April 1, 2008 / 8:34 PM / 10 years ago

Ontario Teachers' fund grapples with shortfall

VANCOUVER, British Columbia (Reuters) - The Ontario Teachers’ Pension Plan, which is working to close the C$34.8 billion ($34.1 billion) purchase of BCE Inc, is reining in the investment risks it takes as it grapples with ways to fill a steep shortfall between the money it takes in versus what it pays out, it said on Tuesday.

Results for 2007 show the pension fund, Canada’s third largest with net assets of C$108.5 billion, posted a 4.5 percent return, but they also reveal a C$12.7 billion shortfall between the plan’s assets and liabilities as of January 1.

The deficit at the defined-benefit pension plan comes as it paid out double the amount of benefits to members versus the contributions it received, as the number of its active members relative to pensioners drops.

“The bottom line is that, as your plan matures, it is necessary to insulate the fund and therefore its members from market volatility,” Teachers’ Chief Executive Jim Leech said in an interview.

Pension funding shortfalls are common around the world in defined-benefit plans, where the size of members’ pensions is independent of the performance of a fund’s investment.

Asked if the BCE purchase, where Teachers’ is leading a consortium of private equity investors, fitted into the fund’s greater drive to conservatism, Leech said: “We believe our risk models adequately measure the risk of that investment.”

Teachers’ already owns C$2 billion of BCE stock and is doubling this position through the buyout transaction.

Its partners in the consortium are U.S.-based Providence Equity Partners, Madison Dearborn Partners and Merrill Lynch Global Private Equity.

Leech said some 45 percent of Teachers’ assets are invested in equities and within that only 9 percent is in private equity — the division that will house the BCE investment. “So there is lots of room to increase private equity,” he said.

One of the ways Teachers’ has strengthened its risk profile is to cut its investment in equities from 65 percent of assets in 1995 to 45 percent now. At the same time, its investments in real estate and infrastructure assets have risen sharply.

Teachers’ is also in talks with the plan’s co-sponsors, the Ontario Teachers’ Federation and the government of Ontario, to seek ways to eliminate the funding shortfall.

($1=$1.02 Canadian)

Reporting by Nicole Mordant; editing by Rob Wilson

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