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Restrictions on Pension Investing: A Canadian Perspective

Restrictions on Pension Investing: A Canadian Perspective. Michael Nobrega OMERS President and CEO 4 June 2008. OMERS – Who We Are. Formed in 1962 Defined Benefit pension plan for local governments in Ontario Jointly sponsored and funded public sector plan

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Restrictions on Pension Investing: A Canadian Perspective

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  1. Restrictions on Pension Investing:A Canadian Perspective Michael NobregaOMERS President and CEO4 June 2008

  2. 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

  3. $1PensionBenefits 70centsInvestmentIncome + 15centsEmployee 15centsEmployer The Challenge The Pension Equation •  30% of average pension benefit is funded from contributions •  70% is funded from investment income + =

  4. Investment Profile An institutional investor with global reach

  5. Investment Performance Significant participation in Infrastructure Private Equity and Real Estate

  6. 2.8% 100% 6.0% 7.4% 3.1% 10.0% 7.9% 90% 11.9% 9.9% 10.3% 20.0% 80% 12.5% 70% 12.5% 60% Private Equity 57.3% Infrastructure 50% 54.1% 48.1% Real Estate 40% Public Equity 42.5% Interest Bearing 30% 20% 24.9% 10% 22.1% 21.7% 15.0% 0% 2003 Actual 2006 Actual 2007 Actual Target Investment Performance A Changing Asset Mix Strategy (includes Real Return Bonds – long term target 5.0%)

  7. The Pension Investment Rules The Federal Investment Rules

  8. 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

  9. 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 Germany Sweden Other developing Countries Decreasing Regulation QLR

  10. 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

  11. 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)

  12. 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

  13. Questions?

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