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

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of the Ontario Teachers’ Pension Plan Board (OTPP or the Plan) at AAA. DBRS Morningstar also confirmed Ontario Teachers’ Finance Trust’s (OTFT) Long-Term Notes, Canadian Short-Term Promissory Notes, and U.S. Commercial Paper (CP) Notes ratings at AAA, R-1 (high), and R-1 (high), respectively. All trends remain Stable. The ratings are supported by the strong legislative and governance frameworks that create a highly captive asset base, require Plan sponsors to be responsive to deteriorations in funding status, and impose high standards of care and prudence on OTPP’s board and management. The ratings are further supported by the Plan’s fully funded status on a going-concern basis for eight consecutive years, substantial net assets and liquidity, strong investment returns, and low recourse debt burden.

OTPP achieved a net return of 8.6% in 2020, underperforming its benchmark (BM) by 210 basis points. The high return was largely driven by strong performance in fixed income, private and public equities, and a strategic investment in gold. Although most asset classes delivered strong results, the Plan's underperformance compared with its BM was primarily because of the impact of the Coronavirus Disease (COVID-19) on some investments in real estate and airports. As a result of the strong investment results, net assets rose by $13.8 billion to $221.2 billion.

Debt with recourse to OTPP rose in 2020 to $21.6 billion or 8.9% of adjusted net assets. During 2020, OTFT issued six senior unsecured notes, including an inaugural issuance of a green bond. Recourse debt remains low compared with total net assets, providing considerable room for cyclical fluctuations in asset values. DBRS Morningstar notes that OTPP continues to meet DBRS Morningstar 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.” OTPP’s 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 DBRS Morningstar’s policy on backup liquidity support for pension plans and provides considerable short-term financial flexibility.

OTPP’s primary challenge continues to be the Plan’s demographics. The ratio of active-to-retired members has continued to track lower, reaching 1.2 times (x) in 2020, and is expected to continue to fall in the future until it stabilizes at around 1.0x. The aging demographics result in growing net pension 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 the Plan in 2008, which promotes intergenerational equity by allowing retired members to share the risk of a funding shortfall along with active members.

Despite the large increase in net assets, the Plan’s deficit on a financial statement basis increased to $36.1 billion in 2020, mainly driven by a reduction in the discount rate, which increased the valuation of the pension liability. On a going-concern basis, the Ontario Teachers’ Pension Plan has been fully funded for eight consecutive years. The recent funding surpluses have enabled Plan sponsors to fully restore benefits and lower contribution rates. The Plan sponsors filed the funding valuation in 2020 and classified the $11.7 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, 2021, the Plan had a preliminary surplus of $8.5 billion. The January 1, 2021, valuation is not required to be filed with the regulatory authorities, but the Plan sponsors may elect to do so.

DBRS Morningstar expects the ratings to remain stable, given the current outlook for the Plan’s funding status.

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 March 17, 2021. For details, see “Global Macroeconomic Scenarios: March 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 methodologies are Rating Canadian Public Pension Funds & Related Exclusive Asset Managers (April 30, 2021) and North American Structured Finance Flow-Through Ratings (January 4, 2021), which can be found on 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 under Related Documents or by contacting us at info@dbrsmorningstar.com.

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 info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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