The Ontario Teachers’ Pension Plan (OTPP) today announced that the fund’s net assets increased to $106 billion in 2006, compared to $96.1 billion in 2005.

The pension plan’s one-year rate of return was 13.2%, compared to its 9.4% composite benchmark.

The fund’s four-year rate of return is 15.7%, while the benchmark is 11.6%, for a four-year value added total of $12.6 billion.

OTPP’s asset mix was 46% equities, 34% inflation-sensitive (including commodities, real estate, real-return bonds and infrastructure and timber) and 20% fixed income investments as of year end.

Equities had a 20.3% rate of return in 2006, compared to a 20.0% benchmark, ending 2006 with $48.8 billion in assets compared to $45.1 billion at the end of 2005. The 2005 rate of return on equities was 17.9%. Private equity investments, which are included in this asset class, had a 26.9% one-year rate of return.

Inflation-sensitive investments earned a 7.4% rate of return in 2006, compared to a 1.6% benchmark, ending the year with $35.4 billion in assets. This compares to a 17.5% rate of return and $30.4 billion in total assets in 2005.

Fixed income investments and absolute return strategies earned a 6.1% rate of return, compared to a 1.4% benchmark in 2006. This asset class totalled $21.5 billion at the end of 2006, compared to $19.3 billion in 2005, when the rate of return was 15.3%.

The fund’s composite benchmark tracks standard indices for Canadian and foreign markets and real rate returns for inflation-sensitive assets, each in proportion to the fund’s asset-mix policy.

“This is the seventh consecutive year in which our managers have beaten the fund’s composite benchmark,” said Bob Bertram, executive vp, investments, in a news release. “Our $3.4 billion in value-added brings the five-year value-added total to $14.6 billion.”

President and CEO Claude Lamoureux explained that 2006’s results remain ahead of benchmarks, while reflecting low interest rate levels and the reduced risk the plan can afford to take. “With a rising proportion of retired to active teachers, and contributions being outpaced by benefit payments, it is simply not prudent to increase the fund’s exposure to the volatility of equity markets,” said Lamoureux. “As such, we have been removing risk from the plan for the past 10 years. Our asset-mix strategy reflects the plan’s risk tolerance.” He added that the investment team continually seeks innovative, but low risk, ways to create value.

Teachers’ has one of the largest payrolls in Canada, paying out a total of $3.8 billion in benefits in 2006. Member and government contributions totalled $1.6 billion in 2006.

On a funding basis, the plan reported a preliminary estimated shortfall of $17.4 billion as of January 1, 2007, compared to a surplus of $0.1 billion in the January 1, 2005 valuation, which was filed with regulators in June 2006. The current preliminary estimated shortfall reflects an actuarial smoothing adjustment, which holds back $11.1 billion in investment gains that will be recognized over the next four years. It also reflects the decrease in interest rate assumptions to 2.8% from 3.725% at January 1, 2005. At 3.725%, the June 2006 filing assumed a higher risk premium than that of recent years. Using that assumption would reduce this year’s preliminary shortfall to $3.6 billion.

Lamoureux noted that this difference underscores the fact that even a small change in real interest rates has a major positive impact on liabilities.

The next funding valuation, as of Jan. 1, 2008, must be filed by Sept. 30, 2008.

OTPP is an independent corporation responsible for investing the $106 billion fund and administering the pensions of Ontario’s 167,000 elementary and secondary school teachers and 104,000 retired teachers.