OMERS earns 10% return in 2014, reduces funding shortfall

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The pension plan for Ontario municipal employees earned a 10-per-cent investment return in 2014 and reduced its funding shortfall as it continued to implement a new lower-risk investment strategy.

The Ontario Municipal Employees Retirement System reported its assets climbed to $72-billion in 2014, up from $65-billion at the end of 2013. The plan is now 90.8 per cent funded, up from 88.2 per cent a year earlier.

OMERS, which manages assets for 450,000 Ontario employees and retirees, has faced a significant funding shortfall since the financial crisis in 2008 when it reported a 15-per-cent loss that cost the fund $8-billion. In 2010, OMERS implemented a plan to eliminate the deficit by 2025, including a contribution increase for members to be phased in over three years.

The 2014 results are the first reported by new OMERS chief executive officer Michael Latimer, who replaced retiring CEO Michael Nobrega last year.

"Given that I've come in on April 1 of last year, we have an opportunity to take a view of our strategy, and so we're doing that with our board," Mr. Latimer said. "I think once we establish that road map … we will put the pin in the map, and we'll be focused."

In the mean time, OMERS has already pledged to increase its exposure to infrastructure investments in countries such as Canada and the U.S., as well as Australia.

"We've got more appetite for infrastructure. We like the stable cash flows that infrastructure provides to the portfolio," said Jonathan Simmons, chief financial officer at OMERS.

Mr. Latimer added that out of the opportunities he sees to invest in private equity, real estate and infrastructure, "the one that sits on the top of the priority list for us is … infrastructure."

OMERS said its Borealis Infrastructure division posted gains of 12.7 per cent, Oxford Properties real estate earned 8.7 per cent and OMERS Private Equity investments earned 14.4 per cent.

As of 2014, OMERS' portfolio was weighted towards the public markets, which made up 58 per cent of investments. Within a few years, Mr. Latimer intends to reduce that to about 53 per cent.

OMERS needs to earn a long-term 6.5-per-cent annualized return on its investments to meet its pension obligations. The fund currently has a net five-year annualized rate of return of 7.9 per cent, and a 10-year annualized return of 7 per cent. OMERS says that 2014 results beat its benchmark of 7.7 per cent.

The fund's 10-per-cent return for 2014 is an improvement from 6.5 per cent earned in 2013, when OMERS introduced a new investment strategy that lost money. The strategy is aimed at reducing public market investments such as stocks and plain-vanilla bonds, replacing them with a lower-risk portfolio with holdings such as inflation-linked bonds and commodities, reducing the risk of losses from major market crashes.

The portfolio lost $407-million in 2013, however, due to a sudden spike in interest rates. OMERS did not detail the results for the new portfolio in 2014, but the fund said its $41-billion capital markets portfolio in total earned returns of 10.7 per cent for the year. Investments in bonds performed well, helping boost returns this year.

The only negative return for a major investment group was posted by OMERS Strategic Investments, which lost 10 per cent last year.

Strategic Investments is the smallest of OMERS main divisions with $2.2-billion in assets invested in alternative areas, including resources and energy, venture capital and emerging new markets such as airport management and lottery operations. OMERS annual report last year said 53 per cent of the division's holdings at the end of 2013 were in the Alberta oil and gas sector, which drove returns down in the year.

With files from Jacqueline Nelson.