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

DBRS Limited (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’s subsidiaries at AAA and R-1 (high), respectively, based on the unconditional and irrevocable guarantees provided by OMERS to the debt instruments. The trends remain Stable on all ratings. Despite the funding deficit in the OMERS Primary Pension Plan (the Plan), the ratings continue to be supported by the Fund’s high level of assets, low recourse debt burden, large base of financially sound employers and healthy demographic profile, which results in sustained net contribution inflows.

OMERS delivered a solid 10.7% gross total fund return in 2014, beating its benchmark by 260 basis point (bps), as investment performance was solid across nearly all investment teams. After a disappointing result in 2013, the public markets portfolio generated a strong 11.1% return, with the beta portfolio rebounding solidly in 2014. Private market assets collectively returned 10.3% in 2014, somewhat weaker than last year. OMERS Strategic Investments (OSI) was the only notable outlier, posting a -9.5% return, though these assets account for a small share of the Fund’s net assets. Net investment income of $6.5 billion and net contribution inflows drove net assets to $71.6 billion by December 31, 2014 (excluding the Retirement Compensation Arrangement and Additional Voluntary Contributions components, which are seen as less captive). This increase helped to bring down the Plan’s funding deficit to $7.1 billion as of year-end 2014, on a going concern basis; the Plan is on track to be fully funded by 2025. DBRS notes that OMERS Sponsors Corporation adopted a new Funding Management Strategy in 2014, which creates a framework for addressing future plan design decisions, and provides greater clarity and certainty to plan members and employers on contribution rate and benefits adjustments as the Fund moves through periods of funding deficits and surpluses.

Higher commercial paper outstanding drove debt with recourse to the Fund up by 18.8% to $3.6 billion, or 4.8% of adjusted net assets by year-end 2014, comfortably below the internal 10.0% limit. Current recourse debt levels remain commensurate to the assigned ratings and add financial flexibility. While overall leverage is expected to increase as the Fund broadens its global reach in private market assets and seeks to capitalize on the low interest rate environment, DBRS expects recourse debt to grow in a more measured fashion.

The long-term asset mix strategy remains unchanged at 53% public market assets and 47% private market investments. OMERS experienced a year of considerable transition in 2014. There were several notable changes at the senior management level, including a new chief investment officer in the public markets division, which itself underwent a large-scale portfolio restructuring in 2013. OMERS also consolidated the number of investment teams and streamlined the OSI portfolio. The existing strategic plan, which covers the 2012 to 2016 period, is coming to an end, and management is undertaking a strategic review, which, among other things, could result in a shift in the Fund’s asset composition, geographic focus or investment strategies. DBRS expects the strategic plan to be updated within the next year.

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.

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.

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