Ontario Teachers' Pension Plan Board: The Asset Allocation Decision

In 1994, William Booth, a member of the management team of the Ontario Teachers' Pension Plan Board, was asked to re-examine the diversification strategy that the $30 billion fund had been pursuing since its inception and to determine an optimal long-term asset allocation policy for the fund. After inheriting a portfolio that consisted entirely of fixed-income securities in 1990, by the end of 1993, the allocation to equity was only 20% short of a 1995 interim policy target of 66%. Booth's primary task was to determine whether the shift in asset mix should stop at 66% equity in 1995, which was above the allocation to equities for the average pension plan, or whether it should continue to some higher amount (an independent consultant recommended an 80% allocation to equity). Booth knew that a higher allocation to equities would likely increase total returns over the long-term, thereby reducing the cost of funding the plan. However, equities exhibited greater volatility than bonds and a higher allocation to equities therefore created some risk that future funding costs might rise above current levels.

The case attempts to achieve the following teaching objectives:<ul><li>Understand the nature of pension fund management and identifying the various risks faced by pension funds</li><li>Understand the concept of the efficient frontier and how the various assumptions used in the analysis can affect the results</li><li> Understand the importance and effect of defining and selecting asset classes.</li></ul>

• Portfolio Management
• Assets
• Investment Analysis
• Pensions