Monday, February 28, 2011

OMERS Earns 12% in 2010 But Deficit Swells

Tara Perkins of the Globe and Mail reports, OMERS boosts return, funding deficit swells:
The Ontario Municipal Employees Retirement System has posted a 12.01-per-cent rate of return for 2010, up from 10.6 per cent in 2009. But its funding deficit has tripled to $4.5-billion as its pension benefit obligations have increased.

OMERS released a summary of its financial results Monday, with detailed information to follow later this month. The fund, which provides pension services to more than 400,000 people, is grappling with a shortfall in the wake of the recession.

Temporary contribution increases and benefit reductions are part of the strategy to return it to balance. It requires a 6.5-per-cent annual return to bring itself back into a surplus position in 2025.

“Based on our asset mix policy and active investment strategy, we believe we can generate average returns of 7 per cent to 11 per cent annually over the next five years,” said chief financial officer Patrick Crowley. “Doing so would return the plan to surplus between 2015 and 2020 - five to 10 years ahead of schedule.”

OMERS’ net assets rose to $53.3-billion last year, up from $47.8-billion the prior year. Its 12.01-per-cent return compares to a benchmark portfolio return of 11.47 per cent. RBC Dexia Investor Services Ltd. has estimated an 11.25-per-cent median return for large pension funds in 2010. Earlier this month, the Caisse de dépôt et placement du Québec posted a 13.6-per-cent return for the year.

OMERS is in the midst of working to shift its portfolio away from stocks and bonds towards private market investments, such as private equity, infrastructure and real estate. Its private equity portfolio delivered returns of 22.21 per cent last year (the benchmark return was 28.05 per cent). Infrastructure returned 10.10 per cent, compared to a benchmark of 8.5 per cent, while Oxford Properties returned 7.51 per cent, compared to a benchmark of 6.65 per cent.

OMERS released this press release on their website:

Today, OMERS announced its net assets rose to $53.3 billion as of December 31, 2010, up from $47.8 billion the year before. The total rate of return in 2010 was 12.01 per cent, compared to 10.6 per cent in 2009. The Plan’s growth in net assets for 2009 and 2010 combined was $9.9 billion.

“OMERS achieved excellent investment results in 2010, supporting our mission of creating surplus wealth for plan members and sponsors,” said John Sabo, Chair of the OMERS Administration Corporation Board of Directors. “Our performance, which stems from our asset mix shift to world-class private market investments, and strong market investment returns driven by the recovery of the global financial markets, reflects our focus on risk-adjusted returns, which is designed to manage volatility and respond to our long-term liability profile.” In the seven years since OMERS adopted a policy shifting its asset mix more heavily into private market investments, the Plan has earned an annualized return of 8.11% which includes the investment return of -15.3% in 2008.

Like many other pension plans, OMERS continues to face a funding shortfall caused by the 2008 global economic downturn. The Plan’s 2010 funding deficit was $4.5 billion, versus $1.5 billion a year earlier. These amounts are included in OMERS financial statements, which will be available later in the first quarter of 2011. Actuarial assumptions indicate OMERS requires an investment return of 6.5% annually to keep assets and liabilities in balance. That rate of return, combined with temporary contribution increases and benefit reductions, will see the Plan return to surplus in 2025. “Based on our asset mix policy and active investment strategy, we believe we can generate average returns of 7% to 11% annually over the next five years. Doing so would return the Plan to surplus between 2015 and 2020 – five to 10 years ahead of schedule,” said Patrick Crowley, OMERS Chief Financial Officer.

OMERS also continues to advance programs requested by various stakeholders and codified in the OMERS Act 2006 and the Plan text. The first of these programs, Additional Voluntary Contributions (AVCs), allows members to invest their registered retirement savings in the OMERS Fund, effective January 1, 2011. Other specific capital-raising programs will be launched in 2011.

OMERS was named 2010 and 2011 Global Pension Fund of the Year, Canada, by World Finance magazine. This award is based on excellence in member service, innovation, risk management and investment performance. OMERS was also named one of the country’s best employers for the third year in a row, ranking 13th on Aon Hewitt’s 2011 list of the 50 Best Employers in Canada.

For a more detailed breakdown, click here to view the fact sheet. The returns came from both public and private markets but I did notice that even though private equity returned 22.2%, it underperformed the benchmark which returned 28%. Borealis Infrastructure returned 10.1% beating its benchmark by 160 basis points while Oxford Properties and OMERS Strategic Investments marginally beat their benchmarks. OMERS Capital Markets (public markets) delivered decent returns, outperforming the benchmark by 93 basis points (the fact sheet doesn't provide further details on fixed income and public equities).

The funding deficit is serious but they're trying to address it by temporarily raising contribution rates and reducing benefits. As for assuming 7% to 11% over the next five years, I think this is achievable but it won't be easy. OMERS is betting big on private markets to achieve these returns. We'll see if they can deliver them in what will certainly prove to be treacherous markets.

Finally, Tara Perkins also reported in CTV, OMERS wants in on private pension plans:

Pension funds want Ottawa to let them in on the new private-sector retirement savings pools, allowing the funds to compete head-to-head against banks and insurers.

The desire to cater to small businesses and self-employed savers signals a shift in the way big funds operate, and comes as the country’s retirement system enters a period of massive reforms.

Some big funds want the federal government to allow more players to administer the new pooled registered pension plans (PRPPs), Michael Nobrega, chief executive officer of the Ontario Municipal Employees Retirement System told reporters in Toronto on Monday.

Federal Finance Minister Jim Flaherty signalled in December that the government will push forward with the development of PRPPs to help allay a looming retirement savings crisis. Ottawa said the PRPPs, which are designed for people without company pension plans, will be administered by “regulated financial institutions.” The institutions will essentially offer pension plans that small businesses or self-employed people can sign up for. The idea is that through regulations and new laws, governments will ensure that plan administrators charge lower management fees than are currently available.

“Right now, it’s insurance companies and the banks,” Mr. Nobrega said. “I would suspect that the federal government would be wise to include a broader range of providers other than simply the banks and insurance companies, because the pension funds do have the muscle and investment systems to do it.”

Financial institutions, and especially life insurers, lobbied for the creation of PRPPs as an alternative to expanding the Canada Pension Plan. Ottawa backed the idea because it was leery of taking more money off paycheques during the economic recovery, and did not have the necessary provincial support to expand the CPP, though it is still considering doing so.

Under the PRPP proposal, plan administrators would be responsible for receiving contributions to a plan from individuals and employers, and responding to enquiries from them.

“Consultations are still in their early stages,” Bram Sepers, a spokesman for Ted Menzies, minister of state for finance, said Monday. “As of today, no decisions have been made. Pension funds are only one of the stakeholder groups being consulted for the development of PRPP legislation.”

The establishment of PRPPs comes as a number of pension funds are seeking new avenues for profit and growth. Last month, OMERS launched “additional voluntary contributions,” a program in which its members can elect to invest additional money with the fund.

“We are seeing millions of dollars coming in,” said Jennifer Brown, OMERS’ chief pension officer. So far, close to 2,000 people have signed up for the program, she said.

The Ontario government gave OMERS the ability to provide third-party investment management services in 2009. Like other major funds, OMERS is shifting its asset mix, taking more control of its investments, and seeking ways to boost its relevance in the retirement market.

OMERS reported its 2010 financial results on Monday, showing an annual return of 12.01 per cent or $5.4-billion, up from 10.6 per cent or $4.3-billion in 2009. For the first time since the financial crisis, the fund’s assets exceeded their 2007 level, and now amount to $53.3-billion. However, its funding deficit still tripled to $4.5-billion as its pension benefit obligations have increased.

The run-up in equity markets last year is helping pension funds to recuperate. Last week the Caisse de dépôt et placement du Québec, which has been looking to offer its depositors more tailor-made investment strategies, posted a 13.6-per-cent return.

“It really was the product of a lot of things that we started doing in 2009: simplifying, taking our leverage down, getting out of complex derivatives,” Caisse CEO Michael Sabia said in an interview Monday. The pension manager was able to sell a number of assets it was looking to shed, including complex real estate debt, into a relatively strong market.

But Mr. Sabia is quick to point out that one year’s returns don’t make a trend, and he is working to position the fund for the long term. Having removed some of its key risks, the Caisse is now embarking on the second chapter of Mr. Sabia’s turnaround plan, in which it will decide what investment areas to focus on in the future.

“The business we’re in is a marathon, it’s not a sprint,” Mr. Sabia said.

Mr. Nobrega is right, PRPPs cater to banks and insurance companies but defined-benefit plans like OMERS, OTPP and the Caisse which is a fund not a plan, should also be allowed to compete in this space as they offer better products which invest in both public and private markets.

I covered the Caisse's 2010 results last week. They were exceptionally strong, returning 13.6% and beating the overall benchmark by 410 basis points (13.6% vs 9.5%). This came after two tough years which included the 2008 disaster. But as I stated last week, it's going to be tough for anyone else to beat these results. And even though OMERS performed well compared to other large Canadian pension funds, they didn't perform better than the Caisse in 2010. I doubt anyone did.

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