The Ontario Teachers’ Pension Plan (OTPP) has been a trailblazing model in pension planning since 1990. With approximately 343,000 active and retired members, it has become one of the largest public pension plans in the world. More than this, it’s one of the most successful and innovative, with plans around the globe recognizing the potential in its sustainable and responsible approach.
But what’s behind the success of the Ontario Teachers’ Pension Plan? What sets it apart from other plans, and why are they beginning to adopt the OTPP’s approach?
What is the OTPP? How Does it Work?
The OTPP is an independent pension plan that manages the pensions of teachers and educators in Ontario, Canada. It ensures that professional educators have financial security in their retirement by investing contributions across a range of asset classes.
The OTPP is, specifically, a defined benefit pension plan. Unlike a defined contribution plan, teachers are guaranteed benefits based on a formula including factors like their salary and their years of service. Both the employer and employee contribute to ensure payment of the employee’s benefits. As benefits are guaranteed, the plan must consistently meet its investment targets. To ensure this, its investment plan emphasises long-term sustainability as well as diligent risk-adjustment.
At a total portfolio level, according to the OTPP website, the plan’s strategic asset allocation process always incorporates risks and opportunities related to sustainability issues, such as climate change. At an investment level, they promise due diligence, taking into account the nature of each investment, the ownership stake and size of the investment, and details specific to the transaction. Post-investment, the OTPP is pro-active in managing investment-specific risks, assessing their overall sustainability as part of a long-term model.
The Origins of the OTPP’s Success
In the 1980s, the Ontario government introduced a number of reforms to modernize its financial sustainability and efficiency measures. At the same time, concerns emerged across North America over the long-term viability of public pension plans, an issue we recently covered in regard to an aging population and increased life expectancy in the US.
Ontario, like the rest of North America, had to figure out how to meet the growing financial demands of retirees alongside this decrease in long-term viability.
Significantly, these reforms led to the creation of independent pension funds. In 1990, the OTPP was restructured so that it would oversee the investment and administration of its pension funds, independent of Ontario’s government. The plan reformed itself to start running like a business, instead of a government agency.
Some significant appointments from the outset helped this transition. In particular, the appointment of Gerald Bouey as the first Board Chair of the OTPP provided a boost. Bouey was previously a well-regarded governor of the Bank of Canada, who had worked to guide the country through inflationary difficulties in the 1980s.
The plan then appointed an actuary and insurance executive, Claude Lamourex, to help its transition towards running like a business. Alongside Lamourex and Bouey, the plan hired a number of executives with high levels of experience in asset management and investing, in a number of different roles.
From the outset, the OTPP was the product of a significant society-wide reform in Canada. Ontario took these reforms seriously. Taking advantage of the opportunity, the OTPP hired executives with high levels of experience who could assist in its transition towards greater efficiency and better returns. In turn, a lasting and more efficient organisation emerged.
What Makes the OTPP Different From Other Pension Plans?
The OTPP uses active management, private equity investments, and a long-term, sustainable approach to investing that sets it apart from traditional pension funds, which are more passive.
Before 1990, pension plans would usually only invest in government bonds or blue-chip stocks, which are considered safe and stable but provide lower returns. The OTPP model introduced modern diversification and risk management strategies to increase returns without foregoing safety.
Like other pension plans, the OTPP had only invested in government bonds. In 1991, the Plan started to invest in private equity and infrastructure, which was a new concept for a pension plan. But it was only the beginning of a wider diversification across numerous asset classes, which would become a key feature of its model.
By 1995, the plan became the largest shareholder in Cadillac Fairview, a real estate subsidiary. It showed the plan’s newfound dedication, since its reform, to high yield investments, as a well as a financial savviness that had not been seen in public pension planning before. Its success showed how pension plans could be both smart and safe when it came to investing.
Today, the OTPP invests broadly across fixed income, public and private equity markets, real estate, infrastructure, natural resources, and credit. On top of this, the OTPP invests in venture capital through the Teachers’ Venture Growth (TVG), an investment initiative launched in 2019. The initiative was launched specifically for venture capital investments in innovative and high growth technology companies.
Recently, however, the plan has started to look at mitigating risks by shifting its focus towards partnerships, rather than direct ownership of firms.
What are the Advantages of an OTPP Pension?
The OTPP’s defined benefit model provides stable, predictable growth focused on long-term sustainability.
The defined benefit plan guarantees a predetermined pension, making it easier for teachers to plan their retirement. For as long as they live, they’ll receive a defined, guaranteed pension, rather than relying on the savings accumulated from their contributions.
Additionally, a defined benefit plan is lower risk for employees. In a direct contribution plan, employees’ contributions will diminish in the case of poor performance. In contrast, defined benefit plans guarantee a pre-defined income. If the fund underperforms, it has to bear the cost of this performance itself.
OTPP is also a particularly well performing pension plan, seeing impressive gains of 9.4% in 2024. Unlike other plans, experienced professionals focused on active management and risk adjustment manage OTTP pensions. As part of it’s long-term plan, it’s subject to regular actuarial assessments to ensure it can meet all its benefit payments. And the plan has an inspiring historical record of successfully diversifying and adjusting for risks, regularly increasing returns each year.
What are the Potential Downsides?
A potential problem for the teachers’ pensions is that they depend on investment returns, which can be subject to external shocks. Case in point: this week’s stock market crash in the wake of Trump’s tariffs. While diversification can hedge the risks associated with investing, investors can’t always foresee economic crises before they happen. And when they do, they serve a big hit across all asset classes.
While this would also affect a pension in, for example, government bonds and blue-chip stocks, these would still be safer than even a diversified portfolio in the case of a crisis.
Fortunately for teachers, if investments underperform the long-term financial cost lies with the plan and the employer. In other words, their pre-defined income will remain guaranteed. But the employer may need to increase their employee’s regular contributions in order to make up for the shortfall, leaving them with less cash in the short-term.
Additionally, despite impressive returns, the OTPP’s record isn’t entirely clean. The plan is currently facing a class action lawsuit over a misguided venture into crypto, losing US$95 million after FTX went bankrupt.
Ultimately, sustainability is the biggest issue for the teachers’ plan. If over a long period of time it fails to meet its targets, it could be forced to make troublesome adjustments either to its investment strategy, contributions, or as a last resort, the pensions it pays out. This is unlikely, however, and adjustments to benefits would be subject to oversight by regulatory bodies.
A Model for the Future
The OTPP’s success lies in combining the security of a defined benefit plan with sophisticated and sustainable investment strategies. It’s investment model based on a long-term vision and active management of investments, in conjunction with its diverse portfolio, has seen its impressive returns growing year upon year.
According to a report by the IMF, the growth of the pension industry, including the emergence of major players like the OTPP, can contribute to a national financial stability.
There are some risks associated with the markets on which its beneficiaries rely, and concerns related to the diligence of the OTPP following its Bitcoin investment. But it’s overall returns show that it’s an exemplary model for pension funds grappling with the same issues, as well as the ultimate problem in retirement planning: sustainability.
Author: Sean Maguire
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