Ontario Teachers’ Pension Plan Chief Executive Officer Jim Leech said changes to inflation-protection guarantees for his plan members will allow Canada’s third-biggest pension fund to invest in higher-risk assets such as equities.
“It gives us the flexibility to take more risk, still within our very conservative risk-management framework,” Leech said. “We could, for example, raise our allocation to equities, or it could mean less reliance” on real-return bonds.
The Ontario government and the teachers’ union agreed this month to eliminate an inflation-protection guarantee paid on future benefits under the Ontario Teachers’ plan.
“Just at a time when we need great returns for this fund, we can’t really afford to put the members in jeopardy because of the guarantees,” Leech, 65, said today in a telephone interview. “You loosen the guarantees, that allows us more flexibility to take risk.”
Under the changes, inflation protection on pension plans for service accruing after 2013 will depend on the plan’s funding.
“The plan’s liabilities are very sensitive to interest rates, and the current low interest rate environment has led to a series of deficits,” according to a Feb. 7 statement. “The partners recognized the need to take action now to balance the plan’s assets and liabilities and to reduce the plan’s risk profile.”
The inflation changes allow Ontario Teachers’ to eliminate its C$9.6 billion ($9.4 billion) deficit as of the end of 2011. The Toronto-based pension fund manager, with assets of C$117 billion, will report 2012 results April 2.
“It is a significant move,” Scott MacDonald, head of pensions, insurance and sovereign wealth strategy for RBC Investor Services, said today in an interview. “It certainly does manage the liabilities of the plan with a little bit more freedom.”
Ontario Teachers’ manages the retirement funds of 300,000 active and retired teachers in Canada’s most populous province.