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 of 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 deficit in the Primary Pension Plan, the ratings continue to benefit from a sizable liquidity position, a sound ratio of active-to-retired plan members, a low recourse debt burden, and a history of prudent management.

Amid a very difficult investment climate, particularly in the second half of the year, OMERS delivered a total portfolio return of 3.17% in 2011. This was below the Fund’s actuarial assumed return, but still 65 basis points greater than the portfolio benchmark, driven primarily by strong returns from the private markets portfolio. Fixed income products also contributed to asset growth but failed to match the benchmark. Considerable headwinds stemming from the European sovereign crisis, slower growth in emerging market economies, and softer demand for commodities helped to dampen performance in the public equities portfolio, which provided a meaningful offset in total portfolio returns.

The funding status of OMERS Primary Pension Plan (the Plan) continued to worsen in 2011 to a going concern deficit of $7.3 billion, or 11.3% of accrued pension obligations, as a result of continued amortization of unrecognized prior years’ losses, increased accrued pension obligations, and unfavorable experience compared with economic and Plan demographic assumptions.

The funding deficit is expected to widen further by the end of 2012, at which point the losses suffered in 2008 will be fully recognized, thus easing the pressure on the funding position in the years to come. Following the filing of the December 31, 2010, actuarial valuation, the Plan sponsors approved temporary contribution rate increases for both employers and members, averaging 2.9% over a three-year period (1.0% for each of 2011, 2012 and 0.9% for 2013), and benefit reductions starting in 2013 for members who leave the plan. These actions will provide relief to the Plan’s funding status, and are expected to help eliminate the deficit over the next ten to fifteen years.

During the year, OMERS moved closer to its long-term target asset mix policy of 47% private markets and 53% public markets. As exemplified through the 2011 results, OMERS’ capital shift to private markets is designed to enhance diversification, reduce exposure to volatile public equity markets, and ensure reliable and predictable cash flows to help pay pensions. OMERS also continued in its efforts to increase its geographical diversification, boost its active internal asset management capabilities, and expand its capital base.

Recourse debt declined by 19% to $3.6 billion as at December 31, 2011, as commercial paper outstanding was reduced during the year. Sitting at 6.2% of adjusted net assets, recourse debt remains manageable, while liquidity as measured by DBRS was maintained at a substantial level. OMERS currently has no plans to increase recourse debt but noted that this could change should market opportunities arise. The internal debt policy was revised in 2011, with the definition of total debt (both recourse and non-recourse debt) broadened, and the maximum permitted total debt amount increased from 20% to 40% of adjusted net assets, although the 10% internal limit for recourse debt remains unchanged. The continued expansion in the infrastructure and real estate portfolios is likely to result in continued growth in non-recourse debt over the medium term. Recourse debt may also rise over the medium term, depending on investment opportunities, but is expected to remain within the 10% limit, which, combined with OMERS’ sizable asset base and substantial liquidity, provide considerable flexibility.

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

The applicable methodology is Rating Canadian Public Pension Funds & Related Exclusive Asset Managers, which can be found on our website under Methodologies.