DBRS Confirms Ontrea Inc. at AAA

DBRS has today confirmed the ratings on the Series A Debentures and Series B Debentures (collectively, the Debentures) of Ontrea Inc. (Ontrea) at AAA, based on the unconditional guarantees provided by the Ontario Teachers’ Pension Plan Board (OTPP or the Fund), which manages the defined-benefit pension plan (the Plan) of Ontario teachers. The trends on the ratings remain Stable as net assets continue to far exceed recourse debt. The balance of the Debentures with recourse to OTPP remains unchanged at $1.2 billion in 2009 and declined to 1.24% of net assets available for benefits. In addition, DBRS believes OTPP will take the necessary measures to bring the Plan into balance over the medium to long term.

In 2009, OTPP had a strong year in terms of investment performance as global capital markets began to recover near the mid-point of the year. The Fund delivered total investment returns of 13.0%, exceeding its benchmark measure by 420 basis points (bps). This performance helped recover some of the loss experienced in 2008, when OTPP realized total investment returns of minus 18.0% (versus a benchmark return of minus 9.6%). OTPP’s performance continues to vary more than its benchmark, reinforcing the suggestion that the Fund’s risk profile may be meaningfully higher than that of the benchmark portfolio. That said, the Fund’s ten-year average return remains sound at 6.2%, or 220 bps above its benchmark, with annual returns bettering the benchmark in nine of the last ten years.

OTPP’s funding status on a financial statement basis weakened significantly to a deficit of $22.8 billion in 2009 from a deficit of $11.2 billion the previous year. This deterioration is mainly the result of a considerable increase in the value for accrued pension benefits and the continued amortization of 2008’s investment loss. Accrued benefits increased to $131.9 billion at the end of 2009 from $118.1 billion a year earlier. Almost $10 billion of this increase was due to the assumption of a lower discount rate as interest rates fell through the year. The real interest rate used to discount pension liabilities for financial statement purposes was 2.05% at December 31, 2009, versus 2.65% year over year.

In 2009, the Plan filed a statutory actuarial valuation as at January 1, 2009, with the regulatory authorities and disclosed a funding surplus of $0.8 billion. Using the assumptions prescribed by the Funding Management Policy, the estimate of the funding deficit was approximately $17.1 million as at January 1, 2010. The 2009 filing came only one year after the previous filing, providing the Plan sponsors with an additional year to consider contribution and/or benefit changes to help balance Plan assets and pension costs over the long term. A balanced funding valuation must be filed with the pension regulator at least every three years, although Plan sponsors have the option of filing earlier.

Although investment returns should improve with the economy and rates should ultimately rise from historic lows, DBRS believes OTPP can not rely on investment returns and the potential of higher discount rates alone to resolve its funding deficit. As such, DBRS expects the next actuarial valuation, due by September 30, 2012, will likely require increased contribution rates and/or reduced benefits given the maturity of the Plan. Changes to deal with the funding deficiency and support the long-term sustainability of the Plan should be consistent with the Pension Benefits Act.

Notes:
The Series A Debentures and Series B Debentures are guaranteed unconditionally by the Ontario Teachers’ Pension Plan Board (OTPP).

All figures are in Canadian dollars unless otherwise noted.

DBRS ratings on public pension funds and pension fund asset managers are primarily based on the funding status, membership fundamentals and cash flow outlook of the public pension plan or pension plan depositors, the net asset and liquidity position of the fund in relation to outstanding recourse debt, the fund’s investment track record and portfolio management strategy as well as the financial strength of plan contributors.

This is a Corporate (Public Finance) rating.