Ontario Teacher's Pension Strategy

Ontario Teacher's Pension Plan Board: Hedging Foreign Currency Exposure

Ontario Teacher's Pension Plan Board: Hedge Foreign Currency Direct exposure

Issue Identification

The Ontario Teacher's Pension plan Plan (OTPP) is a described contribution plan that was developed in 1917 to provide and administer a pension arrange for Ontario school-teachers. В Sponsored by Ontario Govt and the Ontario Teacher's Federation, the plan currently supports 343, 000 professors, former instructors and pensioners. The latest government decision to eliminate the 30% constraint on foreign investments plus the increased volatility in the marketplace has motivated the OTPP Investment Panel to address this: 1 . If to continue the International Equity Swap Software 2 . Whether to administer becomes the Foreign Exchange Hedging Policy

Goals and Objectives

To be able to come to a decision, it is very important that any solution put forth need to align together with the goals and objectives of the fund. OTPP is a long-term fund determined to minimize risk, costs and the additional input required to fund the plan when maximizing it is returns.

OTPP Expense Strategy

In the early 1990's the OTPP board noticed that it was essential to begin trading abroad to diversify risk and to cash in on foreign opportunities to accomplish greater earnings, given how big is the pay for. However , it absolutely was not till 1996 the fact that Foreign Exchange Hedge Program (FX Hedge Program) was applied in response to a significant rise in currency coverage. As the fund confronted increased foreign currency risk, risikomanagement became important and thus, a hedging insurance plan of 50 percent of the foreign currency direct exposure was presented. Due to the fact that OTPP has a continual commitment in supporting its pensioners, it should expose on its own to limited risk and effectively hedge against any kind of unexpected changes in its purchases. Hence, a conservative plan of hedge 50% of foreign exchange direct exposure was enforced. Additionally , the International Fairness Swap Software (IE Change Program) was implemented as being a solution to the us government restriction of 30% control of foreign investments. Since most resources were tied up in non-marketable Ontario Debentures, a swap program empowered OTPP to reallocate their assets.

OTPP Performance Evaluation

The tactical decision to diversify further than Canada and into global markets has been proven as beneficial to the OTPP investment portfolio. They have contributed substantive value to the fund over the 10 year period (1995-2005) by simply reducing potential losses, as five with the six foreign exchange appreciated resistant to the Canadian dollars. For the past 15 years, OTPP investments have consistently outperformed the standard rate of returns, generating a 10-year average rate of return of eleven. 4% and a low return of $15. six billion more than benchmark returns. Despite the portfolio's negative price of results in 2001-2002, it has still produced considerable investment expansion in relation to the benchmark, demonstrating the strength of OTPP's investment guidelines in risikomanagement. В

However , since interest rates have rejected by approximately 3% (1990-2004), the value of the pension finance has increased. This has resulted in larger amount of payments designed to pensioners. Additionally , the demographics of the OTPP plan membership have improved significantly over the past 30 years. The ratio of active members per retiree has lowered from 15: 1 in the 1970s to the present rate of 1. 6: 1 . Moreover, the expected years pensioners rely on the pension have also increased to 29 years. All these elements have exerted a great deal of pressure on the pension plan to sustain its money with contributions from fewer working instructors. With the money market being increasingly unpredictable, OTPP is concerned regarding future ability to support pension payments.

Decision Criteria

The Expense Committee must consider this criteria once deciding whether to...

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