The Ontario Teachers Pension Plan (OTPP) followed its provincial stablemate OMERS in reporting a benchmark-beating positive return in 2022, defying the trends seen elsewhere in the sovereign investor universe.
OTPP reported an annual return of 4.0%, comfortably ahead of its 2.3% benchmark and a fraction behind OMERS which notched up a 4.2% return. The fund continues to edge towards its target of C$300 billion AUM by 2030 with net assets totalling C$247.2 billion (US$182 billion) at end-2022, up C$5.6 billion or 2.3% from end-2021. It is on course to sustain its fully-funded status that it has achieved for 10 successive years and by 2023 had a C$17.5 billion funding surplus. The 10-year annualized net return is a healthy 8.5%.
The investor attributes its positive yield to strong returns from inflation sensitive – commodities, natural resources and inflation hedge – and infrastructure asset classes, which offset the losses in public equity (-12.5%) and fixed income (-5.9%). In real assets, real estate contracted 3.5% against benchmark growth of 6.7%, but this performance was outweighed by the outperformance of infrastructure with a 18.7% gain against the benchmark growth of 15.1%. Private equity outperformed a benchmark contraction of 3.9% with growth of 6.1%. In all, the portfolio achieved a value add of C$4.4 billion.
OTPP’s buoyant performance mirrors that of OMERS, which achieved C$4.9 billion (US$3.6 billion) in investment gains. Net assets at end-2022 were C$124.2 billion (US$91.3 billion), up 2.6% from C$121 billion at end-2021. Over 10 years, OMERS has earned an average net return of 7.5% and adding C$64.4 billion to the Plan. However, it has only exceeded its benchmark by 0.1 percentage point. Unlike OTPP, OMERS is not yet fully funded and its “smoothed” funded ratio (averaging investment returns over five years) dipped from 97% at end-2021 to 95%, although it was still higher than 86% in 2012.
OMERS and OTPP beat peers such as CPP and CDPQ which reported 2022 returns of -5.0% and -5.6% respectively, mirroring the rest of the sovereign investment universe which was hit by losses on public markets and a high level of volatility in the wake of Russia’s invasion of Ukraine.
Both Ontario funds are more heavily weighted to real assets than CPP and CDPQ, which were resilient to inflation and volatility.
Jonathan Simmons, OMERS Chief Financial and Strategy Officer, said, “Our significant allocations to private investments and focus on short-term credit over long-term bonds protected OMERS from the worst period of market losses incurred by investors since the 2008 global financial crisis.”
Jo Taylor, OTPP’s President & Chief Executive Officer, stated, “Our relative investment performance in 2022 was impressive, as many public equity and fixed income indices experienced double-digit losses during the year.
While the two Ontario funds may have out-performed peers in 2022, the all-important long-term performance counts is lagging. Québec’s CDPQ reported superior annualized returns over 10 years of 8.0% and beat its benchmark by 1.0 percentage point, while the federal-level C$536 billion CPP achieved a 10-year average return of 10.0%. With long-term horizons, pension funds need to bolster multi-year yields to fully fund pensions and OMERS is under pressure to reverse the deterioration in the funded ratio and sustain strong yield performance.