CUPE Ontario Seeks a Review of OMERS Performance

Christine Dobby of the Toronto Star reports CUPE seeks a review of OMERS pension plan performance after a loss in 2020:

The union representing 125,000 Ontario municipal workers who are members of the OMERS pension plan is calling for a third-party review of the plan’s investment performance after it posted a “shocking” loss in 2020.

The Canadian Union of Public Employees Ontario published a report Wednesday that highlights what it says is a long-term pattern of underperformance by the Ontario Municipal Employees Retirement System, which manages the retirement income of more than 500,000 active and retired municipal employees.

The public call comes after OMERS published its annual results in February, revealing it had lost 2.7 per cent in 2020, a significant swing from the 6.9-per-cent gain it had set as a benchmark.

“We’d been warned that 2020 might be a bad year for returns, but we were shocked at how bad,” CUPE Ontario president Fred Hahn said during a virtual press conference Wednesday. He said the 2.7-per-cent loss amounted to about $3 billion. “No other comparable pension plans had a negative return in 2020.”

But OMERS said Wednesday “an additional third-party independent review is not warranted.”

George Cooke, chair of the board of directors of the OMERS Administration Corporation, said the pension plan is governed by an independent expert board that “continually and thoroughly reviews investment performance, independent of management, utilizing external experts where appropriate.”

“Following the 2020 results specifically, we undertook a thoughtful look at our investment strategy and past decisions with an open mind,” Cooke said in an emailed statement.

“We are confident in our strong new leadership team and have concluded that our current investment strategy is appropriate,” he said. (Blake Hutcheson took over as OMERS CEO last June and the pension plan named new heads of its capital markets and infrastructure businesses earlier this year.)

CUPE Ontario’s report notes that the Healthcare of Ontario Pension Plan (HOOPP), the Ontario Teachers’ Pension Plan and the Caisse de dépôt et placement du Québec posted annual returns for 2020 of 11.4 per cent, 8.6 per cent and 7.5 per cent, respectively.

The report also points to a longer-term trend of lower returns at OMERS, which had a 10-year annualized return of 8.2 per cent as of 2019. In contrast, HOOPP, Teachers and the Caisse had 10-year returns of 11.4 per cent, 9.8 per cent and 9 per cent, respectively, at that time. OMERS’ 2020 performance brought its long-term rate of return down even further.

PBI Actuarial Consultants Ltd. reviewed CUPE’s report, which is based on publicly available information. PBI said the comparisons made are reasonable and show “a significant gap in performance between OMERS and other comparable public pension plans and funds.”

“We hear a lot about front-line heroes these days and this is a critical pension plan for them,” Hahn said in an interview. “We need there to be a mechanism to discover what’s going on here and fix it.”

Many CUPE Ontario employees — which include special education assistants, Toronto Public Library employees and Children’s Aid Society workers — work part-time hours, earn low wages or both. 

During the news conference, union leaders said their members are concerned about losing benefits such as pension payments that are indexed to inflation or being required to contribute more to make up for investing shortfalls.

Yolanda McClean, second vice-president of CUPE Ontario and a member of CUPE Local 4400, representing education workers at the Toronto District School Board, said workers in her local earn an average of $38,000 per year and are predominantly racialized women.

“We care about this plan. We want to fix whatever is going on at OMERS to turn the tide,” McClean said.

Hahn said CUPE leaders met with executives and board members from OMERS on two occasions this year. The union asked for a review of the pension plan’s investment returns, but Hahn said OMERS told them it wasn’t necessary. 

OMERS, which has $105 billion in net assets, has pointed to three main factors for the 2020 loss. It said widespread lockdowns affecting the retail, transportation and entertainment sectors “significantly impacted” its real estate and private equity portfolio. With respect to publicly traded companies, OMERS said dividend-paying stocks it owns in the financial services and energy sectors were also hit hard.

Finally, the pension plan said it took steps amid the market turmoil of March and April 2020 to reduce foreign currency hedging positions, a move designed to protect against a potential decline in value of the Canadian dollar. It said those “prudential steps” achieved their objective but “resulted in currency losses, as the Canadian dollar appreciated after we reduced our hedges.”

David Milstead of the Globe and Mail also reports that CUPE report calls for third-party review, alleges underperformance by pension fund manager OMERS:

The union for Ontario public sector employees has renewed calls for an outside review of the Ontario Municipal Employees Retirement System, saying the pension’s 2020 loss is part of a long-term pattern of underperformance.

In response, OMERS said Wednesday that an independent review “is not warranted.”

The Canadian Union of Public Employees (CUPE) Ontario said that 2020 was “not just one tough year” for OMERS, which posted a negative 2.7-per-cent return in 2020. The union, which initially spoke out when OMERS released that result in February, issued a report Wednesday that suggests OMERS has underperformed its own internal benchmarks, as well as other large Canadian pension plans, for the past decade or more.

CUPE says OMERS’s 10-year return of 6.7 per cent is lower than seven other major Canadian pensions, whose returns over the period ranged from 8.5 per cent to 11.2 per cent. It’s also lower than the 10-year internal benchmark of 7.3 per cent. OMERS does not disclose the 10-year benchmark figure in its annual reports, which makes it different from the other plans, CUPE says. CUPE said OMERS provided the figure to the union.

The long-term underperformance can also be seen in the 10 years ended in 2019, indicating the issue is not solely the result of OMERS’s performance during the pandemic, according to CUPE.

CUPE has raised questions of OMERS management before, including a lengthy critique of its expenses after it announced its 2018 results. Fred Hahn, President of CUPE Ontario, said the union has engaged with OMERS management and “we kept being told everything would be fine ... we weren’t satisfied with that.”

Mr. Hahn and other CUPE members who appeared at a Wednesday press conference questioned whether benefits would ultimately be endangered.

“We care about this plan – we want to fix whatever’s going on, to provide our members with certainty,” said Yolanda McClean of CUPE’s Toronto Education Worker/Local 4400.

In a statement, George Cooke, the chair of the board of directors of OMERS Administration Corp., said the board, which is nominated by the employer and employee sponsors of the plan, “continually and thoroughly reviews investment performance, independent of management, utilizing external experts where appropriate.”

“Following the 2020 results specifically, we undertook a thoughtful look at our investment strategy and past decisions with an open mind,” Mr. Cooke said in the statement. “We are confident in our strong new leadership team and have concluded that our current investment strategy is appropriate. An additional third-party independent review is not warranted.”

CUPE Ontario represents 125,000 of the pension’s 289,000 active members. Two CUPE researchers authored the report, which was reviewed by PBI Actuarial Consultants of Vancouver. “Overall, we believe the analysis is sufficient to conclude that OMERS investment performance in 2020 and longer term is significantly lower than other comparable plans,” wrote Bradley Hough of PBI.

In 2020, OMERS’s real estate investments posted an 11.4-per-cent loss, while the value of its private equity portfolio declined by 8.4 per cent. Its performance also suffered from being heavily invested in dividend-paying oil and gas and financial-services stocks and underweight in technology companies. The fund’s benchmark was a gain of 6.9 per cent, so it underperformed by 9.6 percentage points, the biggest margin of the past decade, according to CUPE.

Alright, let me begin by stating I hope everyone in Canada had a superb long weekend.

I was bombarded with emails last week bringing this CUPE Ontario issue to my attention but had to cover other material and wanted to take my time to cover this properly.

Let me just state that I personally find it very sad and disturbing when I see public-sector union representatives publicly go after the very pension that feeds them and their members.

Going after your pension in such a public manner is not only damaging the brand of your pension, it's also demoralizing for the people working hard at these pensions to make sure they remain fully solvent over the long run.

Moreover, as you will read below, Fred Hahn has a personal agenda going after OMERS, he has no clue of what he's talking about and quite frankly, I am not impressed with PBI Actuarial who should know better than comparing returns of pensions with different asset mixes and liabilities. They are comparing apples to oranges and missing a lot of important points.

First, CUPE Ontario put out a press release stating “Not just ‘one tough year’”:

The long-term underperformance of the Ontario Municipal Employees Retirement System (OMERS) pension plan urgently requires a full and independent review, says CUPE Ontario in a report released today.

“Investment returns are a critical part of funding the pensions of front-line workers. Unlike the comparable eight large defined benefit pension plans and funds in Canada, OMERS has fallen short on that front,” said Fred Hahn, President of CUPE Ontario. “Not only were their 2020 returns shockingly below that of comparable pension plans, but we have seen, over time, OMERS regularly falling short of even their own, internal benchmarks. This is at least a decade-long problem. We need to find out why OMERS continues to post such poor investment returns. As the largest representative of workers in this plan, we want to ensure hard-working members’ pensions are protected and that they aren’t asked to pay for OMERS’ mistakes.”

The report, titled Not Just One “Tough Year”: The Need for a Review of OMERS Investment Performance, examines how OMERS investments have performed compared to other large pension plans and funds. It also reveals how OMERS has underperformed compared to its own internal benchmarks.

OMERS’ claim that its 2020 return of -2.7%, or a loss of $3-billion, was due to the economic impacts of COVID-19 is unsupported in comparison to other major plans who were investing in the same economic climate and had healthy returns regardless. As well, though OMERS has publicly claimed its 2020 results were an anomaly and in no way indicative of its strength as a long-term investor, the report’s comparison of OMERS’ 10-year returns with those of eight comparable plans, in periods both before and including 2020, shows those claims are simply not accurate.

As the report details, over that much longer period of time, OMERS’ investment results still find it at the bottom of the pack for major Canadian pension plans and funds. Additionally, OMERS’ results have fallen short of its own internal benchmarks, and, unlike other major pension plans and funds, OMERS no longer reports this critical information in their annual reporting, making it difficult for plan members and their union representatives to hold their investment managers accountable.

“This blatant issue of lack of transparency, which does not exist in other pension plans, makes it very difficult for sponsors like CUPE Ontario to understand why OMERS continues to underperform,” said Hahn. “We urgently need an independent and fully transparent review conducted by those of us, like CUPE Ontario and other sponsors from both sides of the table, who are the representatives of these hard-working plan members and employers. And we need OMERS to agree to fully co-operate in that independent and fully transparent review.”

Of OMERS’ 289,000 active members, CUPE Ontario is the largest sponsor, representing 125,000 plan members.

“Retirement income security is critical for all workers, and we know that is best accomplished through defined benefit plans like OMERS,” said Hahn. “Many of our members in OMERS are some of the lowest-waged workers in the plan and they have continued working for municipalities, school boards, and child welfare agencies in no small part because they can access a defined benefit pension.”

“Our concern does not lie with the defined benefit model but with the long-term investment return record at OMERS, which falls well short of what it could be and what is being achieved by other large plans and funds. As the largest plan sponsor, we appoint representatives to both OMERS Boards, but restrictive confidentiality rules prevent these representatives from keeping us – and therefore our members – fully-informed about issues at OMERS, including these problematic investment returns. The first thing you need to do to solve a problem is to admit there is one and as this report details, OMERS’ investment issues are not new. It is well past time for plan sponsors to work together to fix OMERS.”

Take the time to download and read the CUPE Ontario report here

To a layperson, this report is black and white, it clearly shows OMERS long-term performance (cherry-picking the data for maximum effect) has been lower than its peers and even lower than its benchmark portfolio.

But to an expert reading this report, it's so misguided, so biased, so warped, so grossly misleading that it took me minutes to read it and conclude this is a CUPE Ontario sanctioned "hit piece" which ignores important points and distorts facts in the most prejudicial way.

The first thing I can tell you is that the only measure of success for a pension plan -- whether it's OMERS, OTPP, OPTrust, HOOPP or CAAT pension plan - is it's funded status.

Hugh O'Reilly, the former chief executive officer of OPSEU Pension Trust (OPTrust) and Jim Keohane, the former CEO of Healthcare of Ontario Pension Plan (HOOPP) wrote a wonderful comment about this five years ago which you can read here.

Please note this part:

Positive investment returns are generally a good indication of success, but not always. There are scenarios in which investment returns have been positive and the funded ratio has declined, and conversely times when investment returns are negative yet the funded ratio improved.

Our own industry has been as guilty as anyone else in trumpeting annual returns. In a world in which so many people are in a pension rat race to accumulate the biggest pot of money before they retire, it feels normal to celebrate when we've been able to make our assets perform faster, higher and stronger. However, if we are honest with ourselves, it's not the business we're in. Does this mean that returns don't matter? Not at all. What it does mean is that as pension plans, our investment approach must be inextricably linked to the goal of keeping the plan fully funded.

Growing and maintaining our funding surplus over time to ensure we can deliver pension benefits to our members leads to very different decision-making, particularly when it comes to risk management, and the nature and mix of assets that we hold in the investment portfolio.

For members, the true value of a defined-benefit (DB) pension plan is certainty at a stage of life when there is little runway to accumulate more. Beyond the dollars that will one day be paid, we give members the confidence that they can count on their pension to be there when they retire and that their contributions will remain as stable as possible during their working years.

When creating certainty is the true goal, taking undue risk with members' futures for the sake of a few hundred extra basis points in a given year makes no sense at all. That is why both of our organizations have adopted an approach that puts funding first, one in which we balance the need to generate returns with the need to effectively manage risk.

I'm happy to report that by this measure of success, all of Canada's large public pensions are doing very well as they are all fully funded.

Even after it experienced a 2.7% loss in 2020, OMERS is still 97% funded:

At year-end, our funded status, calculated on a smoothed basis, remains at 97%, which is unchanged from last year. On a fair value basis (i.e., without smoothing), our funded ratio was 93% down from 101% in 2019. This decrease is driven by our negative investment return in 2020, discussed in the following Investments section. 

We measured our funded status using a slightly lower real discount rate than last year, having decreased it by a further 5 bps to 3.85% (excluding inflation). Progressively lowering our discount rate in this manner is a key component of our strategy. Since 2015, we have reduced the real discount rate by 40 bps and we intend to keep lowering it, as a lower discount rate can help make the Plan more resilient to the funding risks we see on the horizon. We are doing this incrementally so that we balance our long-term financial health with benefit and contribution rate stability.

Pension Terminology

  • The “funded ratio” is the ratio of net investment assets to long-term pension obligations. It is an indicator of the long-term financial health of the Plan. It can be calculated on a “smoothed” or “fair value” basis:
    • "Smoothed” evens out the variations in annual returns over a five-year period. In this way, contribution rates and benefits are set using a more stable, long-term view of investment performance.
    • “Fair value” uses year-end values of OMERS assets, without any adjustments. Because our investment returns vary each year, this calculation results in a funded ratio that will also vary year over year. In some years the variation will be significant.
  • The “discount rate” is the interest rate used to estimate the dollar value of OMERS long-term pension obligations. It includes two components: a “real” rate before inflation and net of a margin for risk and an inflation estimate. Setting the discount rate is key to managing the Plan and addressing risk. Lowering it increases the dollar value of our pension obligations and therefore decreases our funded ratio but can help make the Plan more resilient against future adverse experience.
For all intensive purposes, 97% funded on a smoothed basis is fully funded.

And here's something else the CUPE Ontario report fails to mention.

Unlike other pensions plans, OMERS still guarantees cost-of-living-adjustments (this will soon change).
In fact, OMERS and OPTrust are the only Canadian pensions still doing this, all the other major pension plans in Canada that manage assets and liabilities (HOOPP, OTPP and CAAT Pension Plan) adopted conditional inflation protection long ago, providing them with another critical lever to manage their funded status, something OMERS and OPTrust don't have access to.

However, effective January 1, 2023, OMERS will adopt shared risk indexing:

Provides the option for the SC Board, based on its annual assessment of the Plan’s health and viability, to reduce future inflation increases on benefits earned after December 31, 2022.

This change is effective January 1, 2023 and does not affect benefits earned before that date. This means that when you retire, the benefits earned on or before December 31, 2022 will be granted full indexation. Benefits earned on or after January 1, 2023 will be subject to Shared Risk Indexing, meaning that the level of indexation will depend on the SC Board’s annual assessment of the financial health of the Plan.

More information will be available closer to the implementation date.

Between you and me, it's about time that OMERS adopts shared risk indexing because it ensures inter-generational equity in risk sharing (as more members retire, they can afford to shoulder some of the risk of the plan), but there was pushback from, you guessed it, Fred Hahn, president of CUPE Ontario.

Again, none of this is mentioned in this report from CUPE Ontario, it only mentions funded status quickly without getting into details and primarily focuses on performance without regard to differences in liabilities and asset mixes of these pensions.

The report also cherry-picks data to make OMERS look bad relative to its peers:

Again, these comparisons are absurd for a lot of reasons but the most important one is you are not comparing apples to apples, each pension has different liabilities, different asset mixes and quite truthfully, as I stated at the top, the only thing that ultimately counts is funded status.

For example, in terms of asset mix, OMERS has close half its assets in private markets, 28% divided equally in Real Estate and Private Equity and 20% in Infrastructure, and only 6% in Bonds:

By contrast, HOOPP has 50% of its assets in bonds, has successfully ridden bond yields down over the last 20 years but now that yields are at record lows, it's looking to beef up its infrastructure portfolio and other strategies in its new LDI 2.0 approach.

Basically, as HOOPP grows, it's looking to shift its asset mix so that it looks more like that of its larger Canadian peers including OMERS.

And just so we are clear, I remember Jim Keohane, HOOPP's former CEO, telling me "OMERS has great infrastructure assets" precisely because it was one of the first to diversify into this asset class "when valuations were more reasonable" (Jim's words).

What else? That RBC Pension Plan Universe which they included in this report is heavily skewed to global public equities which is why it delivered 9.2% annualized last year, but over the long run, it hasn't produced better risk-adjusted returns than the large Canadian pensions which have more invested in private markets and have the right approach too.

Another thing, when OMERS released its results in late February, Blake Hutcheson, OMERS President and CEO, was spot on to draw attention to the long run:

“We are a long-term investor that pays pensions over decades, and with a strong team and strategy in place, this single year will not define us,” said Blake Hutcheson, OMERS President and CEO.

Over the ten-year period leading up to 2020, OMERS investment portfolio performed well by any measure, averaging an annual return of 8.2%, and in 2019 alone OMERS delivered 11.9%. We are active investors and asset managers with high-quality assets diversified globally and we believe in the strong investment future that our portfolio represents for over 500,000 members and our more than 1,000 employers in Ontario,” he added.

OMERS funded status on a smoothed basis remains at 97%, with a lower discount rate of 5.85%. “Over the past five years OMERS has lowered its discount rate by 40 basis points, to improve resilience to risks we see on the horizon,” said Jonathan Simmons, OMERS CFO.

We are making the appropriate changes to better position our platform for the future. Pension payments continue as usual and OMERS paid pension benefits of $5.1 billion in 2020 to more than 180,000 members.

“As announced early in January we are entering a new year with a refreshed senior team to shape our way forward,” said Mr. Hutcheson. “Collectively this new team brings deep experience from inside and outside of OMERS, multiple countries, perspectives and backgrounds, and it achieves much greater gender diversity. I would confidently put this new team up against any other to deliver on OMERS commitment to our members in the years ahead.”

The fundamentals of our strategy remain sound. In any year, regardless of result, we would evolve our approach to adapt to current realities. Given the disruptions we experienced this year, we have made a number of important adjustments that lend additional strength to our approach,” said Mr. Hutcheson.

So, going into 2020, the 10-year annualized return was 8.2%, which was in line with its peers (never mind what they say in the report). Also worth noting, the 3 and 5-year annualized returns going into 2020 were just as solid (8.5%).

Then the pandemic hit, OMERS lost 2.7% and it impacted its short and long-term results:

 I note that OPTrust was not included in their report. It also fared well in 2020, delivering 8.9% last year, giving it a 10-year annualized return of 7.8% which is above that of OMERS's 6.7%.

Again, who cares? OMERS got hit in 2020 for reasons I discussed in detail on this blog here.

The CUPE report discusses "lack of transparency" but there was plenty of transparency about where things didn't go well last year:

Also, Blake Hutcheson was very transparent with me as to where OMERS got hit in Real Estate and Private Equity:

Blake and I spoke about real estate. They got hit in Retail and Offices in Calgary and New York City.

Interestingly, Blake told me Retail represents 16% of the real estate book and diversification (both geographic and sectors) helped mitigate some of the fallout. 

Still, the lockdowns impacted malls, hotels, offices, airports, toll roads, and two of their 20 private equity companies -- Cineplex and a recruiting agency -- both of which accounted for 90% of the losses in PE (-8.4%).

Blake admitted that they need more diversification in Private Equity and "smaller ticket sizes" but the damage was done, the global pandemic wreaked havoc on some private businesses.

Think about it, companies cannot function with a no revenue model, some of OMERS portfolio companies were severely impacted by the lockdowns, more than their peers which were also impacted.

Some of their tenants went belly up, that impacted their real estate revenues.

Also, the footnote in the press release is important:

* For disclosure purposes, we present our investments and our performance by asset class. As such, Oxford Properties’ real estate credit business and public equity investment into HKSE-listed ESR Logistics is presented under ‘credit’ and ‘public equity’ respectively, and not in ‘real estate’. Including the performance of its credit business and investment in ESR Logistics, the Oxford Properties 2020 net return is -6.8%.

Blake told me Oxford lost 7% last year but because REITs are shifted to capital markets, the real losses in Real Estate were not as bad as reported (-11.4%). 

It's important to note that most of Canada's large pensions lost money in Real Estate last year, including CPP Investments which just posted a 20% return (it lost 4% in Real Estate).

Why? In short, they got slammed in Retail and Offices but made money in logistics, healthcare, and multifamily properties. Also, those that were more exposed to Canadian properties got hit harder.

But pandemics don't occur every year, they occur once in a lifetime (hopefully) and we really need to put 2020 behind us once and for all.

As I stated when I covered OMERS 2020 results, there's no doubt in my mind that OMERS will bounce back this year, and that's what is going on.

Last week, I covered how AIMCo and OMERS sold ERM to KKR.  

The sale of ERM is OMERS Private Equity’s fourth realisation in Europe and its fifth successful exit globally in the past three years.

That tells me they are printing money this year in private markets, and even in public markets where the tech melt-up of last year has cooled significantly and value stocks are more in favor, things are reverting back to the mean. 

I suspect by this time next year, this chart will need to be updated:

Don't hold your breadth, however, I doubt Fred Hahn and CUPE Ontario will update their results if they look remotely favorable to OMERS.

Mr. Hahn obviously has an axe to grind, he's running to be re-elected and he found his whipping boy, the very pension that feeds him and his members.

But in publicly going after OMERS, he's only weakening the organization's brand and to be really honest, he's exposing how clueless he is about what really matters.

There's nothing nefarious going on at OMERS. Period. You don't need a third-party independent review, you need to trust the organization's independent governance and let OMERS senior managers execute on their long-term strategy.

Last year wasn't a disastrous year. Trust me, I've seen a few disastrous years covering pensions over a decade, this wasn't one of them.

It was a bad year, one OMERS has already put behind it.

I suggest Fred Hahn and other CUPE Ontario members do the same, focus on the long run, OMERS has great assets, assets other pensions can only dream of owning (like Bruce Power).

When I read the conclusion of the report, I was floored:


Serious concerns with OMERS investment performance? Really?  I have no concerns, none, zero, zilch!

My concerns are with power hungry union hacks who think they're pension experts even though they clearly don't have the fainstest of what they're talking about.

And I'll leave it at that before my Greek side comes out and I eat Fred Hahn for dinner (it's time for dinner and I get very irritable when I'm hungry).

Read the report they put together with a shaker of salt, it's grossly biased, grossly misleading and quite frankly, it misses the most critical point, namely, OMERS is fully funded and doing great.

More discouragingly, it's totally disrespectful to the hard-working men and women at OMERS and it's demoralizing reading these articles by reporters who also don't have a clue about pensions.

For example, David Milstead of the Globe and Mail wrote an article last week on how CPP Investments made 20% in fiscal 2021 but underperformed its benchmark.

Really buddy? Who cares if it underperformed its benchmark? They made 20% and the Fund's long-term return is way above the required minimum rate of return for the CPP to be solvent over the next 75 years set by the Chief Actuary of Canada. That's all Canadians care about.

It drives me nuts reading these articles, it's as if reporters are looking for anything negative because that's what sells newspapers.

Anyway, bottom line, forget Fred Hahn and CUPE Ontario's "hit piece" on OMERS. It has more holes in it than Swiss cheese and anyone in the pension industry with half a brain will ignore it.

Below, on April 6, OMERS hosted its 2021 Annual Meeting. Over 1,300 people registered for this virtual event to hear from the OMERS Executive Leadership Team on a variety of topics.

I actually couldn't embed it below because it's not on Vimeo or YouTube (it should be) but a full recording of the webcast is available here.

Take the time to watch this, especially listen to Blake Hutcheson's comments starting at the 45 minute mark. He explains a lot and is more than transparent!

Again, my only criticism is that OMERS doesn't have a dedicated YouTube channel to post these webcasts there so I can easily embed them here. Take the time to watch it here.