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 Plan’s substantial net assets and liquidity and low debt burden further support the ratings.

OPB earned a total return of 9.4% (net of all expenses) in 2021, compared with 7.0% in 2020. The return exceeded its benchmark of 7.8% and the discount rate of 4.73%. Total Plan performance was driven primarily by strong results in the Canadian and global equities as well as private equities, while the Plan’s fixed income portfolio and infrastructure underperformed. Canadian equities and foreign developed equities had returns of 25.0% and 21.5%, respectively, improving from 2.9% and 16.5%, respectively, in the prior year. The performance of emerging equities deteriorated in 2021 to 0.3% from 17.0% in 2020. The real estate market was hit hard by the Coronavirus Disease (COVID-19) pandemic in 2020, but rebounded partly in 2021. The return in the real estate portfolio was 12.9% in 2021, compared with -19.2% in 2020. Infrastructure had a return of 12.4% in 2021, which underperformed the benchmark of 21.7%. Global credit was introduced in 2020 and had a return of 5.7%, outperforming the benchmark of 1.4%. The past five years have delivered strong investment returns of 7.6% compounded annually. As a result of the positive investment returns, net assets rose by 9.1% to $33.8 billion as at December 31, 2021, from the prior year. OPB approved the new Strategic Asset Allocation (SAA) in April 2021 to be phased in gradually over the following four years. Portfolio leverage is introduced to the new SAA to reduce volatility and improve risk-adjusted returns.

Although the increase in the Government of Canada’s (rated AAA with a Stable trend by DBRS Morningstar) long-term bond yields resulted in a negative return on the fixed income portfolio, it helped to improve the Plan’s funded status to approximately 94% at the end of 2021 from 90% in 2020. On a financial statement basis, the Plan’s deficit decreased to $852 million, or 2.5% of the accrued pension obligation. As a result of the increase in bond yields, the effective real discount rate increased to 3.25% at the end of 2021. During 2021, contributions for all OPB members and employers totalled $1,496 million, compared with $1,105 million in 2020. During 2021, the Province of Ontario (rated AA (low) with a Stable trend by DBRS Morningstar), as the Plan’s sponsor, continued to make special payments toward the funding shortfall and also made an additional contribution of $385 million related to the Retirement Compensation Arrangement Trust Fund.

The Plan continues to have a weaker demographic profile than other rated plans, with an active-to-retired membership ratio of 1.12 times (x), compared with 1.09x in 2020. The increase was the result of more than 300 new members joining the Plan from the consolidation of the Agricorp Pension Plan into the Plan, plus an overall increase in the active population of the Ontario public service.

Debt with recourse to the Plan decreased slightly in 2021 to $2.4 billion, or 6.7% of adjusted net assets. The recourse debt ratio 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 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 fourth year of operation in 2021, 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.

ESG CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929.

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

The principal methodology is Rating Canadian Public Pension Funds & Related Exclusive Asset Managers (April 26, 2022), which can be found on www.dbrsmorningstar.com under Methodologies & Criteria.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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].

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