Ontario Municipal Employees Retirement System

Ontario Municipal Employees Retirement System

October 19, 2007 13:29 ET

OMERS Urges Pension Commission to Abolish Costly Investment Rules for Pension Funds

TORONTO, ONTARIO--(Marketwire - Oct. 19, 2007) - Rules that restrict how much pension funds can invest in certain assets cost them billions of dollars of lost investment income and should be removed from Ontario's Pension Benefits Act, the OMERS Pension Plan urged the Ontario Expert Commission on Pensions.

At the same time, pension regulations should move from rigid rules to principles and to a cooperative regulatory model based on constructive industry consultation.

The federal investment rules included in the Pension Benefits Act limit pension funds to owning no more than 30% of a company's shares eligible to elect a board of directors. Of book value assets, they can invest only 5% in a single parcel of real estate or Canadian resource property, 15% in all Canadian resource properties, 25% in all real estate and Canadian resource properties, and 10% in any one entity.

"These rules are not only commercially bizarre, they're anti-Canadian," Michael Nobrega, OMERS President and Chief Executive Officer, told the Commission. "Consider the restrictions on Canadian resource properties. These rules limit how much we can invest in Canadian resource properties but we can invest in resource companies in Europe, Asia or South America. So much for Canadians enjoying the global commodities boom through their pension funds."

He described the 30% rule as equally bizarre. Canada is heavily populated by small and medium sized firms that need capital to grow. "In taking ownership of these companies to strengthen their governance and financial performance we are forced to surrender the right to vote all our shares. Controls like this, with no clear purpose, can be considered anti-Canadian small business."

Pension funds are forced to construct elaborate financial, legal and organizational structures to comply with the rules and achieve an appropriate level of influence over their assets. "These quantitative rules reduce our annual investment returns by 100 to 200 basis points a year. Over the past decade, we are talking about billions of dollars of lost income."

OMERS urged the Commission to ask the Ontario Minister of Finance to suspend the rules immediately for three years while government studies the issue further.

Mr. Nobrega recommended that Ontario's pension law respect the broad fiduciary powers of plan administrators in developing best industry practices by shifting to a principles-based approach from excessive use of rules. The Pension Benefits Act should state core principles for pension plans, such as to optimize investment returns without incurring undue risk; to deliver pension benefits at affordable cost; to comply with the "prudent person" test; to practice full transparency and disclosure to plan sponsors and members; and to define their governance structures and practices.

"With clearly stated principles, pension plans will be able to grow in the ways that are most appropriate to their individual mandates. Member and liability profiles differ. So do asset mix policies and investment strategies to meet long-term liability obligations. One size does not fit all. Principles would provide the flexibility for each plan to responsibly determine its own destiny," he said.

At OMERS, 70 cents of every pension benefit dollar comes from investment income. As investment performance carries the liability load, pension plans must have large and sophisticated investment organizations. "We believe that OMERS and other large public sector pension plans have earned the right to be treated with regulatory confidence by lawmakers. We are experts at pension administration and pension fund investing. We are passionate about doing the right thing for plan members. We have succeeded through markets good and bad over four decades."

In an era of complex and sophisticated investing, regulators and the regulated would benefit from greater clarity on how the law should be applied.

The Financial Services Commission of Ontario (FSCO) should be proactive in advising the industry and issue comprehensive policy statements for industry consultation. FSCO should also be empowered to issue binding rulings in advance of a pension plan following a proposed course of action. The Financial Services Tribunal should also have authority to arbitrate pension matters rather than having disputes go to the courts.

OMERS also recommended that public sector pension plans be exempt from the solvency valuations designed to safeguard the pension benefits of employees if a plan is wound up. "This makes sense in the private sector where there is a risk of employer bankruptcy. It makes no sense in the public sector where the likelihood of plan windup with a government sponsor is negligible."

Mr. Nobrega said that the Pension Benefits Act has failed to keep up with the changes that have occurred in pension plan governance and investment practices among the leading defined benefit pension plans. "A gap has opened up between legislative intent and industry best practices."

In encouraging the Commission to recommend small pension plans consolidate with each other or larger plans, OMERS said that Canada needs large pension funds with global investment organizations. "OMERS is the second largest fund in Ontario. But we are a small fund in the global context, ranking 46th. That's a humbling realization. Unless we grow, I would be surprised if we make the top 100 list in five to ten years."

Critical mass on a global basis leads to better investment opportunities, higher returns and cost-efficiency in delivering affordable pensions to their members."

OMERS is one of Canada's largest pension plans, with more than $48 billion in assets invested around the globe in publicly-traded investments, real estate, infrastructure and private equity. It provides pension services to approximately 372,000 active and retired members on behalf of over 900 employers across Ontario. To view a copy of the OMERS presentation and to learn more about OMERS please visit our website at www.omers.com.

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