Ontario Teacher's Pension Plan Essay

1369 Words Apr 21st, 2012 6 Pages
Ontario Teacher’s Pension Plan Board: Hedging Foreign Currency Exposure


Ontario Teacher’s Pension Plan Board: Hedging Foreign Currency Exposure

Issue Identification
The Ontario Teacher’s Pension Plan (OTPP) is a defined contribution plan that was created in 1917 to provide and administer a pension plan for Ontario school teachers. Sponsored by the Ontario Government and the Ontario Teacher’s Federation, the plan currently supports 343,000 teachers, former teachers and pensioners. The recent government decision to eliminate the 30% constraint on foreign investments and the increased volatility in the currency market has prompted the OTPP Investment Committee to address the following:
1. Whether to continue the International
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Alternative:
Although OTPP has performed well in the past, the future outlook of the pension plan remains uncertain. Therefore, OTPP has four alternatives to the future direction of the fund. OTPP can continue or discontinue the IE Swap Program and maintain or revise the current 50% FX Hedge Policy.

Continue/Discontinue the Swap Program
Previously, the swap program was used as a means to bypass the government restriction on foreign investment. With the regulation being lifted, OTPP has to now evaluate whether the swap program remains necessary. The program has allowed OTPP to reallocate their assets cost-effectively as it eliminates OTPP’s cost of transacting directly in foreign exchange market. Moreover, since OTPP does not gain ownership of the securities, it has reduced the amount of cash required and limited its risk by transferring the risk to counter-parties (UBS, Credit Suisse, JP Morgan, etc.).

However, the swap program does have it downsides. Firstly, swaps have a set maturity date and thus, needs to be reestablished periodically, which bears additional costs. In addition, the swap agreement is subject to credit risk as there is a possibility that the dealer will default. Despite this, the situation does not seem likely as the current swap dealer for OTPP are reputable banks such as Goldman Sachs and JP Morgan. In general, if OTPP decides to…

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