Otpp Case Study Essay

3128 Words13 Pages
Case Study

Ontario Teachers’ Pension Plan
Patrick Jordan, John Schneider, David Mundorf, Alexandre Champavere, and Lezhi Huang

Table of Contents
Ontario Teachers’ Pension Plan............................... 2 Background .............................................................. 2 Risk Assessment ....................................................... 2 Portfolio Selection Analysis ...................................... 3 Optimal Asset Allocation.......................................... 4 Recommendations.................................................... 4 References ................................................................ 5 Exhibit 1.................................................................... 6 Exhibit 2
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They also affect the book value of the liabilities, which is used to calculate the current surplus or deficit of the OTPPB. This is important because the contribution rate is set according to the asset-liability gap. Changes in the inflation rate have a considerable effect on the size of the liabilities of the fund since the benefits are almost perfectly indexed to the consumer price index (CPI). An unexpected rise in inflation would lead to an immediate increase of cash outflow, but wages and thereby cash inflow would likely increase only after some delay and at a lower rate.

Interest Rate Risk

Inflation Risk

1

One-year 95% Canadian Dollar VaR of 21.43%
2

Demographic Risk and Salary Risk Currency Risk

A rise in teachers’ salaries and a considerably longer life expectancy without an equivalently longer period of employment poses a long-term risk for the fund. The future benefit payments depend on the average of the five highest annual salaries and so if salaries rise the liabilities will tend to increase more than contribution inflows. Moreover, if life expectancy increases, retired teachers receive benefits over a longer period without having contributed additional monies to the fund. Currently, a maximum of 20% of the portfolio may be invested in non-North American equities. This is necessary for diversification purposes but also poses some exchange rate risk.

Market risk,
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