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Restrictions on Pension Investing:
A Canadian Perspective
Michael NobregaOMERS President and CEO
4 June 2008
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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
OMERS – Who We Are
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70centsInvestment
Income+ =$1
PensionBenefits
15centsEmployer
+15centsEmployee
The Challenge
The Pension Equation
30% of average pension benefit is funded from contributions
70% is funded from investment income
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An institutional investor with global reach
Continent% of Fund
Canada 61.0%USA 18.8%Europe 14.5%Asia 4.9%Australia / Oceana 1.0%South America 0.6%Africa 0.2%
Investment Profile
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Investment Performance
24.9%21.7% 22.1%
15.0%
57.3%54.1%
48.1%
42.5%
11.9%
10.3%12.5%
12.5%
7.9%9.9%
20.0%
6.0% 7.4% 10.0%3.1%
2.8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2003Actual
2006Actual
2007Actual
Target
Private Equity
Infrastructure
Real Estate
Public Equity Interest Bearing(includes Real ReturnBonds – long termtarget 5.0%)
A Changing Asset Mix Strategy
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The Pension Investment Rules
The Federal Investment Rules
Rule Description
5% Rule Invest 5% or less of fund’s book value in single parcel of real estate or Canadian resource property
10% Rule Invest no more than 10% of fund’s book value in any one entity
15% Rule Invest 15% or less of fund’s book value in Canadian resource properties
25% Rule Invest 25% or less of fund’s book value in aggregate in real estate and Canadian resource properties
30% Rule Can only own 30% or less of shares eligible to elect corporate board
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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
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
USANetherlands
UKJapan
AustraliaCanada
Italy
GermanySweden
Other developing Countries
QLR
PPR
Dec
reas
ing
Reg
ulat
ion
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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