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OMERS president and CEO Michael NobregaDarren Calabrese

The Ontario Municipal Employees Retirement System saw its funding deficit climb in 2011, despite positive investment returns, as the crash of 2008 continues to inflict pain on its portfolio.

The plan, which invests on behalf of almost 420,000 members, said Friday that its funding deficit climbed to $7.3-billion last year from $4.5-billion a year earlier.

The increase is the result of the dramatic losses that the plan had in 2008, which it phases in over a five-year period according to actuarial rules, chief executive officer Michael Nobrega told reporters at a press conference. "We had a surplus in 2007," he noted.

But the losses incurred three years ago continue to sting, at a time when pension plans grapple with headwinds such as an aging population, low interest rates, and an unpredictable investment climate.

Recent surveys have suggested that Canadian pension plans saw their funding fall by almost 15 percentage points throughout 2011, leaving many with large shortfalls.

With the pension sector struggling as the baby boomers enter retirement, governments are considering a number of initiatives to bolster the retirement savings industry, some of which could benefit OMERS, Mr. Nobrega said.

He welcomed recent comments by Ted Menzies, the Conservative Minister of State for Finance, which suggest that pension plans will be allowed to compete with banks and insurers to manage Pooled Registered Pension Plans, a new pension scheme being rolled out by Ottawa.

Mr. Nobrega was also happy to see Ontario's much-publicized Drummond report recommend that the province look at increasing efficiencies within the pension system, something he hopes will lead to consolidation.

He said that Ontario needs pension "champions" that have world-class headquarters, and "you can't do it by having six, seven, eight pension funds in the $10-billion range."

Mr. Nobrega added that the Drummond report could result in OMERS' members seeing little or no salary increases in the near future, a development that would likely have a positive impact on the plan's liabilities but a negative impact on its contributions down the line.

In the meantime, OMERS said continued investment returns (which it hopes will be between 7 and 11 per cent annually over the long-term) and temporary contribution increases from members as well as benefit reductions should return the plan to surplus within 10 to 15 years. Mr. Nobrega said he doesn't think further contribution hikes or benefit cuts will be necessary.

OMERS earned 3.17 per cent on its investments, or $1.7-billion, in 2011, and its assets rose to an all-time high of $55.1-billion.

Canada's benchmark S&P/TSX composite index fell 11 per cent last year. But a rebound in the final quarter allowed plans, on average, to avoid investment losses, according to RBC Dexia Investor Services.

It was OMERS' private market portfolio – which includes assets such as infrastructure, real estate and private equity holdings – that kept its returns afloat while stock markets tanked. The private market portfolio generated a return of 8.2 per cent, while the public markets portfolio had a return of negative 0.22 per cent.

At the end of the year OMERS had 42 per cent of its assets in private markets, and 58 per cent in public. It has been shifting away from public holdings in recent years – in 2003, the mix was 18 per cent private and 82 per cent public. Its goal is to have roughly 47 per cent private and 53 per cent public.

Within its portfolio, OMERS also shifted away from stocks toward bonds in the second half of last year in an effort to decrease its risks.

It continues to hold more fixed-income investments, which now make up more than 30 per cent of its total portfolio, chief investment officer Michael Latimer said during a press conference. That's up about 12 percentage points from the start of 2011.

While OMERS' executives acknowledged fixed income might be risky these days, Mr. Latimer said it is difficult to keep up returns.