Ontario Teachers' Pension Plan
Ontario Teachers' Pension Plan
Total Assets: $68.2 billion (2003)
NAIC: 525110 Pension Funds
The Ontario Teachers' Pension Plan (OTPP) evolved into one of the most powerful institutional investors in Canada during the 1990s. The plan serves teachers in elementary and secondary schools, pensioners, and their survivors. Forced to change to meet a rising tide of benefits, the plan has been retooled to allow for more creative investment of the teachers' retirement contributions.
Old Plan, New Design: 1917–93
A pension plan for Ontario teachers was created in 1917 and for the next 70-odd years acted as a government agency. As required by law, contributions from the teachers and matching funds from the government were put into nonnegotiable provincial bonds. The system came under stress in 1975, following the indexing of benefits to the cost of living. The level of government and teacher contributions and rate of return on nonmarketable Ontario debentures could not keep pace with inflation. The plan was running a multibillion-dollar deficit by the end of the 1980s.
An outcry for change rose up, and a committee representing the province and the Ontario Teachers Federation was formed to address the problem. They determined the best route was to convert the plan to a nonprofit private corporation and allow for flexibility in its investment options. In addition, the government would boost its level of contributions to the reconstituted organization. The Ontario Teachers' Pension Plan Board was established on December 31, 1989, replacing the Ontario Teachers' Superannuation Fund.
Chairman of the nine-member board, Gerald Bouey, asked Claude Lamoureux, former CEO of Metropolitan Life's Canadian operations, to lead the change. Trained as an actuary, Lamoureux knew how to manage benefits, but to build the assets needed to pay out future claims, he would need a team of investment specialists. He tapped Robert Bertram as chief investment officer.
The pair inherited a staff of 256 employees who primarily dispersed pension checks, according to Institutional Investor Americas. The benefits administration system was in dire need of repair and sorely lacking on the customer service end. A $10 million upgrade of information technology was set in motion. The economy in the 1990s would cooperate as well, by cooling inflation and lessening pressure on the plan's resources.
With its diversification plan in motion, the fund ventured into Canadian real estate. Given the depressed market, OTPP was on the lookout for bargains on income-producing property. In 1991 OTPP paid about $180 million for a 50 percent stake in three Cadillac Fairview Corporation Ltd. shopping centers, according to the Financial Post. The overall plan was to create a real estate portfolio totaling 5 percent to 15 percent of assets and consisting of industrial and office properties. Geographic expansion was also on tap.
As of March 31, 1991, the OTPP held $21 billion in assets: 81 percent in Ontario debentures; 5 percent in marketable bonds; and 4 percent in money market assets. An additional 10 percent of assets were evenly split between Canadian and U.S. stocks, but the pension plan had much more ambitious goals for its equity investments.
Whirlwind Ride: 1994–98
When Lamoureux and Bertram began their quest to rebuild the plan, they envisioned two-thirds of investments in equities by 1997. By early 1994, the figure had reached 44 percent and climbed to 63 percent by early 1995.
In slightly more than four years, the country's largest single pension fund had put together a staff of 45 investment professionals and plowed almost $10 million into Canadian equities. Bertram asserted, "I would argue that with $6 billion-plus in equity index funds, we probably represent over half of all index funds in Canada. Just guessing." "A change in the fund's strategy can alter the shape of an industry," wrote Gord Mclaughlin for the Financial Post.
The formerly low-profile pension fund further boosted its name recognition when it got involved in some volatile corporate power struggles. OTPP backed one brother over another for the control of McCain Food Groups Inc., in 1993. Entry into the arena of professional sports, through its investment in Maple Leaf Gardens in 1994, would involve more intrigue.
Internal workings caused public recognition of another kind. In December 1995, Lamoureux noted that the technology upgrade and related consolidation of data had revealed a shocking error rate in entitlements. Two-thirds of recipients had been either underpaid or overpaid. Small errors made over a period of decades caused part of the problem, but of greater consequence were periodic regulatory and labor related shifts. Mandates on methods and types of data collected changed over the years. In addition, plan implementation itself was subject to interpretation. To rectify the problem OTPP established an entitlement review. More than $450 million went toward compensation. Underpaid pensioners received lost benefits. Those being overpaid were not penalized with cuts. An additional $22 million was spent on the review process, according to Ivey Business Quarterly.
Lamoureux's commitment to public disclosure was evident in the handling of the entitlement crisis. More was revealed about him by the way he got to work each day. Even though OTPP's capital pool totaled $54.5 billion in March 1998, placing it among the most powerful of Canadian financial institutions, the fund's top executive rode the subway to work. Raised next to a pipe-organ factory in his hometown of Cap-dela-Madeleine, Québec, and educated at the Université de Montreal and Laval University in Quebec, his lifestyle appeared in sharp contrast to his peers in the financial industry.
"While Lamoureux doesn't act like a Bay Street power broker, the numbers say he is," wrote Sandra Rubin for the Financial Post. "With just a third of its capital, Ontario Teachers' owns about 1.5% of the $1.17 trillion in shares listed on the Toronto Stock Exchange. It's among the biggest single shareholders of BCE Inc., Royal Bank of Canada, Maple Leaf Foods, Canadian Imperial Bank of Commerce, and Bank of Montreal, with investments of more than $500 million in each."
With the plan in such solid state, the government ceased its special payments to the fund in 1998 and returned to its normal contribution level.
Power Plays: 1999–2001
The companies in which OTPP invested could expect to have Lamoureux keeping an eye on more than the bottom line. Issues of corporate governance and executive compensation topped his list of concerns. A U.S. counterpart, the California Public Employees Retirement System (Calpers), held companies to open accountability, while Lamoureux had used more low-key tactics to voice his concerns.
Corporate executives had reason to listen when Lamoureux spoke. OTPP was among a new breed of institutional power brokers. Large pension plans—such as OTPP, Caisée de depot et placement du Québec, and the Ontario Municipal Employees Retirement Board—plus an array of mutual fund managers, as a group, controlled more than half the equity value of Canada's publicly traded companies, according to Maclean's. While the new concentration of power worried some, Ontario's current and former teachers, retired teachers, and beneficiaries could rest more easily about their financial futures.
Lamoureux, Bertram, and the OTPP investment team had moved the seriously underfunded plan into a position of overfunding during the 1990s. The legacy of conservatism had been replaced by forays into private equity, emerging markets, quantitative investing, junk bonds, commodities, and real estate. In addition, Bertram, with help from Goldman, Sachs & Co., devised an end run around a government-set 20 percent limit on its foreign investment, according to Barry Rehfeld, writing for Institutional Investor Americas in 1999. "Its foreign holdings are funded for the most part through a combination of interest rate and equity swaps. Ontario Teachers first swaps the fixed coupon on its provincial nonmarketable bonds for the floatingrate interest on foreign debt; it then swaps the floating coupon for the returns of foreign indexes. Because the fund doesn't actually own the underlying foreign assets, it technically meets government guidelines." Bertram was lobbying to have the 20 percent restriction on foreign investment lifted.
This is a defined benefit plan co-sponsored by the Ontario government through the Ministry of Education, and the plan members, represented by the Ontario Teachers' Federation. The co-sponsors are equally responsible for plan gains and losses. A six-member Partners' Committee is responsible for changing benefits in the plan.
The Ontario Teachers' Pension Plan has the fiduciary duty to administer the plan and manage the investment fund in the best interests of present and future plan members and their survivors. This duty is vested in a nine-member board of directors appointed equally by the partners. Day-to-day management is delegated by the directors to a chief executive officer and his staff.
The Pension Benefits Act (Ontario) defines the fiduciary duties of all pension plan administrators in Ontario and obliges them to administer the plan and invest assets with the same prudence expected of a person dealing with another's property. The standards of conduct expected of a fiduciary are also set out in common law.
Although no more government debentures had been issued after 1998, the OTPP's last was not set to expire until 2012. The return on these assets and other fixed-income investments had yields below what was needed in relation to liabilities. To compensate for this, OTPP started buying Canadian bonds indexed to inflation, known as real bonds. On the other hand, the plan's return on its private equity investments at times was stellar. OTPP invested $9 million in Canada's Westjet Airlines in 1996. Following its public offering in 1999, the shares were worth $60 million.
Due to concerns over high-tech stocks, OTPP moved to lessen its exposure to equity holdings late in 1999. A percentage of its U.S. equities, held mainly though a Standard & Poor's 500 index fund, were the first to go, according to Pensions & Investments. Then in early 2000, OTPP moved to limit its exposure to Canada's Nortel Networks Corporation, a big player on the Toronto Stock Exchange 300 index—not a popular position at the time. Non-North American international stocks, also in index funds, hit the chopping block as well. By year-end 2000, the wisdom of the move was evident by the tumble taken by the market. In keeping with its more active investment strategy, OTPP went looking for bargains in U.S. stocks, following the September 11, 2001, market slide. Funds once earmarked for indexes also were going into private equity and infrastructure investments.
Securing the Future: 2002 and Beyond
OTPP's level of equity investments remained high and so did Lamoureux's obsession with good corporate governance. He gained some allies when he and Stephen Jarislowsky, CEO of an investment counsel managing $33 billion, established the Canadian Coalition for Good Governance. "I want this (coalition) to do what the OSC (Ontario Securities Commission) and government with its laws have not been able to do," Jarislowsky told Pensions & Investments in August 2002. "We want these companies to understand if they don't have good governance, they'll have trouble with us. If they fake figures, the accountants will have trouble with us. If companies give too many stock options, they will have trouble with us."
The need to keep on top of its investments was no less crucial in 2002 than it had been in 1990. The number of teachers contributing to the plan in relation to the number of pensioners had dropped dramatically over the past three decades. OTPP needed to maintain sufficient return to pay out future pension benefits. In addition, the public equity market of the early 21st century continued to be uncertain.
The Teachers' Merchant Bank, created in 1991 to handle private equity deals, was expected to double in size by middecade. It participated in the largest leveraged buyout in Canadian history in 2002, teaming with Kohlberg Kravis Roberts & Co., New York, for BCE Inc.'s telephone directory business. As of mid-year 2003, the merchant bank had invested in more than 100 companies and 25 private equity funds. The rate of return exceeded 25 percent per annum.
Investments in retail and office property were concentrated in North America—plans for entry into South America, Asia, and Europe had been scratched. The $11.5 billion real estate portfolio was in the hands of Cadillac Fairview Corporation Ltd., a wholly owned subsidiary since 2000.
Overall returns moved to the positive side for the first time in two years, during the first half of 2003. Net assets climbed $2 billion to $68.2 billion during the period. Asset distribution included: 50 percent in equities; 20 percent in fixed-income securities; and 30 percent in inflation-sensitive investments.
- A pension plan is created for Ontario teachers.
- Ontario teachers' benefits are linked to inflation.
- The Ontario Teachers' Pension Plan Board is created by the Ontario government.
- A new investment strategy for teachers' pension contributions is implemented.
- Teachers' Merchant Bank for private equity investments is created.
- Widespread error in entitlement distribution is revealed.
- Volatile markets lead to more active management of the public equity portfolio.
- Corporate governance is in the spotlight.
Cadillac Fairview Corporation Ltd.
Feinberg, Phyllis, "Creating a Code," Pension & Investments, August 5, 2002, p. 14.
——, "Doubling in Size," Pensions & Investments, October 14, 2002, p. 14.
——, "Goodbye to Indexing," Pensions & Investments, June 24, 2002.
——, "Prescient Move," Pensions & Investments, December 11, 2000, p. 3.
Gray, John, "Shareholder No. 1," Canadian Business, August 4, 2003.
Hayes, Victor, "A Legacy of Confusion," Ivey Business Quarterly, Autumn 1998, p. 42.
Horvitch, Sonita, "Teachers' Fund Diversifies by Buying into Malls," Financial Post, September 28, 1991, p. 23.
MacFadyen, Ken, "The Ontario Teachers' Pension Plan Looks to Be More Direct," Buyouts, August 11, 2003.
Mclaughlin, Gord, "Teachers' Fund Dared to Be Great," Financial Post, March 4, 1995, p. 4.
McMurdy, Deirdre, "Walk Softly, Carry $73 Billion," Canadian Business, June 25, 2001.
"Ontario Teachers' Pension Plan Reports Results for 2002," Canadian Corporate News, March 10, 2003.
Rehfeld, Barry, "Second City, First Rate," Institutional Investor Americas, October 1999, pp. 75+.
Rubin, Sandra, "Walk Softly, Carry a Big Stick," Financial Post, March 21, 1998, p. 8.
"The $60-Billion Investor: Claude Lamoureux," Maclean's, November 2, 1998, p. 58.
Verburg, Peter, "We Don't Need No Regulation," Canadian Business, August, 5, 2002.