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

DBRS has today confirmed the Issuer Rating of OMERS Administration Corporation (OMERS or the Fund) at AAA and the ratings on the long- and short-term guaranteed debt of OMERS’ subsidiaries at AAA and R-1 (high), respectively, based on the unconditional guarantees provided by OMERS to the debt instruments. The trends on all ratings remain Stable. The ratings are underpinned by OMERS’ sizable asset base which greatly exceeds outstanding guaranteed debt obligations, a healthy active-to-retired member ratio and a large base of financially sound employers. The funding deficiency of the Primary Pension Plan (the Plan) remains a concern, but is expected to shrink in the coming years.

OMERS posted a 6.5% total investment return in 2013 driven by strong private market performance, but offset by weak returns in the public markets portfolio. The Fund notably underperformed the benchmark of 10.2%; however, over a longer ten-year period, OMERS has generated a sound 7.6% total investment return, which is better than the benchmark by 42 basis points. Sizable net investment income and continued net contribution inflows pushed net assets to $64.7 billion (excluding the Retirement Compensation Arrangement and Additional Voluntary Contributions components, which are seen as less captive). The funding deficit improved for the first time since 2007 to $8.6 billion, or 11.8% of accrued pension obligations, at YE2013 on a going concern basis. The funding position is expected to benefit from the Plan’s relatively sound demographics, recently implemented contribution and benefit changes as well as a revised investment strategy. The Plan is expected to return a funding surplus by 2025.

OMERS’ guaranteed debt declined by 21.7% to $3 billion by YE2013 because of the retirement of maturing debt and lower commercial paper outstanding. At a low of 4.4% of adjusted net assets, recourse debt is very manageable and has declined from a high of 8.8% in 2009, providing resilience to the credit profile. OMERS currently has no plans to increase recourse leverage, but this could change should market opportunities arise. DBRS expects OMERS’ recourse leverage to remain well below the 10% internal limit, while total portfolio debt (both recourse and non-recourse debt) is expected to remain below 40% of adjusted net assets.

The long-term asset mix policy remains unchanged at 53% public markets assets and 47% private markets assets; however, the Fund’s public markets portfolio has been restructured as a result of implementing a risk-balanced strategy. OMERS employs this strategy to deliver more stable long-term investment returns by better balancing risk among asset classes relative to the traditional 60% equity/40% bonds portfolio. Through this approach, OMERS aims to generate a higher risk-adjusted return with the same historical volatility. DBRS notes that the revised strategy requires increased use of economic leverage, namely derivatives, which in some cases introduce new counterparty and liquidity risk exposures versus investing in physical securities. In conjunction with the revised public markets investment strategy, the Fund has revamped its risk management framework to better monitor and manage its risk exposures. Going forward, DBRS will pay particular attention to the evolution of OMERS’ risk management practices as the risk-balanced strategy evolves.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Rating Canadian Public Pension Funds & Related Exclusive Asset Managers, DBRS Criteria: Guarantees and Other Forms of Explicit Support and DBRS Criteria: Commercial Paper Liquidity for Non-Bank Issuers, which can be found on our website under Methodologies.