Today OMERS Administration Corporation advised the Plan’s sponsors that the 2013  OMERS investment return rate was 6.5% (gross). The 2013 returns did not meet theminimum gross return target of 7% (6.5% net of investment expenses). Last year the investment performance was 9.5% net on a gross return of 10%.

What does this mean? A lower than required OMERS investment rate of return means only a marginally improved funded status, from 85.6% to 88.2%. Based on the 2013 investment results, the funding deficit is $8.6 billion “due to higher actuarial asset values, higher contribution rates and lower inflation”.

The Sponsors Corporation commented:

“These returns fall short of our minimum gross return target of 7% and they may disappoint the expectations of many stakeholders. However, we are confident that we have made strong additions to the OAC Board with a number of highly experienced directors and an independent chair, who will provide effective oversight going forward.

While each individual year’s results are important, OMERS investment strategy is designed to perform over longer timeframes. The five- and 10- year rates of return are within the 7% minimum rate of return required to match assets with liabilities over the long term. However, historical returns may not be replicable going forward. The long term financial health of the plan continues to be challenged by the impacts of members living longer, a low interest rate environment and market volatility. The Sponsors Corporation is examining plan design options to better position the plan to withstand unforeseen external events”.

MEPCO concurs that the 2013 returns are disheartening. The results add to MEPCO/AMO’s anxiety about the funding status and the funding strategy. The current blended contribution rates (employer and employee) have increased 40% over the past five years and stand at an historical high of 21.38%. Given the continuing uncertainty about reducing the funding deficit, AMO and its Sponsor Corporation (SC) representatives remain focused on measured benefit reductions on a temporary and go forward basis as a reasonable and concise approach to dealing with the deficit sooner and with higher predictability. There is no desire to see more contribution increases.

Over the last six years, AMO’s SC representatives, supported by MEPCO, have submitted a series of Specified Plan Change proposals. Our focus has been on adjusting the OMERS plan benefit by reducing the 100% indexation, as other Ontario public sector plans, such as Teachers Pension have done. In fact, if plan sponsors had been able to accept the indexation proposal put forward by AMO’s SC representatives in 2007, the 2012 deficit would have been $2-3 billion lower and the blended contribution rate would be about 3% lower.