Morningstar DBRS Confirms Ontario Teachers' Pension Plan Board at AAA and Ontario Teachers' Finance Trust at AAA and R-1 (high), Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating of Ontario Teachers' Pension Plan Board (Ontario Teachers') at AAA. Morningstar DBRS also confirmed the credit ratings of Ontario Teachers' Finance Trust's (OTFT) Long-Term Notes at AAA and its Canadian Short-Term Promissory Notes and U.S. Commercial Paper (CP) Notes at R-1 (high). All trends remain Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings are supported by the strong legislative and governance frameworks that create a highly captive asset base, requiring Ontario Teachers' Pension Plan's (the Plan) sponsors to be responsive to any significant deterioration in the funding status and to impose high standards of care and prudence on Ontario Teachers' board and management. The credit ratings are further supported by the Plan's fully funded status on a going-concern basis for over a decade, substantial net assets and liquidity, solid long-term investment returns, and low recourse debt burden. OTFT is a wholly- owned subsidiary of Ontario Teachers', and issues debt with recourse to the plan. The credit ratings on the debt issued by OTFT are supported by the unconditional and irrevocable guarantee provided by Ontario Teachers'.

CREDIT RATING DRIVERS
Morningstar DBRS would downgrade the credit ratings if Ontario Teachers' were to experience a material adverse change in its legislated framework. The credit ratings would also be downgraded if there were a material increase in recourse debt combined with the Plan no longer being fully funded.

CREDIT RATING RATIONALE
Legislated Framework: AAA
Ontario Teachers' was established by the Teachers' Pension Act on January 1, 1990, as an arm's length pension plan from the government to exclusively manage the net contributions from members and their employers. This exclusive and indefinite legal mandate allows Ontario Teachers' to manage the contributions and pay retirement benefits for over 340,000 active and retired teachers in Ontario.

Plan Sponsors and Demographics of a Plan's Membership: AA
The Plan is jointly sponsored by the Province of Ontario (rated AA, Stable trend) and the Ontario Teachers' Federation. The Plan's demographics remain Ontario Teachers' primary challenge. The ratio of active-to-retired members stood at 1.2 times in 2024 and is expected to fall further in the near term. The aging demographics result in growing net pension payments (contributions minus benefit payments) and reduced ability to equitably offset significant investment losses through contribution increases. To help mitigate the risk of its declining active-to-retired ratio, the Plan sponsors introduced conditional inflation protection in 2008, which promotes intergenerational equity by allowing retired members to share the risk of a funding shortfall along with active members.

Management Framework: AAA
Ontario Teachers' has an extensive enterprise risk management framework aimed at ensuring the Plan meets its short- and long-term objectives. The board sets the overall direction for Ontario Teachers' risk management activities through the approval of key policies and risk-appetite statements, and by providing oversight through its various committees. Senior management has implemented systems and internal controls to meet the policy requirements and has established several committees to ensure compliance and to address issues or concerns as they arise.

Investment risk management is achieved through broad diversification of risk exposures. In practice, Ontario Teachers' uses risk budgets informed by the risk-appetite statements to allocate risk across investment departments. The Finance Division independently measures the investment risk exposure and regularly updates the Investment Committee of the board.

Financial Resources: AAA
Ontario Teachers' achieved a net return of 9.4% in 2024, underperforming its benchmark (BM) of 12.9% by 350 basis points (bps). The strong performance in public equities and credit investments were partially offset by negative returns in real estate assets, which were affected by asset-specific challenges, such as office building investments. The underperformance with respect to the BM was in part due to many asset classes being benchmarked against global stock indices that performed extremely well during the year and Ontario Teachers' relative low allocation to public equities in the asset mix. Nonetheless, investment returns outpaced distributions resulting in net assets increasing by $18.8 billion to $266.3 billion.

Funding Status: AAA
The Plan's financial statement surplus increased significantly to $53.2 billion in 2024 from $36.1 billion in 2023, driven primarily by the increase in net assets available for benefits of $18.8 billion, and offset by a net increase in accrued pension benefits of $1.8 billion. The discount rate used to value the pension liability in the financial statements is based on market rates of bonds issued by the Province of Ontario, with characteristics similar to the obligations under the Plan. On a going-concern basis, the Plan has been fully funded for 12 consecutive years. The Plan sponsors filed the funding valuation in 2024 and classified the $19.4 billion surplus as a contingency reserve, maintaining the average contribution rate at 11% and the 100% inflation protection on all pensions. As of January 1, 2025, the Plan had a preliminary surplus of $29.1 billion.

Liabilities: AAA
Debt with recourse to Ontario Teachers' rose in 2024 to $31.3 billion, or 10.5% of adjusted net assets (as calculated by Morningstar DBRS) . During 2024, OTFT issued two senior unsecured notes, in both USD and CAD. Recourse debt remains low compared with total net assets, providing considerable room for cyclical fluctuations in asset values. Morningstar DBRS notes that Ontario Teachers' continues to meet the Morningstar DBRS criteria for CP liquidity support as outlined in the appendix to the "Rating Canadian Public Pension Funds & Related Exclusive Asset Managers" methodology titled "Self-Liquidity for Canadian Public Pension Funds and Related Exclusive Asset Managers' CP Programs." Overall, Ontario Teachers' liquidity position remains sound with sufficient same-day available funds equal to at least five business days of upcoming liabilities and discounted assets equal to the remaining maximum authorized CP program limit, which is consistent with Morningstar DRBS' policy on backup liquidity support for pension plans and provides considerable short-term financial flexibility.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025) https://dbrs.morningstar.com/research/454196.

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

The principal methodology is the Rating Canadian Public Pension Funds & Related Exclusive Asset Managers (April 16, 2024) https://dbrs.morningstar.com/research/431261. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025) https://dbrs.morningstar.com/research/454196 in its consideration of ESG factors.

The following methodology has also been applied:
Morningstar DBRS Global Corporate Criteria (February 3, 2025)
https://dbrs.morningstar.com/research/447186

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at https://dbrs.morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' trends and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com.

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