Ontario Teachers’ Pension Plan Returns 9.7% in 2017

C$189.5 billion plan reports being fully funded for fifth straight year.

The Ontario Teachers’ Pension Plan earned a net return of 9.7% in 2017, and reported that it was 105%-funded as of the beginning of 2018, marking the fifth straight year that the pension has been fully funded.

The pension plan reported total net assets of C$189.5 billion ($148.1 billion) for the year ending Dec. 31, 2017, which is approximately a 10-fold increase since the plan’s inception in 1990.

“That we were able to achieve this funding surplus while using a prudent discount rate of 4.8%, one of the lowest in the pension industry, testifies to the financial health and sustainability of the Plan,” Ron Mock, CEO of the Ontario Teachers’ Pension Plan, said in a release. “Being in a surplus position in the plan is the true measure of success.”

The pension plan exceeded its total fund benchmark of 8.2% for the year, and net investment income was $17 billion. Equity assets returned 17.6%, outpacing the benchmark of 15.4%, and producing a $1.1 billion annual gain for the asset class. The fund’s private equity investments were its top performer, returning 18.8% for the year, well ahead of the benchmark’s return of 14.6%. The fund’s real assets returned 10.9%, compared to the benchmark of 7.1%, while its fixed-income holdings earned 2.6%, matching its benchmark.

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“This year we lowered our exposure to passive investments and moved further into active strategies where we can add value by leveraging our experience as well as our capital,” said Mock. “Our investment strategy is built to last; it guides us through the changing markets landscape.”

The fund’s five- and 10-year total net returns are 9.6% and 7.6%, respectively, and it has an annualized net return of 9.9% since inception. More than 75% of the plan’s funding comes from investment returns, with the rest coming from member and government contributions.

The Ontario Teachers’ Federation, and the Ontario government, the plan’s sponsors, said they chose to file the Jan. 1, 2017, valuation restoring 100% inflation protection on all pensions, and reducing contribution rates by 1.1% for all active members, effective Jan. 1, 2018. The sponsors also allocated $10.3 billion in surplus to a contingency reserve that would help support the pension in the event of a severe market event.

Ontario Teachers’ asset classes were redefined in 2017 from five asset classes to six: equities, fixed income, credit, inflation sensitive, real assets, and absolute return strategies.

In local currencies, the return on investments was 11.9% for 2017, up from 7.2% in the year-ago period. Converting the return back into Canadian dollars had a negative impact of 1.8% on the plan’s total fund net return which, with administrative expenses, brought the net return to 9.7%. 

“Foreign currency exposure is part of our overall portfolio construction, and we take the risk associated with currency into consideration,” said the fund. “In certain circumstances, we will take hedging measures to reduce our exposure to the currency risks which come from investing globally.”

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British Airways Closes Pension Plans

Closes one pension to future accruals and another to future contributions.

British Airways has closed two of its pension funds to future accruals and contributions, effective March 31. The airline closed its New Airways Pension Scheme (NAPS) to future accrual, and its British Airways Retirement Plan to future contributions, and has replaced them both with the British Airways Pension Plan, a defined contribution pension plan.

International Airlines Group, the parent company of British Airways, said the annual costs for British Airways Pension Plan are expected to be approximately £80 million ($112.5 million) lower than the equivalent NAPS and British Airways Retirement Plan costs were in 2017. IAG also said the most recent full actuarial valuation for NAPS will reflect the closure to future accrual.

“This is an important step in managing the risk in NAPS and ensuring the airline has an appropriate cost-base for the future,” Steve Gunning, British Airways’ chief financial officer, said in a release. “The new arrangements include a market-competitive defined contribution scheme and will stop the build-up of further liabilities and risk in NAPS. This will help to improve the security of existing benefits.”

The new plan offers a choice of contribution rates, and the ability to opt for cash instead of a pension. Following the closures, members’ deferred pensions will be increased annually by inflation up to 5% per year as measured by the CPI, which is typically lower than the previous assumption for pay growth, which included pay increases and promotions.

British Airways currently makes deficit contributions to NAPS of £300 million each year, as well as up to an additional £150 million yearly, depending on its cash balance.

As part of the closure of NAPS, the airline agreed to make certain additional transition payments to NAPS members, if the deficit had reduced more than expected at either the 2018 or 2021 valuations.

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