Restrictions on Pension Investing: A Canadian Perspective

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Restrictions on Pension InvestingA Canadian
Perspective
Michael NobregaOMERS President and CEO4 June
2008
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OMERS Who We Are

• Formed in 1962
• Defined Benefit pension plan for local
  governments in Ontario
• Jointly sponsored and funded public sector plan
• 380,000 members (including 103,000 retirees) 906
  employers
• Small actuarial surplus (80MM)as at Dec/07
• Net assets of over 51 billion as of Dec/07
• Fund returns 8.7 in 2007, 13.7 average in 2005
  - 07

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The Challenge
The Pension Equation

• ? 30 of average pension benefit is funded from
  contributions

• ? 70 is funded from investment income

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Investment Profile
An institutional investor with global reach
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Significant participation in Infrastructure
Private Equity and Real Estate
Investment Performance
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Investment Performance
A Changing Asset Mix Strategy
(includes Real Return Bonds long term target
5.0)
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The Pension Investment Rules
The Federal Investment Rules
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The Pension Investment Rules
Rationale for the Rules

• Rules exist to ensure pension funds are properly
  invested
• Quantitative limits derive from historic legal
  list approach to regulating insurance
• Limit risk of exposure to single company/sector
• Ensure that pension funds remain passive
  investors focussed on plan administration
• Prudent person standard added to PBA in 1990
• Rules harmonized in 2000

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The Pension Investment Rules
The Global Picture
PPR

• Internationally, pensions are regulated along a
  continuum between prudent person rules (PPR) and
  quantitative limit rules (QLR)
• Fewer quantitative limits allows for increased
  competitiveness
• Canada ranks 5th in the world in pension plan
  assets managed but is in the middle of continuum
  between PPR and QLR
• Large Canadian plans are at a competitive
  disadvantage over large plans in USA,
  Netherlands, UK

USA Netherlands UK Japan Australia Canada Italy G
ermany Sweden Other developing Countries
Decreasing Regulation
QLR
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The Pension Investment Rules
Impact on Canadian Pension Plans

• Impose burdens and costs
• Significant additional costs and intellectual
  capital required to ensure compliance
• Canadian pension funds losing out on
  opportunities to plans and investors from other
  jurisdictions
• Lower investment returns (estimated between 30
  90 bps)
• Passive investment strategy inconsistent with
  goal of an optimal pension delivery organization
  
• May result in challenges to meet future actuarial
  liabilities
• Has been shown to create intergenerational
  inequity

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The Pension Investment Rules
What is Being Done About the Rules?

• Active Campaign Under Way
• Industry leadership in seeking allies for reform
• Conducting research on the impact of the rules
• Making the case to government for reform
• Seeking an immediate exemption (provincial
  government)
• Working for longer term reform (Ontario Expert
  Commission federal government)

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The Pension Investment Rules
OMERS Submission to the Ontario Expert Commission
on Pensions

• Recommendations
• Exempt jointly-sponsored pension plans from
  quantitative investment rules
• Amend PBA to consist of fundamental principles
• Exempt public sector pension plans from solvency
  funding requirements
• Provide increased authority and enhanced role for
  FSCO

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Questions?