The Case For Change at OMERS?

A reader of my blog and member of OMERS sent me an email he received from OMERS Sponsors Corporation announcing proposed Plan options for consultation:
Last month, we sent a special bulletin to members announcing important updates on the Comprehensive Plan Review, including revised timelines. In this latest edition, we’re sharing the results of the June Sponsors Corporation (SC) Board meeting, including the Plan change proposals and next steps.

  • Despite recent gains, the OMERS Plan remains financially vulnerable to longer-term pressures beyond our immediate control
  • Extensive modelling shows that the cost of the Plan will continue to increase over time – substantially under some circumstances
  • Possible Plan options are being considered to help stabilize Plan costs, reduce long-term funding risk, and introduce an important level of equity across generations
  • Changes (if any) are unlikely to take effect before January 1, 2021
  • No impact on pension benefits accrued (earned) before the effective date of any change
  • No impact on current retirees or members who retire before the effective date
  • SAVE THE DATE: Member webcasts starting next month on August 14 and 16
  • New e-alerts: Sign up to get notifications on all the latest updates
  • New SC Facebook page – coming soon
The case for change

Change is seldom easy, but it is often necessary – in the best interests of our members. Despite recent investment success, the OMERS Plan remains financially vulnerable to longer-term pressures. Consider the facts:
  • The Plan has not yet recovered fully from the 2008 financial crisis. As at December 31, 2017, the Plan was 94% funded and had a deficit of more than $5 billion on a smoothed basis.
  • We have the highest discount rate among our peer plans, which means that we are allocating more risk to future generations.
  • Investment markets are challenging in 2018, and OMERS is not immune to investment market pressures. The Plan needs to generate about $6 billion in investment earnings each year just to maintain its funding at current levels.
  • In 2017, the Plan collected $4 billion in contributions from members and employers, and paid out $4 billion in pensions. Going forward, the Plan will pay out more than it collects, creating a negative cash flow.
  • Enhancements to the Canada Pension Plan (CPP) will increase both benefit and contribution levels for OMERS members and employers, beginning in 2019.
  • Like all major pension plans, we also face a number of financial realities that are beyond our immediate control. These include a steadily maturing plan, longer life expectancy, changing demographic and workplace trends, and an increasingly uncertain economic environment.
Collectively, these factors will increase the cost of the Plan over time – substantially under some circumstances. This means higher contributions for members and employers, reduced benefits, or some combination of the two.

That’s where the Comprehensive Plan Review comes in. The primary objective is simply to ensure that the OMERS Plan remains sustainable, meaningful and affordable for generations to come. It’s about protecting the Plan’s long-term future – and the essential benefits it provides.

Summary of proposed Plan options

Following an intense eight-month review – including regular discussions with sponsors and other stakeholders – the SC Board has identified the following potential Plan options for further consideration and consultation:

  1. Replace guaranteed indexing with conditional indexing for future pensions
  2. Integrate the pension formula with the new “Year’s Additional Maximum Pensionable Earnings” (YAMPE), introduced as part of the enhanced Canada Pension Plan (CPP)
  3. Update the criteria for early retirement subsidies
  4. Eliminate the current 35-year cap for credited service
  5. Make participation for non-full-time employees mandatory, with possible opt-out
  6. Allow paramedics to negotiate NRA 60 participation

Click any of the links above to learn more about each of the proposed Plan options.

Key things to consider

As you consider the options, there are a few essential things to keep in mind:
  • No changes have been confirmed at this point. The SC Board will vote on final changes in November, following broader consultation. As always, Plan changes require a two-thirds affirmative vote by the SC Board, and are unlikely to take effect before January 1, 2021.
  • If the SC Board approves any of the proposed options in November, the approved changes will apply only to benefits accrued (earned) after the effective date of the change. The current rules will apply to all benefits earned before the effective date.
  • Any changes will have no impact on current retirees or members who retire before the effective date. In no case will benefits earned before the effective date be reduced.
As always, we encourage you to review these materials carefully. If you have any questions, check out our Frequently Asked Questions. If you have a question you can’t find an answer to, send an email to

SAVE THE DATE: Upcoming webcasts

Between now and the SC Board meeting in November, we will be hosting a series of informational webcasts on the proposed Plan options. The first two sessions will be on August 14 and 16.

This is your opportunity to hear about the Comprehensive Plan Review first-hand. Sign-up details will be posted on our website later this month.

While registration may be limited, there will be a number of webcasts happening over the next few months, and more opportunities to sign up for a future session. As always, you can continue to share your thoughts and questions by sending an email to

Keeping you informed

The SC website is your central information source for regular updates on the Comprehensive Plan Review. This site will be updated with our latest resources, including videos, newsletters and answers to member questions. Please visit and check back from time to time for the latest news.

*New* Sign up for e-alerts

If you’d like to get an email notification on updates we post on the site, sign up for e-alerts by clicking here.

Let me begin this comment by thanking the member of OMERS who forwarded this email to me.

Second, I think it's important everyone reads about the Comprehensive Plan Review here.

It was almost a month ago where I discussed why OMERS is reviewing its indexing policy, noting the following:
So who is right, the Canadian Union of Public Employees union or the CEO of OMERS's Sponsors Corporation when it comes to conditional inflation protection?

Let me unequivocally, emphatically state that Paul Harrietha is spot on and it's about time CUPE stop demanding guaranteed inflation protection and allow OMERS to adopt conditional inflation protection.

The two best pension plans in the country, Ontario Teachers' and HOOPP, both adopted conditional inflation protection.

Go read my comment on making OTPP young again where I stated:

What's crucially important to understand is that not only does conditional inflation protection (CIP) address intergenerational risk sharing, it also allows the plan to breathe a little easier if they do experience a severe loss and run into problems in the future.

In effect, as more teachers retire, if the plan runs into trouble and experiences a deficit, CIP allows them to slightly adjust benefits (remove full indexation for a period) until the plan's funded status is fully restored again.

Because there will be more retired relative to active teachers, they will be able to easily shoulder small adjustments to their benefits for a period to restore the plan back to fully funded status.

This isn't rocket science. The Healthcare of Ontario Pension Plan does the same thing and so do other Ontario pension plans like the Ontario Pension Board and CAAT Pension Plan which recently hit 118% funded status, putting it right behind HOOPP in terms of the best funded Canadian plan.

Importantly, while all these plans have different maturities and demographics, they've all adopted a sensible shared-risk model which is fair to all members of their plan, active and retired members, and it ensures the sustainability of their plan for many more years.
As of now, only two large Canadian pension plans offer guaranteed as opposed to conditional inflation protection, OMERS and OPTrust.

OPTrust is fully funded but to address the challenges it has ahead to maintain guaranteed inflation protection without burdening current workers, it's looking at an innovative new pension initiative which will launch a new defined benefit plan for employers in the broader public sector, charitable and not-for-profit industries.

In other words, it's looking to increase assets under management to maintain guaranteed inflation protection for retired members of the plan.

The problem with this approach is they have to sell it to new members, which isn't easy, and even if they're successful, it might not be the most efficient way to address the problem of intergenerational equity.

A much simpler approach is just to adopt conditional inflation protection and explain to plan members because the ratio of active to retired members has shifted to almost one for one, it only makes sense that when the plan runs into problems, retired members bear some of the risk too and accept their cost-of-living adjustments (indexing) will be adjusted lower in periods where the plan runs into deficits.

This cut in benefits won't be material, it won't be felt, and it will only last until the plan's funded status is restored to fully funded status.

Unions hate conditional inflation protection but I really don't understand why. Yes, OMERS is doing well, had an exceptional year last year and posted solid gains over the last four years but so what?

You cannot expect a plan's funded status to rely solely on its investment gains. You absolutely need to adopt a shared-risk model to ensure the plan's long-term sustainability.

I've said it before and I will say it again, the key to a successful pension plan is great governance and adopting a shared-risk model which spreads the risk across active and retired members.

Hiking the contribution rate puts pressure on active members but as more and more people retire, shouldn't they too bear some of the risk if the plan runs into trouble?
Shortly after writing that comment, I saw OPSEU President Warren (Smokey) Thomas saying the executive of the OMERS Pension Plan can expect a fight if they try to rush through unnecessary pension plan changes that will leave members paying more for less:
"The OMERS pension plan is in good shape financially and will ensure a dignified retirement for the hundreds of thousands of Ontarians who've paid into it throughout their working careers," said Thomas. "We don't see any good reason to scale back the size of peoples' pensions or to increase the amount that people pay in. We'll fight any proposal to do either."
I suggest Smokey reads my previous comment and this comment carefully because he's dead wrong to oppose these proposed changes and if the union does fight OMERS on these proposed changes, it will only weaken the Plan considerably and might jeopardize benefits in the future if deficits pass a point of no return.

Now, I don't want to be an alarmist, OMERS is doing great, its 94% funded status is a great achievement which has happened over the last few years and for all intensive purposes, it's a fully-funded plan which is quite remarkable given it guarantees inflation protection (OPTrust is the other major Canadian plan which is fully funded and guarantees inflation protection, most don't).

The big problem is what's going to happen the next time markets tank because of a major global financial crisis and all pensions, including Canada's mighty pensions, will be tested as their funded status deteriorates.

Let me even give you a scenario. What if global stocks don't go down 30% like 2008 and come roaring back? What if we get a protracted bear market like 1974-75 or worse where stocks decline and go nowhere for many years as interest rates stay at ultra-low levels or make new secular lows?

Well, in this scenario, even Canada's fully funded pensions are going to feel the sting, but some are much better equipped to deal with this scenario than others.

Importantly, and I really need to stress this, mature plans like Ontario Teachers', HOOPP and CAAT Pension Plan which have adopted conditional inflation protection and a shared risk model will be able to weather the storm ahead much better than an OMERS or OPTrust who are guaranteeing inflation protection.

Again, if the name of the game is to ensure the long-term sustainability of a plan, why not incorporate elements which will ensure this long-term sustainability and also ensure intergenerational equity as demographic pressures put more pressure on current members over retired members.

Too much of a big deal is being made about conditional inflation protection. The unions will huff and puff "oh, they are taking away our benefits" but my answer to that nonsense is "no they're not, they're ensuring the long-term sustainability of your Plan and the partial or even full removal of inflation protection over a brief time until the Plan's fully funded status is restored is painless to retired members."

Unions need to stop being oppositional and get on board with all these proposals, especially adopting conditional inflation protection.

In fact, I would demand conditional inflation protection for all public pension plans in the world no matter what as I consider this a critical element of sustainability.

We live in a new world folks. Low rates and low returns are here to stay and pension plans that don't adapt and implement sensible changes to ensure the long-term sustainability of their plan are going to be in big, big trouble.

Again, I'm not being alarmist, I'm being a realist.

Below, Paul Harrietha, CEO of OMERS Sponsors Corporation, discusses the proposed changes to the OMERS Plan to ensure sustainable, meaningful and affordable pensions for generations to come. Take the time to watch this, it's excellent.

Update: After reading this comment, Claire Prashaw, Manager, Public Affairs at OPTrust, shared this with me as Hugh O'Reilly wanted to clarify something:
Hugh strongly believes in Pension Citizenship- we want others to enjoy what we have, the establishment of OPTrust Select is part of our strategy to ensure more Ontarians have access to a secure, defined benefit retirement plan. We believe OPTrust Select will also benefit the OPSEU Pension Plan by creating greater sustainability over the long term through the allocation of risk and operational costs over a broader membership base. We see the value of sharing investment risk over a larger membership body, this is the risk we refer to rather than offsetting COLA. OPTrust Select is targeted to modest-income earners working for Ontario Charities, Not-For-Profits and the Broader Public Sector – a group that has been long underserviced from a retirement standpoint. We believe that OPTrust Select can be the solution these organizations have been looking for to not only provide a better retirement for employees but also help address talent attraction and retention.
I thank Claire and Hugh for their input on this matter and wish OPTrust success in this innovative new pension initiative which will allow more workers to enjoy the benefits of a defined benefit plan.