OMERS, one of Canada’s largest pension plans, has seen net assets grow to CAD60.8bn, rising by CAD5.7bn in 2012 and by over CAD17bn since the 2008 global credit crisis.
Now in its 50th year, OMERS is an active, diversified investor, pension innovator, and an engine of economic growth and employment in Ontario and Canada.
OMERS total Plan investment return of 10 per cent was driven by strong performance in its private market portfolio and solid public market performance in line with expectations and current market conditions.
“OMERS had a strong year in 2012. The CAD5.7bn increase in our net assets demonstrates the strength and robustness of OMERS business model with the capacity to generate growing investment cash yields and more than ample liquidity to withstand market shocks under stressed financial conditions,” says Michael Nobrega (pictured), OMERS president and chief executive.
OMERS private market portfolio had a 13.8 per cent investment return – with returns of 19.2 per cent (OMERS Private Equity), 16.9 per cent (Oxford Properties), 12.7 per cent (Borealis Infrastructure) and negative 10.1 per cent (OMERS Strategic Investments). OMERS Strategic Investments, which represents less than two and a half per cent of OMERS net investments, has its principal assets in Alberta’s oil and gas sector. The year-end valuation of these assets was negatively impacted as oil and gas prices fell to their lowest levels in five years.
OMERS Capital Markets, which manages the public market portfolio including public equities, fixed income and debt investments, generated a 7.5 per cent return.
In 2003 OMERS adopted its current strategic plan including an investment strategy designed to provide balance between public and private market assets and to generate long-term, stable cash flows while maintaining liquidity. The strategy has evolved to incorporate avenues for the growth of Plan assets and a “direct-drive” ownership model providing OMERS with greater control of its investments at a lower cost.
“As a pension plan we are focused on our ability to pay pensions to our members over the long term in spite of factors such as the increasing average age of Plan members, low interest rates and volatility in the public equity markets. Our strategy is continuing to evolve to provide us with a fortress-like balance sheet that enables the growth of our assets while maintaining the necessary liquidity to withstand market disruptions,” says Nobrega.
One of the key drivers of the strategic plan is OMERS asset mix. OMERS ended the year with 60 per cent of its assets in the public markets and 40 per cent in private market assets, compared with 82 per cent public and 18 per cent private before the new strategy was implemented nine years ago. Its long-term goal is to achieve a mix of approximately 53 per cent public and 47 per cent private market investments.
A second key driver is the strategic priority to directly own and actively manage investments rather than retaining external fund managers. OMERS ended the year with 88 per cent of the portfolio now managed in-house, up from 74 per cent five years ago. The long-term goal is to reach 95 per cent of the portfolio managed internally.
OMERS has a strong and growing balance sheet, currently with more than CAD60bn in net assets. In 2012, OMERS collected CAD3.2bn in contributions and paid out CAD2.7bn in benefits.
Annually the Plan makes a projection regarding its ability to pay pensions over the long-term. At the end of 2012, the total pension entitlements earned to date by all Plan members exceeded OMERS actuarial net assets by CAD10bn, resulting in a funding deficit. This projected, long-term deficit is mainly the result of increasing liabilities and the impact of investment losses incurred as a result of the 2008 global financial crisis.
In 2010 OMERS implemented a plan aimed at eliminating the deficit over time through measures that include a contribution increase phased in over three years assuming a 6.5 per cent net investment return on an annual basis.
“This deficit is based on a long-term projection going out several decades and in no way reflects our ability to pay pensions in the short term. Solid investment returns which have averaged 8.9 per cent per year in the four years since the financial crisis, and 8.24 per cent over the past 10 years, combined with contribution increases, are already having a positive impact on reducing the deficit. Sustained returns at this level could bring the Plan back to fully funded status earlier than anticipated,” says Patrick Crowley, OMERS chief financial officer.
