Friday, March 1, 2019
Ontario TeacherÃ¢â¬â¢s Pension Plan Essay
Ontario Teachers bounty Plan control panel hedgerow Foreign Currency Exposure Ontario Teachers Pension Plan Board Hedging Foreign Currency Exposure answer Identification The Ontario Teachers Pension Plan (OTPP) is a delimitate contribution blueprint that was created in 1917 to provide and administer a indemnity intention for Ontario school teachers. Sponsored by the Ontario Government and the Ontario Teachers Fede ration, the plan currently supports 343,000 teachers, former teachers and pensioners.The recent government decision to eliminate the 30% constraint on hostile investments and the increased volatility in the notes market has prompted the OTPP enthronization Committee to address the following 1. Whether to continue the internationalistic Equity Swap syllabus 2. Whether to administer changes to the Foreign Exchange Hedging insurance Goals and Objectives In order to come to a decision, it is necessary that whatever solution put forth must align with the goals and objectives of the lineage. OTPP is a long-term origin determined to minimize risk, costs and the additional contributions required to fund the plan while maximizing its restitutions.OTPP Investment St regulategy In the aboriginal 1990s the OTPP board realized that it was essential to begin investing overseas to diversify risk and to capitalize on international opportunities to achieve slap-uper returns, given the size of the fund. However, it was not until 1996 that the Foreign Exchange Hedge platform (FX Hedge Program) was implemented in response to a significant lift in currency motion picture. As the fund faced increased unusual currency risk, risk management became essential and thus, a hedging indemnity of 50% of its foreign currency exposure was introduced.Due to the fact that OTPP has a continual commitment in supporting its pensioners, it must expose itself to special risk and effectively hedge against any unexpected changes in its investments. Hence, a conservat ive policy of hedging 50% of foreign exchange exposure was enforced. Additionally, the supranational Equity Swap Program (IE Swap Program) was implemented as a solution to the government restriction of 30% ownership of foreign investments. Since most assets were tied up in non-marketable Ontario Debentures, a swap computer program enabled OTPP to reallocate its assets.OTPP Performance Evaluation The strategic decision to diversify beyond Canada and into global markets has proved to be beneficial to the OTPP investment portfolio. It has contributed substantial observe to the fund over the 10 year period (1995-2005) by decrease potential losses, since five of the six foreign currencies appreciated against the Canadian dollar. For the last(prenominal) 15 years, OTPP investments hold in also consistently outperformed the benchmark rate of returns, generating a 10-year average rate of return of 11. 4% and a gross return of $15. billion over benchmark returns. Despite the portfolios negative rate of returns in 2001-2002, it has still produced considerable investment growth in analogy to the benchmark, demonstrating the strength of OTPPs investment policies in risk management. However, since interest rate bring in declined by approximately 3% (1990-2004), the value of the pension fund has increased. This has resulted in larger amount of payments made to pensioners. Additionally, the demographics of the OTPP plan membership have changed significantly over the past 30 years.The ratio of active members per retired person has decreased from 101 in the 1970s to the present ratio of 1. 61. Moreover, the expected years retirees rely on the pension have also increased to 29 years. All these factors have exerted a great deal of pressure on the pension plan to sustain its championship with contributions from fewer working teachers. With the foreign currency market being more and more volatile, OTPP is concerned regarding its future ability to support pension payment s. Decision CriteriaThe Investment Committee must consider the following criteria when deciding whether to implement changes to the International Equity Swap Program and Foreign Exchange Hedging Policy the funds exposure to foreign exchange risk, transaction costs, and an concurrence of goals and objectives of the fund. Alternative Although OTPP has performed well in the past, the future outlook of the pension plan remains uncertain. Therefore, OTPP has four alternatives to the future direction of the fund. OTPP can continue or discontinue the IE Swap Program and maintain or decree the current 50% FX Hedge Policy.Continue/Discontinue the Swap Program Previously, the swap program was used as a means to get about the government restriction on foreign investment. With the regulation being lifted, OTPP has to now evaluate whether the swap program remains necessary. The program has allowed OTPP to reallocate their assets cost-effectively as it eliminates OTPPs cost of transacting dir ectly in foreign exchange market. Moreover, since OTPP does not gain ownership of the securities, it has reduced the amount of cash required and control its risk by transferring the risk to counter-parties (UBS, Credit Suisse, JP Morgan, etc. ).