Teachers' earns $4.7 billion in investment income, grows net assets to $108.5 billion
4.5% annual rate of return soundly beats benchmark, places plan in top quartile
Preliminary valuation $12.7 billion shortfall reflects mature plan risk aversion
Members again rate service 9/10
TORONTO: The Ontario Teachers' Pension Plan (Teachers') has again beaten its composite benchmark, earning a 4.5% annual rate of return, compared to the composite benchmark's 2.3% return. This translates into $2.3 billion in value added above benchmark and brings the fund's total value, as of December 31, 2007, to $108.5 billion.
"Diversification has always been a hallmark of our investment program, and our real estate, private equity and infrastructure assets led the way with our tactical asset allocation and absolute return strategies in producing a 4.5% total fund return, decisively outperforming the 2.3% composite benchmark," said Jim Leech, President and Chief Executive Officer. "Our Member Services division also continued to turn in stellar results in 2007," he pointed out, "achieving service quality ratings of 9 out of 10 from members, while containing costs."
Bob Bertram, Executive Vice-President, Investments said "Our $4.7 billion year-over-year gain was achieved despite the adverse impact on foreign investments of the rising Canadian dollar, negative credit market impacts of the fallout from the subprime mortgage crisis in the United States, and the collapse of Canada's market for non-bank asset-backed commercial paper. This is the eighth consecutive year in which our managers have beaten the fund's composite benchmark."
Public and private equity investments totalled $50.0 billion at year end, compared to $48.8 billion at December 31, 2006. They returned -0.1% compared to a benchmark return of -1.6%, adding $0.5 billion in value. On a four-year basis, equities generated a 12.8% compound annual return, outperforming this category's four-year benchmark by 2.1 percentage points for $2.9 billion in total value added.
Inflation-sensitive investments totaled $39.3 billion at year end, compared to $35.4 billion at December 31, 2006. They returned 7.0% compared to a benchmark return of 2.9%, adding $1.5 billion in value. On a four-year basis, they returned 11.8%, compared to the 6.1% benchmark, resulting in $6.7 billion of value added.
Fixed income assets and absolute return strategies totaled $18.7 billion at year end, compared to $21.5 billion at December 31, 2006. They returned 5.4% compared to a benchmark return of 9.6%. On a four-year basis, these assets generated a 10.0% return, outperforming the four-year benchmark by 2.2 percentage points, for $1.8 billion in total value added.
The fund's composite benchmark tracks standard indexes for Canadian and foreign markets and real rate returns for inflation sensitive assets, all in proportion to the fund's asset-mix policy.
"Notwithstanding the fund's 2007 investment growth, the preliminary funding valuation at January 1, 2008 shows a $12.7 billion shortfall between the plan's assets and liabilities," said Mr. Leech. "This highlights the continuing challenge of managing a mature plan."
He explained that the "mature" pension plan challenge can be summed up in three ratios: benefits paid out ($4.0 billion) to contributions received ($2.1 billion) is now double; future contributions to total assets has declined from 42% in 1990 to 26% in 2007; and the decline in the number of active members to pensioners has fallen to 1.6:1. "The result," he said, "is that our fund cannot afford the investment risk that it once did." As of year end, the plan's asset mix was 47% equities, 36% inflation sensitive and 17% fixed income investments. In 1995, equities comprised 65% of the fund.
"Put simply," said Mr. Leech, "a declining proportion of the plan's members now bear increasing responsibility for keeping it fully funded. All defined benefit pension plans worldwide face this challenge. Just as Teachers' became innovators in investment management and member service by necessity, we now need to help the plan's sponsors find innovative solutions to achieving intergenerational balance."
The plan's co-sponsors, the Ontario Teachers' Federation and the Government of Ontario, must file a balanced funding valuation with the regulators by September 30, 2008. Teachers' staff and board members have been working with the co-sponsors to help them identify the best solution for eliminating the shortfall.
With $108.5 billion in net assets as of December 31, 2007, the Ontario Teachers' Pension Plan is the largest single-profession pension plan in Canada. As an independent organization, it invests the pension fund's assets and administers the pensions of 278,000 active and retired teachers in Ontario.
Note to Editors: For more information on the plan's 2007 financial results and funding status, please see our annual report.
Director, Communications and Media Relations
Ontario Teachers' Pension Plan