Defined benefit pension plans face a “new dynamic” as the number of active members decreases and the number retirees climbs, according to the head of The Ontario Teachers’ Pension Plan.

Speaking at the CPBI Forum 2008 earlier this week, Teachers’ president and chief executive officer Jim Leech cited his own plan as an example of this new dynamic. He noted that the ratio of retired members to active members has increases substantially in recent years. In 1990, there were four active teachers for every pensioner. Today, there are 1.6 active teachers for each pensioner, said Leech.

With this shifting ratio of active-to-retirees, contributions comprise a smaller percentage of the fund’s value than ever before. “We paid out more than twice as much in pensions as we collected in contributions last year.”

This means the fund can’t afford to take the risk it once could, said Leech. “We cannot expose the fund to the volatility that comes with increased risk.” In 1995, 65% of the fund’s assets were invested in equities. Today, equities comprise only 45% of the fund’s portfolio. That reality makes it more difficult to recover from shortfalls, he said. Despite earning a rate of return of 4.5% in 2007, the fund still saw a shortfall of almost $13 billion dollars.

In order to overcome these demographic realities, Teachers’ needs to be “creative and selective” about its investment program, said Leech. “We continue to comb the world over for appropriate investments. The Canadian world simply isn’t big enough.” As such, only one-third of the fund’s equity portfolio is invested in Canada.

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As well, Leech noted that Teachers’ invested heavily in infrastructure with partners all over the world. He said infrastructure investments are a good fit for the fund, which has “the luxury” of being able to hold investments for the long term.

Leech added that the “glory days” of private equity aren’t over and that more and larger deals, will follow. Last year, Teachers’ led a consortium in a deal to acquire telecommunications giant BCE for $52 billion. “We will go to where the opportunities lead us, be we’ll go with well-considered strategies that meet our risk parameters.”

For more stories from the annual conference, click here to visit our special online section, CPBI Forum 2008.

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