Ontario Government Launches Governance Review of OMERS
The Ontario government is launching a governance review of the province’s largest pension fund for municipal employees, responding to pressure from associations representing police and firefighters that complained of a perceived lack of transparency from one of the pension plan’s two boards of directors.
The review will examine how effective the governance model for the Ontario Municipal Employees Retirement System (OMERS) has been. It will also look at decision-making processes, the composition and effectiveness of two separate boards that oversee OMERS, and the level of engagement with employees and employers.
The review was ordered in August by Ontario’s Municipal Affairs and Housing Minister, Paul Calandra, and revealed publicly at an annual update OMERS gave to Toronto city councillors on Wednesday. Over the summer, multiple associations representing OMERS members wrote to the government urging it to review governance at the $133-billion pension fund, which invests on behalf of more than 626,000 Ontario public service workers.
The provincial government plans to appoint a special adviser to carry out the review over the next year, with a similar mandate and focus as the last review of OMERS’s governance, carried out in 2012 by Tony Dean, a former Ontario secretary of the cabinet and head of the Ontario Public Service. The review will not cover the financial sustainability of the plan or OMERS’s investment performance, nor will it revisit the proposed changes to contribution rates.
“The review is designed to strengthen the governance of OMERS to ensure that it is serving the interests of plan members, and that decisions are made transparently for the long-term interests of the plan,” David Wasyluk, a spokesperson for Mr. Calandra, said in an e-mail.
Under a structure set up in 2006, OMERS is governed by two separate boards overseeing two corporations. The Sponsors Corporation (SC) board, which has been the target of pension plan members’ recent complaints, has 14 directors and is responsible for making board appointments, setting benefits and contributions, and monitoring the plan’s long-term health. A separate Administration Corporation (AC) board has 15 members and oversees the fund’s investments, plan valuation and pension administration.
The requests for a governance review did not raise specific concerns about the AC board, OMERS’s investment performance or the fund’s capacity to pay pensions. OMERS earned an investment return of 8 per cent over the past three years and 7.1 per cent over the past 10 years, and the plan is 98-per-cent funded.
AC board chair George Cooke said in a statement the review is welcome, and good governance practices “include a review from time to time of what is working well, and what could be working better.” SC board chair Barry Brown said the SC board has tried to put the interests of plan members “as a whole” first and foremost.
“In the spirit of continuous improvement, we are committed to fully cooperating with the government in its planned governance review, just as we did in 2012 when the last review was undertaken,” Mr. Brown said in an e-mailed statement.
The flashpoint that sparked the provincial review came over the summer, when associations representing police officers in Ontario felt blindsided by planned changes to contribution rates starting in 2027, according to correspondence reviewed by The Globe and Mail.
Last year, an assessment done by the OMERS SC board concluded that there did not need to be changes to benefits or total contributions to the pension fund. In June, however, that same board approved a reallocation of contribution rates that will require police, firefighters and other employees who earn more than $90,000, as well as some employers, to pay higher contributions – about $15 to $20 more per pay period for most police officers. About 70 per cent of OMERS members will pay the same or lower contribution rates, meaning the total level of contributions to the pension fund won’t change, OMERS said in Wednesday’s presentation.
“It’s about who pays how much,” Joe Pennachetti, a director on the SC board, said at Wednesday’s presentation to city councillors. “A reallocation of rates between classes was required to help ensure that contribution rates continue to be fair and reasonable across all of our diverse group of members.”
The proposed increase to some contribution rates “was unexpectedly revealed to stakeholders at the last moment” before a summer vote, according to a letter that Police Association of Ontario president Mark Baxter and Toronto Police Association president Jon Reid wrote to members, which The Globe reviewed. “We were blindsided by the announcement.”
The two police associations wrote to the Ontario government formally requesting a governance review of OMERS, raising concerns about “an eroding and significantly lacking level of adequate transparency in the decision-making processes within the OMERS SC and its Board of Directors.”
“As it stands, we do not believe the current management of the Sponsors Corporation best serves the interests of our members – and plan members as a whole,” Mr. Baxter said in an e-mailed statement.
Later in June, leaders of the Ontario Professional Fire Fighters Association, the Ontario Association of Chiefs of Police and transit agency Metrolinx each wrote similar letters reviewed by The Globe to Premier Doug Ford, urging the government to launch a governance review.
Other associations representing OMERS members have since weighed in, citing long-standing concerns about governance that preceded this summer’s decision on contribution rates. Mike Major, the executive director of the City of Toronto Administrative, Professional, Supervisory Association (COTAPSA), wrote a letter to Mr. Calandra and Mr. Ford earlier this month emphasizing the association’s “very strong support” for the governance review, and said the current OMERS model is “compromised by undue complexity and expense.”
“We don’t believe the Sponsors Corporation is effective, efficient or fair,” Mr. Major said in an interview. “There’s a better way to do this.”
Alright, I'll tell you how I read this "OMERS governance review" and you can feel free to share your thoughts as well.
First, let me be very clear, there is nothing wrong with the way OMERS is managing its assets and liabilities.
In fact, the funded status of the plan has markedly improved over the last four years and for al intensive purposes, it's now fully funded (98% funded status is fully funded to me).
The way I read this governance review is some members of OMERS aren't happy with the structure of two boards governing OMERS.
In particular, they want a full review of OMERS Sponsors Corporation:
Established under the OMERS Act in 2006, the Sponsors Corporation (SC) works closely and collaboratively with the Administration Corporation (AC) to represent the interests of sponsors, stakeholders, members and beneficiaries of the OMERS Pension Plans.
Our overriding objective is to ensure – through informed decision-making and leading governance practices – that the OMERS Pension Plans remain affordable, meaningful and sustainable in today’s complex and fast-changing world.
This is a simple goal, but a demanding and complex task – all supported by a deeply committed executive team and an experienced Board of Directors nominated by the designated Plan sponsors.
We believe that good governance is the foundation for effective Plan management. To successfully fulfill the SC’s mandate under the OMERS Act, 2006, we have developed a range of effective policies and practices with input and advice from expert third-party advisors.
At the Sponsors Corporation (SC), we are accountable for what we call the “ABCs” of OMERS:
Appointments;
Benefits; and
Contributions.
Specifically, we are solely responsible for:
Determining benefit levels and contribution rates for the Plans, and
Setting compensation levels and appointment protocols for both the SC and AC Boards. This includes formal protocols related to the nomination, appointment and reappointment of Directors for both the AC and SC Boards. The intent is to select qualified candidates to provide effective oversight based on, among other things, their considerable experience, proven competencies, sector knowledge, and commitment to the DB pension model.
On the other side, you have OMERS Administration Corporation (AC) is responsible for pension services and administration, investments, and plan valuation.
The AC Board of Directors consists of 14 members nominated by OMERS employer sponsors and nominated by employee sponsors. The AC also has an independent Board Chair for a total of 15 members. OMERS Sponsors Corporation (SC) makes all appointments to the AC Board.
Now, this is the key passage from the Globe article above:
Last year, an assessment done by the OMERS SC board concluded that there did not need to be changes to benefits or total contributions to the pension fund. In June, however, that same board approved a reallocation of contribution rates that will require police, firefighters and other employees who earn more than $90,000, as well as some employers, to pay higher contributions – about $15 to $20 more per pay period for most police officers. About 70 per cent of OMERS members will pay the same or lower contribution rates, meaning the total level of contributions to the pension fund won’t change, OMERS said in Wednesday’s presentation.
“It’s about who pays how much,” Joe Pennachetti, a director on the SC board, said at Wednesday’s presentation to city councillors. “A reallocation of rates between classes was required to help ensure that contribution rates continue to be fair and reasonable across all of our diverse group of members.”
The proposed increase to some contribution rates “was unexpectedly revealed to stakeholders at the last moment” before a summer vote, according to a letter that Police Association of Ontario president Mark Baxter and Toronto Police Association president Jon Reid wrote to members, which The Globe reviewed. “We were blindsided by the announcement.”
The two police associations wrote to the Ontario government formally requesting a governance review of OMERS, raising concerns about “an eroding and significantly lacking level of adequate transparency in the decision-making processes within the OMERS SC and its Board of Directors.”
“As it stands, we do not believe the current management of the Sponsors Corporation best serves the interests of our members – and plan members as a whole,” Mr. Baxter said in an e-mailed statement.
Later in June, leaders of the Ontario Professional Fire Fighters Association, the Ontario Association of Chiefs of Police and transit agency Metrolinx each wrote similar letters reviewed by The Globe to Premier Doug Ford, urging the government to launch a governance review.
Clearly some members felt they were "blindsided" by higher contribution rates and the policy wasn't properly communicated with them and discussed.
Let me take a step back here and tell you that after I was wrongfully dismissed from PSP Investments back in October 2006, the government of Canada (Treasury Board of Canada Secretariat) hired me to conduct a full governance review of the federal public service pension plan in the fall of 2007.
As part of my report, I had to cover all aspects of plan governance, asset management (PSP Investments), liabilities and plan funding which falls under the purview of the Chief Actuary of Canada, administration, communications, risk management, etc.
As you can imagine, when the folks at PSP Investments caught wind of this, they weren't too pleased and tried to block me, intimidate me using legal demand letters which I sent to my lawyer who sternly warned them to govern themselves accordingly or face legal consequences.
It was very stressful but I now laugh at that whole episode for a lot of reasons. The executive at PSP back then were total idiots acting hyper-deranged but the people at the Treasury Board who asked me to conduct that review on behalf of the government didn't impress me either and they didn't like my final report because it exposed serious governance flaws that made them look bad.
I basically learned the hard way that when you consult, your client doesn't want to hear the truth, they want you to paint a rosy picture of everything they're doing.
Well, that was the end of my consulting career and I decided it's not for me (let McKinsey and Boston Consulting Group charge millions for fluffy reports).
To add insult upon injury, the Treasury Board took months to pay me a measly $25,000 for an in-depth report which was roughly 100 pages long going over best governance practices all over the world (it's still collecting dust somewhere in Ottawa).
And truth be told, I know a lot more about good governance now than I did back then so I feel very comfortable expressing my opinion on this OMERS governance review.
I think OMERS SC dropped the ball communicating this hike in the contribution rate to some members and they didn't take the time to discuss it with members beforehand (through consultations) and that pissed off these members enough to ask for a full review of governance at OMERS.
What else? It's high time OMERS does away with these two separate boards and only have one board like the rest of Canada's large pension plans/ funds and if that requires legislative changes to the OMERS Act, so be it.
I believe in transparency, efficiency and great communication. Period.
There is no good argument to be made as to why OMERS needs two separate boards.
Also note the article states AC board chair George Cooke said in a statement the review is welcome, and good governance practices “include a review from time to time of what is working well, and what could be working better.”
I completely agree with him, it should be welcome and all organizations, not just OMERS, should have governance reviews every five years and a report should be released to the public (posted on their website).
In Canada, all of our large pension plans/ funds tout world-class governance and they do have amazing governance as the long-term results indicate but part of good governance is an independent report by qualified agency to your members to review your governance and I mean everything including benchmarks, compensation, risk management, communications, plan funding and more.
The problem? Typically such reports are done by the Office of the Auditor General (federal and provincial) and they're not properly staffed to conduct a thorough governance review on all aspects of a plan, especially asset management.
At the federal level, OSFI is better suited to conduct in-depth governance reviews of large pension funds.
But nothing is perfect, conducting a governance review is hard work, it requires a lot of collaboration and expert knowledge and it needs to be updated every five years because governance standards are always evolving (just look at how sustainable investing hit the institutional world like a ton of bricks since the pandemic).
Lastly, and I want to emphasize this again, OMERS is doing extremely well, this governance review isn't about the way they manage assets and liabilities, it's more about efficiency and properly communicating policy changes to plan members.
Remember to read my recent comment on CEO Blake Hutcheson being interviewed to kick off season 2 of The Pension Blueprint podcast here.
My message to plan members is you're well within your right to ask for a governance review, fix things that need to be fixed but leave others alone.
That's a wrap for me as I want to go feed my baby his milk and watch the Habs play the Kings tonight (we are leading 1-0).
Below, OMERS CEO Blake Hutcheson at the Empire Club of Canada discusses the story of OMERS.
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