OTPP - Ontario Teachers Defined Benefit Pension Plan

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OTPP - Ontario Teachers Defined Benefit Pension Plan

Postby George$ » 03 Apr 2008 11:34

I'm starting this thread as the OTPP 2007 Annual Report just came out.
And the nespapers have picked up on it -
Ontario Teachers' Pension Plan faces $12.7B shortfall

A 'Deficit' or 'Surplus' in a DB plan is all about assumptions about the future. Any DB plan can claim a 'deficit' OR a 'surplus' - either way - depending upon the actuarial and financial assumptions made by that plan.

Good on OTPP for only assuming a 2.95% real rate of return for their future investments (see page 17 in the 2007 annual report).
This is lower and more realistic than any other DB plan I've seen!

In general - I find the OTPP reports more informative than any other DB report I've read - and I find their issues and assumptions discussed in a helpful and transparent manner. They also have a remarkable record for being first in key investment decisions (eg, use of derivatives to circumvent the old 20% Canadian content rule, first to realize that the 4% RRB were a steal, etc )
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Re: OTPP - Ontario Teachers Defined Benefit Pension Plan

Postby WynnQuon » 03 Apr 2008 16:28

George$ wrote:Good on OTPP for only assuming a 2.95% real rate of return for their future investments


Even that might be a little aggressive. With an inflation rate of 1.8%, that's a nominal return of 4.75%.

The dividend yield of BCE at their takeover price of ~$42 is around 3.4% nominally.
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Re: OTPP - Ontario Teachers Defined Benefit Pension Plan

Postby George$ » 03 Apr 2008 17:05

WynnQuon wrote: .. Even that might be a little aggressive. With an inflation rate of 1.8%, that's a nominal return of 4.75%.

The dividend yield of BCE at their takeover price of ~$42 is around 3.4% nominally.
I agree.

On page 16 in the OTPP annual report they write:
Real rate of return assumptions are based on the yield of Government of Canada Real-Return Bonds (plus 0.5% or 1.0%) ....

With the current RRB yield of 1.69% - clearly OTPP are clearly outside their own guidelines. They should be in the range of 2.19% to 2.69%.

It is painful march back to reality for all DB pension plans - and I do think OTPP is doing more than most to face up to it.
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Postby DanH » 03 Apr 2008 17:10

IIRC, Teachers' previous target rate of return was 4.0% to 4.5% real. So, they've lowered it as prices have risen. Most others raise return targets are prices rise. :shock:
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Postby George$ » 03 Apr 2008 17:18

I think OTPP is slowly trying to get its members to realize that a fully indexed plan with a generous rule of 85 is not sustainable with the current contribution rate and low risk future return expectations.

Benefits must be reduced and or contributions increased. Otherwise they are proceeding with an inter-generalational liability transfer of many billions of dollars. I take their low assumption rate to be a sign they don't want to do that.

just my opinion
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Re: OTPP - Ontario Teachers Defined Benefit Pension Plan

Postby Nortel'd » 03 Apr 2008 20:53

George$ wrote:And the newspapers have picked up on it -
Ontario Teachers' Pension Plan faces $12.7B shortfall


Damn those newspaper articles. At first I thought the OTPP was short $12.7B for the year. The author failed to mention …

[url=http://www.otpp.com/web/website.nsf/web/funding07]How much do you need to pay pension benefits?
At the end of 2007, the plan had $108.5 billion in assets and an annual pension payroll of $4 billion. That means the plan has enough money to meet its pension payroll for many years. But pension plans are required to show, through periodic funding valuations, that they have sufficient assets to pay pensions to all current members who may be collecting benefits more than 70 years from now.

A preliminary valuation of the pension plan as of Jan. 1, 2008, shows a $12.7 billion shortfall between plan assets and liabilities, under the current Funding Management Policy. The OTF and the Ontario government, the plan's sponsors, must file the final valuation, with a plan to return it to balance, by Sept. 30, 2008. ………[/url]

Sorry for intruding into your discussion. I am a member of a DB pension plan (not OTPP) that is currently implementing funding policy that is supposed to help address my plan's current deficit situation.
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Re: OTPP - Ontario Teachers Defined Benefit Pension Plan

Postby lystgl » 03 Apr 2008 21:12

WynnQuon wrote: .. Even that might be a little aggressive. With an inflation rate of 1.8%, that's a nominal return of 4.75%.



Are you sure?
My calc = 4.67?
x-1.8=2.95/1+.018?
Then again, like Dennis Miller used to say, "I could be wrong".
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Re: OTPP - Ontario Teachers Defined Benefit Pension Plan

Postby WynnQuon » 03 Apr 2008 21:59

lystgl wrote:
WynnQuon wrote: .. Even that might be a little aggressive. With an inflation rate of 1.8%, that's a nominal return of 4.75%.



Are you sure?
My calc = 4.67?
x-1.8=2.95/1+.018?
Then again, like Dennis Miller used to say, "I could be wrong".


I could be wrong too!

But isn't nominal rate = real rate + inflation rate
i.e. real-rate = nominal rate - inflation rate.

(no need to apply a discounting factor)
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Re: OTPP - Ontario Teachers Defined Benefit Pension Plan

Postby lystgl » 04 Apr 2008 11:48

WynnQuon wrote:
lystgl wrote:
WynnQuon wrote: .. Even that might be a little aggressive. With an inflation rate of 1.8%, that's a nominal return of 4.75%.



Are you sure?
My calc = 4.67?
x-1.8=2.95/1+.018?
Then again, like Dennis Miller used to say, "I could be wrong".


I could be wrong too!

But isn't nominal rate = real rate + inflation rate
i.e. real-rate = nominal rate - inflation rate.

(no need to apply a discounting factor)


?
http://www.economica.ca/ew01_1p3.htm
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Re: OTPP - Ontario Teachers Defined Benefit Pension Plan

Postby FinEcon » 04 Apr 2008 14:14

You are correct (Fisher identity) that i = r + pi. The 'real rate' is the 'discount rate'


WynnQuon wrote:
lystgl wrote:
WynnQuon wrote: .. Even that might be a little aggressive. With an inflation rate of 1.8%, that's a nominal return of 4.75%.



Are you sure?
My calc = 4.67?
x-1.8=2.95/1+.018?
Then again, like Dennis Miller used to say, "I could be wrong".


I could be wrong too!

But isn't nominal rate = real rate + inflation rate
i.e. real-rate = nominal rate - inflation rate.

(no need to apply a discounting factor)
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Re: OTPP - Ontario Teachers Defined Benefit Pension Plan

Postby WynnQuon » 04 Apr 2008 14:25

lystgl wrote:
WynnQuon wrote:
lystgl wrote:
WynnQuon wrote: .. Even that might be a little aggressive. With an inflation rate of 1.8%, that's a nominal return of 4.75%.



Are you sure?
My calc = 4.67?
x-1.8=2.95/1+.018?
Then again, like Dennis Miller used to say, "I could be wrong".


I could be wrong too!

But isn't nominal rate = real rate + inflation rate
i.e. real-rate = nominal rate - inflation rate.

(no need to apply a discounting factor)


?
http://www.economica.ca/ew01_1p3.htm



ARGH! My brain is exploding :)

Okay, now I think you might be right that you need to apply a discount factor. But is 4.67 correct, shouldn't the final nominal rate be slightly > 4.75?
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Re: OTPP - Ontario Teachers Defined Benefit Pension Plan

Postby lystgl » 04 Apr 2008 16:40

WynnQuon wrote:[ But is 4.67 correct, shouldn't the final nominal rate be slightly > 4.75?


If you divide a number by less than 1 the result will be a higher number, no?
If you divide a number by more than 1, the result will be lower?

2.95+1.8=4.75
----------------- = 4.666
1+.018 (1.8%)

ah, what the hell, (4.67 - 4.75) close enough!(':)')

I guess that real issue is their inability to continue funding teachers' retirement going forward. And they're buying BCE? Literally putting, not all, but many eggs in one basket. Prudent?
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Re: OTPP - Ontario Teachers Defined Benefit Pension Plan

Postby WynnQuon » 04 Apr 2008 17:08

lystgl wrote:
WynnQuon wrote:[ But is 4.67 correct, shouldn't the final nominal rate be slightly > 4.75?


If you divide a number by less than 1 the result will be a higher number, no?
If you divide a number by more than 1, the result will be lower?

2.95+1.8=4.75
----------------- = 4.666
1+.018 (1.8%)

ah, what the hell, (4.67 - 4.75) close enough!(':)')


Not so fast! :) I've fried several hundred brain cells trying to figure it out with no luck. But now we have wiki to the rescue.

http://en.wikipedia.org/wiki/Fisher_equation

rn = rr + i + rr*i , rn=rate nominal; rr=real rate, i=inflation.

rn in our example would then be:

rn = .0295 + .018 + (.018*.0295)
= .04803

So, the nominal rate required is actually 4.803%?

lystgl wrote:I guess that real issue is their inability to continue funding teachers' retirement going forward. And they're buying BCE? Literally putting, not all, but many eggs in one basket. Prudent?


Clean forgot about the real issue :D ...but I agree they've boxed themselves in tightly with the BCE purchase. The only way out would be if BCE can suddenly turn into a growth company despite the saturated markets for DSL and wireless, and the boat-anchor of debt they've taken on....
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Postby Norbert Schlenker » 03 Apr 2009 10:46

Anyone looked at the OTPP 2008 report? Here's what jumped out at me.

Image

That's some underperformance in fixed income. Way bigger than my own. I feel much better now. :lol:
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Postby Bylo Selhi » 03 Apr 2009 10:58

What fixed income benchmark returned 12% last year? (DEX Universe was 6.4% which is the same return that OTPP's bond portfolio achieved.)

See also: Performance by asset class starting at p. 37.
Benchmark underperformance is largely explained by losses incurred through credit market and hedge fund exposures... Consistent with our revised strategy for the fixed income asset class, we are reducing the risk allocation and are returning to more traditional fixed income investments.
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Postby NormR » 03 Apr 2009 11:05

Norbert Schlenker wrote:Anyone looked at the OTPP 2008 report? Here's what jumped out at me.

Image

That's some underperformance in fixed income. Way bigger than my own. I feel much better now. :lol:



Highlighting 4-year returns also seems rather arbitrary/unusual to me. One wonders if the 3 & 5 year numbers weren't very good. I call shenanigans! :wink:

I also note that they changed their benchmarks in 2008. One wonders how they'd have done using the old benchmarks.
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Postby DanH » 03 Apr 2009 11:15

NormR wrote:Highlighting 4-year returns also seems rather arbitrary/unusual to me. One wonders if the 3 & 5 year numbers weren't very good. I call shenanigans! :wink:


This is a focus of the traditional investment consultant. One of the four fatal flaws of managed asset programs I have identified is the performance-driven hiring and firing of managers.

Consultants can't choose one year because it's clearly too short. But they can't choose ten years beause nobody will wait that long to find out that somebody lacks investment skill. So, four years kind of shoots in the middle and is roughly the length of the average business cycle.

There is certainly nothing magical or significant about four year rolling risk-return numbers but it's what the consulting industry (i.e. Mercer, Russell, SEI, etc.) uses. And that explains the fous on on the four year figures.
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Postby scomac » 03 Apr 2009 11:18

Norbert Schlenker wrote:That's some underperformance in fixed income. Way bigger than my own. I feel much better now. :lol:


Here's why.

We use absolute-return strategies, which are managed internally, and external hedge funds with the goal of generating positive returns regardless of movements in the broad markets. We include them in the fixed-income asset class because they normally provide steady income, similar to bonds, although with an additional risk allocation. However, these strategies were the main contributor to losses in the fixed-income asset class in 2008. We reduced our credit and hedge fund exposures in the year.


[Added] I had originally used OTPP as a sort of template for my IPS in designing an income producing portfolio that would be not only sustainable long term but one that would hedge inflation risk. That said, these guys have really ramped up the risk on their internal models IMO; hedge funds in place of fixed income, the bulk of equity exposure is now through the use of derivatives, an [s]aborted[/s] failed attempt at privatizing BCE and God knows what manner of risky private equity they may have ventured into. They don't seem much like the model for prudent and conservative investment management that they once were. :?
Last edited by scomac on 03 Apr 2009 11:28, edited 1 time in total.
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Postby DanH » 03 Apr 2009 11:18

Norbert Schlenker wrote:Anyone looked at the OTPP 2008 report? Here's what jumped out at me.

Image

That's some underperformance in fixed income. Way bigger than my own. I feel much better now. :lol:


The explanation is found in the content of what they call "Fixed Income". Let's just say it ain't your grandpa's bond portfolio. ;)
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Postby Shakespeare » 03 Apr 2009 11:24

Let's just say it ain't your grandpa's bond portfolio
Perhaps it should be - as they themselves seem to realize.
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Postby Bylo Selhi » 03 Apr 2009 11:26

DanH wrote:The explanation is found in the content of what they call "Fixed Income". Let's just say it ain't your grandpa's bond portfolio. ;)

Yabbut their benchmark, which presumably held lots of stuff that grandpa and grandma wouldn't touch, returned a whopping 12% or double the DEX Universe.

That's quite some benchmark!

(I wonder if I can buy an index fund or ETF that tracks their benchmark. (Yeah, I realize that would be returns-chasing and unlikely to end well.))
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Postby George$ » 03 Apr 2009 13:01

DanH wrote: .... The explanation is found in the content of what they call "Fixed Income". Let's just say it ain't your grandpa's bond portfolio. ;)

Dan, do you understand the details? I don't and I don't find the link that helpful. What are the details on this major hit?
They write:
We use absolute-return strategies, which are managed internally, and external hedge funds with the goal of generating positive returns regardless of movements in the broad markets. We include them in the fixed-income asset class because they normally provide steady income, similar to bonds, although with an additional risk allocation. However, these strategies were the main contributor to losses in the fixed-income asset class in 2008. We reduced our credit and hedge fund exposures in the year.
Details???? Was Madoff involved?
Last edited by George$ on 03 Apr 2009 13:02, edited 1 time in total.
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Postby brucecohen » 03 Apr 2009 13:02

NormR wrote:Highlighting 4-year returns also seems rather arbitrary/unusual to me. One wonders if the 3 & 5 year numbers weren't very good. I call shenanigans! :wink:

Four years seems to be the pension industry norm. I don't know why. It was once explained to me but I don't remember. Teachers' and others base their investment mgr comp on average return over past 4 years.
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Postby BRIAN5000 » 03 Apr 2009 16:36

They had 26.4 billion in fixed income and lost 21.1 billion of IT ?? WOW !

CMBS, CDS and other structured products worked for a while then tanked.
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Postby NormR » 03 Apr 2009 17:16

brucecohen wrote:
NormR wrote:Highlighting 4-year returns also seems rather arbitrary/unusual to me. One wonders if the 3 & 5 year numbers weren't very good. I call shenanigans! :wink:

Four years seems to be the pension industry norm. I don't know why. It was once explained to me but I don't remember. Teachers' and others base their investment mgr comp on average return over past 4 years.


Probably there's a good reason somewhere. :?

Anyway, give OTPP kudos, they have a good performance record vs. some simple benchmarks. Over 11 years, they beat a 25/25/25/25 Cdn Bond/Cdn Stock/US Stock/EAFE index portfolio. They also best a 34/33/33 Cdn Bond/Cdn Stock/US Stock index. Plus a more complicated 20/10/30/20/20 Cdn Bond/Cdn RRB/Cdn Stock/US Stock/EAFE portfolio which roughly fits their starting allocation 11 years ago.
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