DBRS Morningstar Confirms OMERS Administration Corporation at AAA and OMERS Finance Trust at AAA and R-1 (high), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the AAA Issuer Rating of OMERS Administration Corporation (OMERS or the Fund). DBRS Morningstar also confirmed the R-1 (high) ratings on the Canadian Commercial Paper (Canadian CP) and U.S. Commercial Paper (U.S. CP; collectively, with the Canadian CP, the CP) of OMERS Finance Trust (OFT), as well as the AAA rating on OFT’s Medium-Term Notes (MTNs). The trend on all ratings is Stable. The ratings on the CP and MTNs are predicated on the unconditional and irrevocable guarantees provided by OMERS on issuances. 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.

OMERS delivered a 15.7% net return in 2021, outperforming its benchmark (BM) return of 6.6%, and exceeding BMs across all segments of the portfolio. Its investments in a high-quality and diversified portfolio positioned it well to capture favourable returns as the pandemic restrictions eased. Public investments generated a return of 14.6%, outperforming its BM of 5.8%. Within this asset class, public equities gained 20.7%, bonds gained 1.3%, and credit investments gained 5.8%. Within the private investments, private equity, real estate, and infrastructure generated double-digit returns of 25.8%, 15.9%, and 10.7%, respectively. Net investment income of $16.4 billion contributed to 14.5% in net asset growth, more than offsetting net pension payments of $988 million and $105 million in pension administrative expenses. As the Plan continues to mature, the Fund relies more on investment returns to grow and meet financial obligations. Net assets backing the Plan (which excludes the Retirement Compensation Arrangement and the Additional Voluntary Contributions component) increased to $119.3 billion as at YE2021 from $104.2 billion in the prior year. The Plan’s funded status on a going-concern basis remained unchanged at 97% as at YE2021. However, the funding deficit declined slightly to $3.1 billion from $3.2 billion in the prior year, and the unrecognized investment returns changed to a cumulative gain of $3.1 billion from a cumulative loss of $4.4 billion, providing a cushion for potential future volatility in returns.

OMERS continued to issue MTNs while reducing its reliance on CP. Debt with recourse to the Fund decreased to $10.6 billion from $11.2 billion, equivalent to 8.2% of adjusted net assets as at YE2021. Debt with recourse to the Fund remains below the internal, long-term 10.0% limit set by the OMERS board and provides considerable room for cyclical fluctuations in asset values. Subsequent to the fiscal year-end, OFT issued its first sustainable bond, amounting to USD 1.1 billion. The inaugural dual tranche offering comprised USD 600 million of 10-year notes and USD 500 million of 30-year notes. OMERS maintains a credit facility as backup liquidity support for the CP programs, which meets the DBRS Morningstar criteria outlined in “DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers.” DBRS Morningstar notes the maximum authorized CP limit (Canadian and U.S. CP programs combined) remained at $5.0 billion. The limit on the credit facility used as backup liquidity support for the CP program was $3.75 billion (75% of the authorized CP limit) and remained undrawn as at YE2021. While OMERS will likely continue to use leverage as the Fund broadens its global reach in private market assets and seeks to enhance investment returns, DBRS Morningstar expects recourse debt to remain within OMERS’ internal 10% limit over the long term.

OMERS continues with its 2025 Strategy, a multiyear plan that focuses on several priorities. The strategy addresses plan maturity, longer life expectancy, and decreasing investment return expectations; changing demographics and workplace trends; diversification of investments globally; and the incorporation of environmental, social, and governance (ESG) factors. OMERS adopts specific governance and risk management practices with a fundamental focus on funding risk to achieve the objectives of the strategy.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no environmental, social, and governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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

The principal methodology is Rating Canadian Public Pension Funds & Related Exclusive Asset Managers (April 26, 2022), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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 under Related Documents or by contacting us at [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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