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Jim Leech, CEO of the Ontario Teachers’ Pension Plan: ‘It provides us with a tool to absorb some hiccups.’Tim Fraser/The Globe and Mail

The Ontario Teachers' Pension Plan is aiming to be more aggressive in its portfolio, its CEO says, after the provincial government and teachers' union struck an unusual deal to tackle the plan's deficit.

"It lowers our risk profile quite substantially, from the board's perspective, such that we can absorb a little more risk in our investment strategy," Teachers' chief executive officer Jim Leech said in an interview Monday. That might mean, for example, new flexibility to bolster investments in emerging markets, do more private equity deals, or put more of its money into stocks.

Mr. Leech has been frustrated because, just as the pension plan needs to boost investment returns, chronic deficits over the past decade have forced it to maintain a highly conservative investment profile. That has meant restricting equities to 45 per cent of its portfolio, a lower weighting than most pension funds.

But the fund's co-sponsors, the Ontario government and the Ontario Teachers' Federation, have agreed to eliminate the guaranteed inflation protection that is paid on benefits to plan members, a move that will wipe out the plan's $9.6-billion deficit (as of Jan. 1, 2012).

The province and union have also agreed to study ways to put a permanent stop to the fund's deficits, research that will likely look at the balance between the number of years that teachers work and the number of years that they receive benefits. In 1990, teachers worked, on average, for 29 years and received retirement benefits for 25 years; by 2011, they worked for 26 years and drew pensions for 30 years. The profession skews toward women and tends to be healthy, resulting in long life expectancy.

The province and union reached the agreement to eliminate the deficit more than two weeks ago but it has remained under the public radar as Queen's Park settles back in after a leadership change. One of the main issues the province has been contending with is contract negotiations with the teachers, in the wake of a bitter dispute that erupted when former premier Dalton McGuinty prohibited teachers from striking last fall and then imposed new contracts on them early last month.

"It is difficult; teachers did take a reduction in benefits, but I think that ensures the sustainability of the pension plan and weathers the storm created by low interest rates and changing demographics," Terry Hamilton, president of the Ontario Teachers' Federation, said in an interview. "The times didn't help the situation but it shows how we continue to work effectively with the government."

Mr. Leech says the agreement is one of the most significant of its kind in the industry. "Pension plans have to evolve," he said. "Plans have to show that they can evolve to the new reality, and I think what these two sponsors have done – the government and the teachers – is shown that they can make that evolution."

Former finance minister Dwight Duncan made it clear last spring that Teachers' pension deficit would have to be tackled through benefit reductions, rather than contribution increases, since the province matches what teachers pay into the plan.

The government and union have agreed to numerous measures over the years to eliminate deficits, and the guaranteed inflation protection had already been cut from 100 per cent to 50 per cent.

But Mr. Leech says the changes should have a more permanent impact this time, characterizing this agreement as "a dramatic move." While the goal will still be to pay inflation protection, the need to do so is removed entirely.

"It provides us with a tool to absorb some hiccups, if there are any, because you can float the inflation protection up and down," Mr. Leech said, adding that the sponsors have "invoked it such that, going forward, 45 per cent will be paid until further notice." That will take effect at the start of 2015, Mr. Hamilton said.

While Teachers has not yet disclosed its 2012 annual results, Mr. Leech said it has informed the co-sponsors that, since interest rates fell further during the year, the fund is likely to report a small deficit as of the start of this year – in the neighbourhood of 97-per-cent or 98-per-cent funded, he said. "But it will be much smaller … and it is easily handled," he said.

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