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 OMERS Administration Corporation’s (OMERS or the Fund) Issuer Rating at AAA. 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 trends on all ratings are 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.

The year 2022 was marked by rising interest rates, high inflation, the continuing Russia-Ukraine war, and fears of a global slowdown. Despite these factors, OMERS registered a positive growth in net assets to $124.4 billion as at December 31, 2022 (from $120.7 billion in 2021), with an investment return of 4.2%, net of expenses, generating $4.9 billion of investment income. Significant allocations to private assets, opting for short-term higher-yielding credit investments and currency diversification, were some of the key factors contributing to positive returns.

On both a fund and asset class level, OMERS measures return performance against the respective benchmarks (BMs). For the year 2022, these BMs were established at the beginning of 2022 under better economic conditions. OMERS set absolute return BMs rather than relative returns to focus on annually growing the assets, irrespective of market volatility and economic conditions, given the Plan’s current funding risk profile. Although positive, the 4.2% return underperformed the BM return of 7.2%, which was established at the beginning of 2022 under better economic conditions. Public asset classes lost 5.4%, underperforming the BM of 5.7%. Within this asset class, public equities lost 11.9% and bonds lost 3.8%, with credit investments being the only gainer with a return of 3.4%. Within the private investments, each asset class (private equity, real estate, and infrastructure) generated double-digit returns of 13.7%, 13.6%, and 12.5%, respectively, outperforming their BMs of 11.2%, 7.1%, and 7.7%. Net investment income of $4.9 billion contributed to 2.9% in net asset growth, more than offsetting net pension payments of $1.3 billion and $113 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 $122.7 billion as at YE2022 from $119.3 billion in the prior year.

The Plan’s funded status on a going-concern basis dipped to 95% as at YE2022 vis-à-vis 97% in YE2021, in part because of higher-than-expected price inflation. The funding deficit rose to $6.7 billion from $3.1 billion in the prior year, and unrecognized investment returns dropped down to a cumulative gain of $0.6 billion from a cumulative gain of $3.1 billion, providing a small cushion for potential future volatility in returns. The key reason for the decrease in the funded ratio and the increase in the funding deficit was higher-than-expected price inflation causing an overall increase in the funding deficit of $5.4 billion. OMERS' annual pensions increase formula, which is linked to Canada’s consumer price index, generated an increase of 6.5%, of which 6.0% was applied to pensions in pay on January 1, 2023, and of which 0.5% will be carried forward to increase pensions in 2024.

OMERS continued to issue MTNs while reducing its reliance on CP. Debt with recourse to the Fund increased to $11.4 billion from $10.6 billion, equivalent to 8.5% of adjusted net assets as at YE2022. Debt with recourse to the Fund remains below the internal long-term 10% limit set by the OMERS board and provides considerable room for cyclical fluctuations in asset values. During 2022, OFT issued its first sustainable bonds, 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 Global 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 $3.9 billion (greater than 75% of the authorized CP limit) and remained undrawn as at YE2022. 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 strategy's objectives.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/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 (May 17, 2022).

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

The principal methodologies applicable to the ratings are Rating Canadian Public Pension Funds & Related Exclusive Asset Managers (April 27, 2023; https://www.dbrsmorningstar.com/research/413011) and North American Structured Finance Flow-Through Ratings (November 22, 2022; https://www.dbrsmorningstar.com/research/405619).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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