diversified portfolio of public and private credit securities. Investing in these assets gives OPB the ability to capitalize on market opportunities while seeking to gain exposure to a wide range of credit strategies. The Global Credit portfolio returned 12.6% in 2020, outperformed the benchmark return of 6.1%. The real estate market was hit hard by the Coronavirus Disease (COVID-19) pandemic last year. Prior to 2020, the 10-year rate of return in OPB’s real estate portfolio was 9.3%. However, in 2020, the real estate portfolio returned a negative 19.2%, which was also much lower than the 3.1% return in 2019. The past five years have delivered strong investment returns of 7.2% compounded annually. Net assets increased by 5.7% to $31.0 billion as at December 31, 2020, from last year.

Although the decline in the Government of Canada long-term bond yields was a key driver for the strong returns, it also meant the Plan’s liabilities increased significantly over the past year. The Plan’s deficit increased to $3,465 million, or 10.1% of the accrued pension obligation, on a financial statement basis. As a result of the decline in bond yields, the effective real discount rate has been lowered to 3.0% at the end of 2020. The increase in the pension liability offset the strong investment returns and resulted in the funded ratio decreasing slightly to 90%, from 92% in 2019. During 2020, contributions for all OPB members and employers, totalled $1,105 million, compared to $889 million in 2019, as a result of the increase in the special payments to $193 million (increasing to $263 million in 2021) towards the funding shortfall made by the Province of Ontario (rated AA (low) with a Stable trend by DBRS Morningstar) as the Plan’s sponsor.

The Plan continues to have a weaker demographic profile than other rated plans, with an active-to-retired membership ratio of 1.09 times (x), compared with 1.12x in 2019. The reduction is largely due to special deferred members terminating their membership in the Plan and withdrawing their commuted value. This group makes up about 70% of the approximately 600 Active Members decrease in 2020. However, OPB expects the ratio to be stable over the next few years.

Debt with recourse to the Plan increased slightly in 2020 to $2.6 billion, or 7.6% 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 will likely remain stable over the near term. OPB transferred its investment and investment finance functions to the Investment Management Corporation of Ontario (IMCO) after IMCO launched and began operations in July 2017. During IMCO’s third year of operation in 2020, it continued the strategic shift of OPB’s assets to private markets from public 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 Morningstar believes that the launch of IMCO and the associated benefits of asset pooling are modestly positive for OPB’s credit profile.

DBRS Morningstar expects the ratings to remain stable for the foreseeable future.

The rating includes additional analysis on the expected performance as a result of the global efforts to contain the coronavirus pandemic. The DBRS Morningstar Sovereigns group initially published its outlook on the coronavirus’ impact on key economic indicators for the 2020–22 time frame on April 16, 2020. The scenarios were updated on June 18, 2021. For details, see “Global Macroeconomic Scenarios: June 2021 Update” at https://www.dbrsmorningstar.com/research/375376.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Canadian Public Pension Funds & Related Exclusive Asset Managers (April 30, 2021), which can be found on www.dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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 [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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 [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577