Diversification strategy fails to avert losses: Investment return -18%; Assets down to $87.4 billion
Members rate service 9 out of 10
TORONTO - The Ontario Teachers' Pension Plan ended 2008 with assets totaling $87.4 billion, compared to its record $108.5 billion level at the end of 2007. The fund's investment return was -18% compared to its composite benchmark return of -9.6%.
"Our investment team fought hard against the downward pressure of the global credit freeze and subsequent stock, bond and real estate market crashes throughout the year; but market forces retained the upper hand at year-end," said Jim Leech, President and Chief Executive Officer. "It is small consolation to us that our results are consistent with the average of other large Canadian pension plans," he added.
The fund's 2008 returns largely reflect its exposure to equities, non-government fixed-income securities, externally managed hedge funds and real estate – diversity that has traditionally cushioned the fund in a downturn.
The current funding shortfall is $2.5 billion; however, $19.5 billion in losses have been held back in the smoothing adjustment and will be recognized over the next four years. Accordingly, the shortfall will grow unless the investment climate turns sharply positive.
The plan's Member Services division achieved quality service ratings of 9 out of 10 by members. It also tied for first place among similar pension plans internationally, and was rated Number One in North America.
Equities (public and private) were $34.9 billion as at December 31, 2008, compared to $50.0 billion at 2007 year-end. They returned –23.2% compared to a benchmark return of –26.4%, or $1.2 billion in value-add above market benchmarks.
The fund's Fixed Income asset class lost $6.7 billion, largely due to credit products, externally managed hedge funds and the Canadian dollar's decline against foreign currencies. This asset class has since adopted a more conservative fixed income asset strategy.
During the year, nominal bonds were used to fund the purchase of real return bonds (which are better matched to funding pensions) when yields spiked in response to a temporary interest rate increase. The real return bonds are recorded within the Inflation Sensitive class. As a result of this asset shift, the fund's Fixed Income portfolio was $5.3 billion as of December 31, 2008, compared to $18.7 billion at 2007 year-end; returns were –43.6% compared to a benchmark return of 12.0%.
Inflation sensitive assets grew to $44.9 billion as of December 31, 2008, compared to $39.3 billion at 2007 year-end. These assets, which include the increased investment in real return bonds, returned 0.2% compared to a benchmark return of 6.8%
This is the third time in the fund's 18-year history that it has registered a loss, but the first time in nine years that it has underperformed benchmark overall.
"Although we know we can't stop market downturns, we make every attempt to insulate the fund from these shocks when they do occur," said Neil Petroff, Executive Vice-President and Chief Investment Officer. "Our investment strategy remains defensive, but flexible enough to take advantage of market opportunities as they arise."
The fund's asset-mix policy was changed as of January 1, 2009 to 45% inflation sensitive, 40% equities and 15% fixed income. In 2008 it was 45% equities, 33% inflation sensitive and 22% fixed income.
Commenting on the year's effects, Mr. Leech said: "This fund remains a solidly built, well-diversified portfolio of high quality assets. The investment team ensured we had adequate liquidity throughout the year to pay for trade settlements and make pension payments. Although we wrote down many of our investments in light of the current economic climate, we continue to hold valuable assets and we are well-positioned for the next market cycle."
The Ontario Teachers' Pension Plan is the largest single-profession pension plan in Canada, with $87.4 billion in assets as of December 31, 2008. An independent organization, it invests the pension fund's assets and administers the pensions of 284,000 active and retired teachers in Ontario. It manages one of the largest payrolls in the country, with $4.2 billion in annual pension payments.
(Note to Editors: See 2008 performance chart, by asset class below; and, Annual Report and Results)
Director, Communications and Media Relations
Ontario Teachers' Pension Plan