Ontario Teacher’s Pension Plan Essay

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 Equity Swap Program 2. Whether to administer changes to the Foreign Exchange Hedging Policy Goals and Objectives In order to come to a decision, it is necessary that any solution put forth must align with the goals and objectives of the fund. OTPP is a long-term fund determined to minimize risk, costs and the additional contributions required to fund the plan while maximizing its returns. OTPP Investment Strategy In the early 1990’s the OTPP board realized that it was essential to begin investing abroad to diversify risk and to capitalize on international opportunities to achieve greater returns, given the size of the fund. However, it was not until 1996 that the Foreign Exchange Hedge Program (FX Hedge Program) was implemented in response to a significant rise in currency exposure. As the fund faced increased foreign currency risk, risk management became essential and thus, a hedging policy of 50% of its foreign currency exposure was introduced. Due to the fact that OTPP has a continual commitment in supporting its pensioners, it must expose itself to limited risk and effectively hedge against any unexpected changes in its investments. Hence, a conservative policy of hedging 50% of foreign exchange exposure was enforced. Additionally, the International Equity Swap Program (IE Swap Program) was implemented as a solution to the government restriction of 30% ownership of foreign investments. Since most assets were tied up in non-marketable Ontario Debentures, a swap program enabled OTPP to reallocate its assets. OTPP Performance Evaluation The strategic decision to diversify beyond Canada and into global markets has proved to be beneficial to the OTPP investment portfolio. It has contributed substantial value to the fund over the 10 year period (1995-2005) by reducing potential losses, since five of the six foreign currencies appreciated against the Canadian dollar. For the past 15 years, OTPP investments have also consistently outperformed the benchmark rate of returns, generating a 10-year average rate of return of 11. 4% and a gross return of $15. billion over benchmark returns. Despite the portfolio’s negative rate of returns in 2001-2002, it has still produced considerable investment growth in relation to the benchmark, demonstrating the strength of OTPP’s investment policies in risk management. However, since interest rates have declined by approximately 3% (1990-2004), the value of the pension fund has increased. This has resulted in larger amount of payments made to pen sioners. Additionally, the demographics of the OTPP plan membership have changed significantly over the past 30 years. The ratio of active members per retiree has decreased from 10:1 in the 1970s to the present ratio of 1. 6:1. Moreover, the expected years retirees rely on the pension have also increased to 29 years. All these factors have exerted a great deal of pressure on the pension plan to sustain its funding with contributions from fewer working teachers. With the foreign currency market being increasingly volatile, OTPP is concerned regarding its future ability to support pension payments. Decision Criteria The Investment Committee must consider the following criteria when deciding whether to implement changes to the International Equity Swap Program and Foreign Exchange Hedging Policy: the fund’s exposure to foreign exchange risk, transaction costs, and an alignment of goals and objectives of the fund. 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. ).

Case Study Part 1 Pinnacle Essay

Cash Ratio: cash and marketable securities/ current liabilities: 6,714,156/25,926,158 =0.03 (2009) 6,369,431/17,605,301 = 0.36 (2008) 7,014,387/16,340,517 = 0.43 (2007) Current Ratio: cash +marketable securities+ net account receivables/ current liabilities: 6,714,156+9,601,883/25,926,158 = 0.63 (2009) 6,369,431+7,495,528/17,605,301 = 0.79 (2008) 7,014,387+6,901,225/16,340,517 =0.85 (2007) Current Ratio: current assets/ current liabilities: 44,497,169/25,926,158 = 1.72 (2009) 36,195,745/17,605,301 = 2.06 (2008) 36,005,390/16,340,517 = 2.20 (2007) Accounts receivable turnover: net sales/ average gross receivables: (9,601,883 + 866,330) + (7,495,528+948,679) + (6,901,225 +862,690) = 26,676,335/3 = 8,892,111.7: average gross receivables 149,245,176/8,892,111.7 = 16.79 (2009) 137,579,664/8,892,111.7 = 15.47 (2008) 125,814,272/8,892,111.7 = 14.15 (2007) Days to collect receivables: 365/accounts receivable turnover 365/16.79 = 21.74 days (2009) 365/15.47 = 23.59 days (2008) 365/14.15 = 25.80 days (2007) Inventory turnover: cost of goods sold/average inventory (28,031,323 +22,206,259 + 21,975,220) = 72,212,802 / 3 = 24,070,934: average inventory 104,807,966/24,070,934 = 4.35 (2009) 96,595,908/24,070,934 = 4.01 (2008) 88,685,361/24,070,934 = 3.68 (2007) Days to sell inventory: 365/inventory turnover 365/4.35 = 83.91 days (2009) 365/4.01 = 91.02 days (2008) 365/3.68 = 99.18 days (2007) Debt to equity: total liabilities/total equity 25,926,158/55,825,756 = 0.46 (2009) 17,605,301/52,758,726 = 0.33 (2008) 16,340,517/50,872,536 = 0.32 (2007) Times interest earned: operating income/interest expense 6,171,502/1,897,346 = 3.25 (2009) 5,998,463/2,128,905 = 2.82 (2008) 4,745,339/2,085,177 = 2.28 (2007) Earning per share: net income/average common shares outstanding 3,260,411/1,000,000 = 3.26 (2009) 2,470,557/1,000,000 = 2.47 (2008) 1,493,609/1,000,000 = .1.49 (2007) Gross profit percent: net sales –cost of goods sold/net sales (149,245,176- 104,807,966)/149,245,176 =29.77% (137,579,664 – 96,595,908)/137,579,664 =29.79% (125,814,272 – 88,685,361)/125,814,272 =29.51% Profit Margin: operating income/net sales 6,171,502/149,245,176 =0.04 5,998,463/137,579,664 =0.04 4,745,339/125,814,272 =0.04 Return on assets: income before taxes/average total assets (102,968,775 + 89,791,858 + 86,673,853)=279374486/3 =93,124,828.7: average total assets 4,274,156/93,124,828.7= 0.05 3,869,558/93,124,828.7=0.04 2,660,162/93,124,828.7=0.03 Return on common equity: income before taxes- preferred dividends/average stock holder equity (55,825,756+52,758,726+50,872,536)=189,457,018/3 =63,152,339.3: average stock holder equity (4,274,156-0)/63,152,339.3 =0.07 (3,869,558 -0)/63,152,339.3 =0.06 (2,660,162 -0) / 63,152,339.3 =0.04 B) Based on your calculations, assess the likelihood (high, medium, or low) that Pinnacle is likely to fail financially in the next 12 months. When reviewing the ratio calculations, it is apparent that the company’s likelihood of failing financially in the next 12 months is low. This is because it is apparent that the short-term debt paying ratios are down from the previous years. For example, the current ratio has decreased from the preceding year concluding that the current assets can cover the current liabilities successfully. Also looking at days to collect receivables is also lowered which presents that it takes less days for the company to collect their receivables implying that the monies owed to them are coming in more quickly. Lastly, in order for a company to succeed they need to have a good turnover rate for the inventory which is just what Pinnacle company has. The inventory turnover ratio is low indicating that it is taking fewer  days than before to sell invent ory. C and D) are on the Excel Spreadsheet labeled Pinnacle Case Study Common-Size Income Statement C) Account Balance Estimate of $ of Potential Misstatement Training37,621 Miscellaneous expenses74,791 Rent125,115 Legal Fees232,798 Miscellaneous office expenses211,874 D) Account BalanceEstimate of $ of Potential Misstatement Welburn Division: Training26,928 Depreciation880,286 Executive salaries174,362 Solar-Electro Division: Legal fees234,669 Miscellaneous office expense202,331 Machine-Tech Division: Depreciation66,596 E) Explain whether you believe the information in requirement c or d provides the most useful data for evaluating the potential for misstatements. Explain why.  I believe that the information in requirement d provides the most useful data for evaluating the potential for misstatements because you can see exactly what each division is claiming in each sub-category. When using the information in requirement c, you are getting an overview of what all the divisions have done and cannot tell which division each misstatement is coming from. Also, by using information from requirement d, the auditor has a better chance of depicting the misstatements because you are focused on one specific division instead of trying to figure out which division the misstatement might have been from. Requirement d is more informative than  using requirement c.

Benefits of promoting Stem and liberal arts education

Benefits of promoting Stem and liberal arts education In many modern societies, there has been a push in schools to emphasize the STEM fields (Science, technology, engineering and math). While there are many societal benefits such as to this educational trend, such as new technologies and scientific advancements. However, there are just as many flaws. While test scores in the sciences may look attractive, they don’t tell the whole story. To combat this growing problem, a more well-rounded style of education, such as the Liberal Arts, should be adopted. As more and more countries push the sciences, there should be an equally large push for the Liberal Arts. A more whole education is important for not only those in the STEM fields, but society a well. Today’s society is becoming more and more reliant on technology. In turn, many countries have felt the need to educate more people capable of working in these fields. For example, the Wall Street Journal recently published an article about Japan and their recent education reforms. Japan’s â€Å"goal is to transform Japans government-funded universities into either global leaders in scientific research or schools focused on vocational training† and consequently, limit the study of the humanities and Liberal Arts (Obe 2). The Japanese hope to model school’s like the California Institute of Technology and maximize their tech-ready personnel. However, in doing so, the effect on the humanities and social sciences would be immense. Culture and history would no longer be taught, and it could be lost forever. Simply studying and creating technology for the sake of doing so is not beneficial to society as a whole nor the person. Is it really necessary to put TV sc reens in our cars? What consequences would this have on society? Questions like these are why the humanities and social sciences are a necessary part of any school, college or university. A school system lacking the human aspect of life is flawed and not complete. Furthermore, countries that contain a high percentage of technologically based companies are not necessarily doing the best economically. In Fareed Zakaria’s Washington Post article, he illustrates the economical and educational differences from a nationwide view. Zakaria recognizes Sweden and Israel as countries with a large number of high tech companies who have also pushed the STEM fields. He also relates this to an internationally based study of foreign economics and technological advancements. Israel ranked first, the US second, and Sweden sixth in providing the world with technological advancements. Contrary to popular belief, this did not lead to them having high economic position. In the study, â€Å"all three countries fare surprisingly poorly in the OECD rankings. Sweden and Israel performed even worse than the United States on the 2012 assessment, landing overall at 28th and 29th, respectively, among the 34 most-developed economies† (Zakaria 7). Both Israel and Sweden have made leaps and bounds in regards to their STEM programs. Due to their focus on the sciences, their children score very well on standardized tests. While test scores and their technological production seems to look good on paper, it does not have the true desired effect on their respective societies. To effectively engage and change kids into well rounded adults, we must adopt a more liberal education. All-encompassing styles of education have been highly regarded for centuries. From the days of Plato to modern philosophers like William Cronon, the benefits of Liberal Arts have transgressed time. Cronon especially notes the benefits and helpfulness the Liberal Arts endows upon its students. His list of ten benefits are extremely relevant to modern society and the workforce. His ideas are echoed by Zakaria. Zakaria makes note that simply teaching math and science is not enough. It will not matter â€Å"how strong your math and science skills are, you still need to know how to learn, think and even write† (Zakaria 11). This speaks volumes to the Liberal Arts. It is not necessarily what you learn in college, but how you think and grow as a person by seeing more than one perspective. That is one thing STEM education may not teach you. As many countries begin to advance towards STEM, there needs to be an equally large look at the Liberal Arts. It is possible to learn a lot in a STEM field, yet it being a part of a Liberal Arts school or higher education. However, there is a difference between learning only your field, and learning about your field relative to the world around you. The real value of the Liberal Arts lies with the beholder, and what it truly means to be a complete human being.