DBRS Confirms OMERS & Related Ratings at AAA and R-1 (high)

DBRS has today confirmed the Counterparty Rating of OMERS Administration Corporation (OMERS or the Fund) at AAA and the ratings on the short- and long-term guaranteed debt of OMERS’ financing subsidiaries at R-1 (high) and AAA, respectively, based on the unconditional guarantee provided by OMERS to the debt instruments. The trends on all ratings remain Stable despite the growing funding deficiency of the Primary Pension Plan, supported by the Fund’s substantial portfolio and liquidity position, a sound ratio of active-to-retired plan members, a moderate debt burden for the rating and a history of prudent management.

Another strong investment performance was recorded in 2010, as returns reached 12.0% or 54 basis points above the portfolio benchmark. All major asset classes contributed to the gains, especially equities as the continuation of the global economic recovery invigorated investor confidence. The asset mix policy remained unchanged although OMERS shifted its focus away from the capital preservation strategy employed during the economic downturn and positioned its portfolio to take advantage of the upswing of equity markets. Efforts also continued to increase geographical diversification, active internal asset management and exposure to private market investments. Outstanding commercial paper was reduced slightly during the year, which, combined with asset growth, reduced the ratio of recourse debt to adjusted net assets to a moderate 7.8%. The year was also marked by the consolidation of the commercial paper programs of OMERS Realty Corporation and Borealis Finance Trust into the program of a new subsidiary, OMERS Finance Trust, which carries the same parent guarantee as its predecessors and now acts as the principal financing vehicle of OMERS.

While investment conditions remained sound, the going concern deficit of the Plan continued to deteriorate in 2010, reaching $4.5 billion or nearly three times the prior year’s level as a result of the recognition of prior years’ investment losses, increased accrued pension benefits and a modest change in actuarial assumptions. However, the Plan remained in a surplus position on a solvency basis. As part of the new actuarial valuation filed in 2010, the sponsors approved contribution rate increases for both active members and employers of on average one percentage point in both 2011 and 2012 and 0.9 percentage point in 2013, which will provide relief to the Plan’s funding status. However, improvement will be slow, dampened by the portion of the 2008 investment losses left to be amortized and the likely continuation expected in the sector by DBRS of slow adverse changes in actuarial assumptions.

DBRS notes that the Pension Benefits Act was recently amended to exempt jointly sponsored pension plans from the requirement to address any solvency deficiency. Nonetheless, jointly sponsored pension plans are still required to take actions to eliminate any going concern deficiency over 15 years. The OMERS plan text outlining the terms under which the Primary Plan is administered was also amended effective January 1, 2011. The OMERS plan text now provides that, in the event of a wind-up, the repayment of the obligations guaranteed by OMERS would have priority over the claims of plan members. This amendment clarifies the previous OMERS plan text which was uncertain as to whether counterparty obligations would enjoy a priority over pension liabilities in the event of a wind-up. DBRS has received a legal opinion confirming the priority interpretation. While a positive development, DBRS puts limited emphasis on such opinions in its assessments of public pension funds given the absence of legal certainty pertaining to this issue.

Note:
All figures are in Canadian dollars unless otherwise noted.

DBRS ratings on public pension funds and pension fund asset managers are primarily based on the funding status, membership fundamentals and cash flow outlook of the public pension plan or pension plan depositors, the net asset and liquidity position of the fund in relation to outstanding recourse debt, the fund’s investment track record and portfolio management strategy as well as the financial strength of plan contributors.