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 …show more content…

Inflation and demographic risks pertain to the fund’s liabilities and these risks cannot be mitigated directly. Therefore, the assets of the fund are particularly important and any asset allocation strategy the OTPPB follows must address both the direct risks to the market value of assets and, indirectly, the risks to the liabilities of the fund. Specifically, it is clear that consecutive years of negative returns would severely damage the funds ability to meet its long-term goals.

Portfolio Selection Analysis
In 1991, a team of consultants formulated a plan to meet the goals of the OTPPB. The consultants followed a six-step procedure for determining the optimal asset allocation for the OTPPB. This procedure included identifying risks, economic variables of interest, generating an efficient set of assets, and finally making a recommendation based on both the assets and liabilities of the OTPPB. In the sequel, these procedures and their results are analyzed and critiqued. • Economic Analysis

As mentioned above, the present value of the liabilities depends heavily on the prevailing interest rate and the inflation rate. Therefore, the asset-liability simulations performed by the consultants were heavily dependent on this information. However, these economic variables are notoriously volatile and difficult to predict. For example, inflation averaged 3.14% in the United States during the years 1926-2002 (Reference 1), yet the