DBRS Confirms Cadillac Fairview Finance Trust at AAA

DBRS has today confirmed the ratings on the Series A, B, and C Debentures (the Debentures) of Cadillac Fairview Finance Trust (CFFT) at AAA, all with Stable trends. The strong ratings primarily reflect the unconditional and irrevocable guarantees provided on the outstanding Debentures by the Ontario Teachers’ Pension Plan Board (OTPP or the Fund), which manages the defined-benefit pension plan (the Plan) of teachers in Ontario. Additional support is provided by the Fund’s solid liquidity position, adept investment and risk management capabilities, and very low recourse debt level relative to its substantial asset base, although the Plan’s relatively mature demographic profile poses a concern.

In 2013, the Fund delivered a strong 10.9% investment return, exceeding its benchmark by 160 basis points. Performance was solid in nearly all asset classes, as buoyant equity markets helped offset negative fixed income returns stemming from rising long-term bond yields in the latter half of the year. The Fund’s ten-year average return remains sound at 8.9%, or 170 basis points above the benchmark. In fact, the Fund has only underperformed its benchmark in two of the past 15 years. The strong investment returns helped push net assets higher to $140.8 billion at December 31, 2013, up from $129.5 billion in the prior year, making OTPP one of the largest asset managers globally. Debt with recourse to the Fund remained unchanged at $2.6 billion in 2013, and consists solely of the outstanding Debentures. At just 1.8% of adjusted net assets, OTPP’s recourse leverage is the lowest among DBRS-rated pension plans, remains notably below the 10% internal limit, and coupled with substantial liquidity position, provides considerable financial flexibility. OTPP currently does not anticipate issuing debt in 2014.

An actuarial valuation as at January 1, 2014, revealed a $1.2 billion funding surplus, the first surplus since 2003. The Plan sponsors opted to file this valuation with the pension regulator one year ahead of the next required filing. Along with another solid investment return in 2013, and a slightly more favourable real discount rate, supporting the notable improvement in the funded position were several significant changes in plan design that have been implemented in recent years to slow the growth in pension liabilities. The improved funding position allowed the Plan’s sponsors moved to partially restore inflation protection for current retirees for service earned after 2009, at a cost of roughly $3.9 billion.

Nevertheless, DBRS notes that the Plan faces pressing demographic challenges stemming from increasing longevity of members, relatively generous early retirement provisions, and a weak active member-to-pensioner ratio, which fell to 1.4 times in 2013 and is expected to fall further to 1.3 times by 2020, thus limiting the Plan’s ability to address future funding challenges via contribution rate increases. In light of these challenges, a tripartite demographic task force consisting of OTPP and the Plan sponsors has been formed to address the imbalance between years worked and years on pension, and to mitigate intergenerational risks posed by the maturity profile. DBRS is encouraged by the strong resolve already shown by the Plan sponsors, including the introduction of conditional inflation protection and the implementation of a 1.1% special contribution rate increase (phased in over three years), which have supported an improvement in the Plan’s funded status. In light of the actions already taken on the contribution front, DBRS expects that any further changes to the plan text will likely focus on benefit reductions.

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 applicable methodologies are Canadian Public Pension Funds & Related Exclusive Asset Managers (May 2014) and DBRS Criteria: Guarantees and Other Forms of Explicit Support (July 2013), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.