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Ontario Teachers' Pension Plan
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Orezone Gold Corporation
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Playfair Mining Ltd
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Premium Exploration Inc
Royal Nickel Corporation
Silver Fields Resources Inc
Skyharbour Resources Ltd
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Threegold Resources Inc
Tinka Resources Limited
True North Gems Inc
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VMS Ventures Inc
Western Copper and Gold Corporation
Wolfden Resources Corporation
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Capstone Mining Corp
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Introduction | Key Players | Services to Members | The Challenges | Investing for Tomorrow | Responsible Investing

Introduction


A pension plan has existed for Ontario teachers since 1917. Ontario Teachers’ Pension Plan, as it became known, is a defined benefit pension plan, meaning that benefits to pensioners are known, guaranteed amounts which are calculated on the basis of service.

In 1990 a board was established for the Plan. The purpose of this board was to

  • administer the Plan,
  • pay pension benefits to members and survivors,
  • report on the Plan’s financial condition, and
  • invest contributions to the Plan with the objective of achieving a higher rate of return on investments than had been typical of public sector pension plans to that time.

Prior to that time, the Plan’s investments had been restricted to non-marketable Government of Ontario debentures. In the years since, the Ontario Teachers’ Pension Plan Board has played a pioneering role among public sector pension plan organizations by broadly diversifying the Plan’s investments, with a strong commitment to publicly-traded and private-held equities, government bonds, real estate, infrastructure, and commodities.

For the year ending December 31, 2014 the Plan had net assets of $154.5 billion, 129,000 pensioners, and 182,000 members actively accruing pension credits. In 2014 it provided approximately $5.3 billion in pension and benefit payments, including survivor pensions, and received approximately $3.2 billion in contributions from members and from the Ontario government and designated employers.


Key Players


The Ontario Teachers’ Pension Plan is sponsored by two organizations. One is the Ontario Teachers’ Federation, which represents all teachers in Ontario’s publicly-funded schools, a total of approximately 160,000 teachers. The other is the Ontario government through the Ministry of Education.

The Ontario Teachers’ Pension Plan Board is an independent organization which manages the investment of the Plan’s assets, namely the contributions the Plan receives, to earn a return which is used to pay pension benefits.

Contributions to the Plan are made first and foremost by teachers. These are members of the Ontario Teachers’ Federation working at Ontario school boards and at designated employers, which comprise private schools and other non-publicly funded organizations. In total members work at approximately 200 employers. Contributions are matched by the Ontario government and designated employers on behalf of all plan members.

The Ontario Teachers’ Federation and the Ontario government have joint responsibility for deciding what benefits the Plan will provide to retirees, the rate at which teachers, the Ontario government and designated employers will contribute to the Plan, how Plan funding shortfalls will be remedied, and how surpluses to the Plan will be used. The Ontario Teachers’ Pension Plan Board provides advice and analytical support to the two sponsors in their deliberations.


Services to Members


The Ontario Teachers’ Pension Plan Board through its Member Services Division is responsible for dealing with the Plan’s many stakeholders: teachers actively working in the profession, inactive teachers, pensioners, and school boards and designated employers.

The Board gathers vast quantities of pension-related documentation from employers, maintains member pension records, pays benefits to current pensioners, assists members in understanding their pensionable service and pensions, and provides information to members on matters such as the pension application process, pension buybacks and employment after retirement. Unlike many pension plan administrators which share the work of pension plan administration with employers, the Board provides full pension administration services to Plan members. The Board also keeps up-to-date on new pension regulations and changes to the Plan so that it can be a source of reliable information for stakeholders.

Contact with members and pensioners is through the telephone, mail, and e-mail. On the Internet, iAccess™Web is a secure website for the use of the many members who choose to access their personal pension information via that means.


The Challenges


The fundamental objective of the Ontario Teachers’ Pension Plan is not simply to pay the pensions which must be paid within a given fiscal year, but to have the ability to fund all pensions which are projected to be required for an additional 70 years, the estimated time between the date a new teacher begins to work and the date on which that teacher or her or his survivor stops collecting pension benefits.

The Plan exists in a world of dramatic demographic and economic changes which have presented it with significant challenges as it strives to achieve its objective.

One challenge is the increasing number of retirees receiving benefits from the Plan. In 2010 the ratio of working members paying into the Plan versus retirees receiving pensions was 1.5 to 1. By comparison, in 1970 this ratio was 10 to 1. Underlying this change is the demographic shift toward an older population, reflected in relatively fewer people of school age and a corresponding drop in the number of working teachers.

Another challenge is the increasing length of time spent by members in retirement versus the amount of time worked. In 2010 the typical member was retiring at the age of 59 and was drawing benefits in retirement for 30 years. By comparison, in 1970 the typical member was retiring at the age of 61 and was receiving pension benefits for 20 years.

A third challenge is the state of the markets in which the Plan’s assets are invested to earn the returns used to pay pensions. Interest rates have been relatively low for a number of years, so returns earned on the many types of investments dependent upon interest rate levels have been correspondingly low.

Rounding out the challenges is the Plan’s increasing need to protect its accumulated assets as the number of members and retirees dependent upon those assets grow in number. The level of investment risk which the Plan could take in earlier years is no longer acceptable. With the shift to a lower risk investment portfolio has inevitably come lower investment returns.

The Plan relies on its investment program to invest and earn a return on the contributions of members and government so as to pay fund benefits to pensioners. It has achieved above benchmark investment returns in many years, including the 11.8% rate of return achieved for the year ending December 31, 2014. In spite of this level of performance, investment returns generated from existing contributions may not keep up with existing benefit obligations over the Plan’s 70-year projection period, given the demographic and other changes.

The Plan sponsors undertake plan funding valuations, which they file with regulatory authorities. These funding valuations, which base themselves on a set of carefully considered actuarial assumptions, predict to what extent Plan assets will exceed or fall short of Plan obligations 70 years into the future. In 2014, after a decade of funding shortfalls, the Plan sponsors were able to file a surplus of $1.2 billion on the basis of a preliminary reported surplus of $5.1 billion. On January 1, 2015 the Plan reported a second consecutive preliminary surplus of $6.8 billion.

Credit for these surpluses can be given to both the Plan's investment program and the actions of the Plan sponsors. The Plan sponsors have made available to themselves and selectively employed a number of potential measures to bring plan assets into balance with plan obligations when assets are predicted to fall short of obligations. These measures, available for use one at a time or in combination, consist of an increase in contributions from Plan members, the government and designated employers, a decrease in pension benefits for future pensioners, or a reduction in the degree to which pensions are protected against inflation. The Plan sponsors can use these measures as necessary to strike a balance between the long-term viability and the affordability of the Plan. In recent years, inflation protection conditional upon Plan performance was the measure used to help the Plan achieve balance.


Investing for Tomorrow


Key to the Plan’s investment program is the diversification of risk, in particular as the Plan’s growing obligations decrease its tolerance for investment losses. The Plan’s assets are therefore placed in a wide variety of investments, and the Plan seeks to maximize investment returns at a level of risk which takes account of the cost and type of future pension benefits.

The Plan’s investments are divided amongst the following asset classes:


Stocks and other equities in publicly-traded businesses — Investments in this category are intended to deliver long-term growth and income. The are chosen using a bottom-up, fundamental process of analysis. With certain publicly-traded businesses or businesses intending to list on a stock exchange, the Plan has gone further by acquiring significant stakes and working with management of those businesses to improve their performance. A portion of this category's investments are intended to passively replicate equity markets in Canada, the U.S. and elsewhere.

Stocks and other equities in privately-held businesses — Through private investment arm Teachers’ Private Capital, the Plan invests in privately-held businesses or invests indirectly through private equity funds or venture capital initiatives, which in turn invest in businesses globally. Teachers' Private Capital works to add value to its portfolio's businesses by assisting in long-term business planning, ensuring good governance practices and developing talent amongst boardmembers and executives.

Fixed-income securities — This category of investments consists of government bonds, provincial bonds, corporate bonds, and real return bonds. These investments provide secure and steady income, act as a hedge against interest rate risks, and stabilize total returns.

Real assets — Assets in this category consist of real estate and infrastructure investments. The Plan’s sizeable real estate portfolio is held through its subsidiary The Cadillac Fairview Corporation Limited and consists of retail and office properties. Infrastructure investments include investments in airports, seaports, high-speed rail services, power generation and distribution, and water and wastewater treatment.

Natural resources — Natural resources assets are physical, producing assets comprising timberlands, agriculture and Canadian oil and gas investments. The category also includes commodity investments carried out through the use of derivatives.

Rounding out the Plan’s investments are absolute return strategies, broadly defined as investing to achieve a return measured in absolute numbers rather than a return measured relative to the performance of a benchmark. Externally-managed hedge funds and a number of in-house investment strategies are the main contributors to the Board’s absolute return strategies.

Funding for all of the Plan's asset classes is provided by money-market activity. In this area the investment program relies largely on derivative contracts, which efficiently provide exposure to global equity and commodity indices, and bond repurchase agreements, which allow the Plan to retain economic exposure to government bonds.

The Board gauges the success of its investment program by measuring the returns to each asset class against standard investment industry benchmarks for that asset class. Benchmarks comprise stock, bond and commodities indices and economic indices. The overall return to the investment program is likewise measured against the return to an overall benchmark.

The effect of inflation on future pensions is of great concern to the Plan, therefore a large portion of the Plan’s investments provide a return which is sensitive to inflation rates. For example, real return bonds, including debt issued primarily by the Canadian and U.S. federal governments, provide returns that are indexed to inflation. Investments in the real asset category are by their nature also linked to changes in inflation.


Responsible Investing


The size of the Plan’s investment positions in many businesses allows it to exert considerable influence over those businesses. It uses this influence to promote good governance practices, which are significant in determining the effectiveness of business management and therefore long-term investment returns. The Plan actively participates in organizations which promote improvements in the disclosure of environmental, social and governance factors and the adoption of responsible investment practices.

The Board does not target specific industries for investment on the grounds that those industries are considered more ethical than others. Rather, the Board incorporates an analysis of environmental concerns, social concerns and corporate governance considerations into its assessment of the risk involved in investing the Plan’s funds when the Board evaluates each prospective investment, regardless of its industry.


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