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GOVERNING A LARGE, COMPLEX AND
GLOBAL PENSION-BASED ENTERPRISE
S U B M I S S I O N BY
T H E
B OA R D O F D I R E C TO RS
O F
O M E RS A D M I N I ST RAT I O N
C O R P O RAT I O N
TO
TO N Y D E A N
O M E RS 2012
G OV E R N A N C E R E V I E W E R
AU G U ST 29 , 2012
T A B L E O F C O N T E N T S
Letter from the OAC Board Chair 3 Key Points 6 A Brief Contextual History 7 What Needs to Be Governed? 12 The OAC Today and Tomorrow 15 Enhancing OAC Governance 33 Clarifying Roles and Authorities 39 Conclusion 41
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August29,2012Mr.TonyDeanOMERS2012GovernanceReviewerOMERSGovernanceReviewc/oMunicipalFinancePolicyBranchMinistryofMunicipalAffairsandHousing777BayStreet,13thFloorTorontoONM5G2E5DearMr.Dean:OMERSAdministrationCorporation(theOAC)welcomestheopportunitytomakeaformalsubmissionasyoureviewtheeffectiveness,efficiencyandfairnessofOMERSgovernancestructure,asrequiredundertheOntarioMunicipalEmployeesRetirementSystemReviewAct,2006.TheOACBoardacceptsthatithasafiduciarydutytomakeasubmissiononbehalfoftheOACandalltheplanmembersitserves.Thegovernanceofapension‐basedinstitutionthatisimportanttosomanyOntariansdeservesbroad‐basedandtransparentconsultation.HowOMERSisgovernedandbywhomisalsocriticaltorelationshipbuildingwithawidearrayofstakeholdersandinvestmentpartnersinOntario,acrossCanadaandincreasinglyworldwide.TheOACBoardhascarefullyconsideredyourmandateandtermsofreference.Weconvenedfourfull‐dayspecialgovernancereviewmeetingswithafacilitator,developedaseriesofgovernancediscussionpapersandsharedourinitialthoughtsonwaystoimprovetheefficiency,effectivenessandfairnessofOMERSgovernancewiththeSponsorsCorporationBoard(theSCBoard).FollowingthesesessionsandourexchangewiththeSCBoard,wedecidedthat,insteadofmakingspecificrecommendations,wewouldadoptthefollowingprinciplestoshapeoursubmission:
1. TheOACandSCBoardsshouldmutuallyagreeonrecommendingchangestotheOMERSAct,2006,wheneverpossible.
2. TheOACBoardiscommittedtotheexistingbi‐cameralpartnershipmodel.
3. ThesponsorsoftheOMERSPrimaryPensionPlanhavetheultimateauthoritytonominatecandidatesdirectlytotheOACBoard.
4. EmployeeandemployersponsorshaveequalrightstonominatecandidatestotheOACBoard.
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5. TheOACBoardiscommittedtogovernanceexcellenceandbestpracticesadaptedtotheneedsofajointlysponsoredmulti‐employerpensionplan.
6. OACBoardeffectivenessincarryingoutitsfiduciaryandoversightrolesrequiresdirectorswiththerightmixofcompetenciesrelevanttoplanadministrationandfundinvesting.
7. TheOACBoardrequiresarobustnominatingprocessthatacknowledgesthecompetencyneedsoftheBoardasawhole.
8. TheOACBoardisbestpositionedtoidentifythegovernanceneedsoftheOACBoardandprovideguidancetosponsorsonnominatingcandidatesthatcanfillcompetencygaps.
9. Therobustnominatingprocessmaybesupportedbyasearchfirmtoassistsponsorsinsourcingandevaluatingpotentialdirectorcandidates.
10. OMERSgovernancestructureshouldbesufficientlyflexibletoaccommodatefutureplanmembershipgrowth,includingplanconsolidation,whichisessentialtothePrimaryPensionPlan’slong‐termfinancialsustainability.
11. TherolesanddutiesoftheSCandOACrequirecleardelineation,reducingoverlapwhereverpossible,toensureefficientandeffectivegovernance.
12. ThesuccessofOMERSdependsoncooperationandpartnershipbetweentheOACandSC.
Astheresultofourconsiderationoftheseprinciples,theOACBoarddecidedtofocusitssubmissiononthemandateoftheOACandtheroleofitsboardbyasking:
• Whatneedstobegoverned?• WhatistheOACtodayandtomorrow?• HowshouldOACgovernancebeenhanced?• Whereandhowshouldrolesandauthoritiesbeclarified?
OnAugust23,2012,theOACBoardunanimouslyapprovedthissubmission,directedmetosubmitittoyouandagreedtopostitatthattimeontheOMERSwebsite.ThesubmissionbeginswithabriefcontextualhistorytodefinetheOAC’sroleastheplanadministratorandfundtrusteeforOMERSPensionPlans.Wethendescribeinsomedetailthelarge,complexandglobalpension‐basedenterprisethatneedstobegoverned.TheOACisoneofthelargestcorporationsinOntario.Itemploysapproximately1,000professionalsinplanadministrationandfundinvestingandhasanorganizationstructure,policies,procedures,protocols,legalandethicalobligationsandspecifieddutiesmuchlikeanypublicorprivatesectorcorporation.TheOACisalsosubjecttocommonlawfiduciaryobligationsandOntario’sPensionBenefitsActinitsadministrationandinvestmentofthePensionPlans.Thegovernanceofsuchavitalprovince‐widecorporationshouldbeanexemplarofbestpracticesinOntario’spublicsector.
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Wethenexplorewhatcanbedoneundertheexistingbi‐cameralmodeltoimprovethegovernanceoftheOACandprovideexamplesofoverlappingauthoritiesthatarecausinginefficiencies.Amajorissuethataffectsgovernanceefficiency,effectivenessandfairnessismatchingthecompetenciesoftheOACBoardwiththecomplexitiesandscopeoftheOACitself.OurBoardhasaddressedthischallengewithinthelimitsofourstatutoryauthoritiesfornearlyfiveyears,andwewelcomeyourindependentviewsonhowwecanmakesubstantiveprogressaswellasimprovetheOACBoardnominatingprocess.OnapersonalnoteasChair,IbecameanOMERSmemberin1984andjoinedtheOMERSBoardin1997.Ihavehadafront‐rowseatfor15yearstothesurprisesthatcanchallengegovernance.OMERSwentfromahugefundingsurplusin1998intodeficitby2003,gotbacktobreakevenforabriefmomentin2007andthenfellsteeplyintodeficitwhenthe2008globalcreditcrisisshookcapitalmarkets.In2003and2004,theOACBoardandManagementbegantoaddresstheneedtotransformOMERSinreadinessfortroublingtimesahead.OMERShastransitionedfromatraditionalandpassivepensionplanintoadynamicandprogressivepension‐basedcorporation,ajourneythathasinvolved40directorsandthreeconsecutiveCEOs.Likeotherlargebusinesses,theOACfacesmanyinvestment,operationalandstrategicrisks,anditdoesn’ttakemuchtotarnishourTripleAreputation.Thegovernancechallengedoesnotgeteasier.Wehaveafundingdeficittocorrectandtherightinvestmentstrategytogetbacktosurplusataffordablecontributionratesforemployersandplanmembers.OurjobasdirectorsistomakesurethatManagementdeliversonthepensionpromise.Withthepublicmarketshighlyvolatile,thereismuchforustobeconcernedabout.TheOACBoardiscurrentlyreviewingtheappropriatenessofitsassetmixpolicyandwhetherweshouldacceleratethealreadysubstantialmoveintoprivatemarketinvestmentstodelivermorestableandpredictableinvestmentreturnstounderwritethepensionpledge.
WelookforwardtodiscussingourrecommendationssothatOMERScanmoveforwardwithconfidenceunderanefficient,effectiveandfairgovernancestructurethatservicesthebestinterestsofallplanmembersandemployerswithinthecontextofpublicpoliciesandtheinterestsoftheprovince’staxpayers.SubmittedonbehalfoftheOACBoard,RickMillerOACBoardChair
• The OMERS Administration Corporation is one of Ontario’s largest
and most important corporations providing vital fi nancial security and
pension services to more than 420,000 pension plan members.
• OMERS should be an exemplar of best governance practices adapted
to the needs of a jointly sponsored multi-employer pension plan.
• All employer and employee sponsors groups should be actively
and directly engaged in appointing those who govern the OMERS
Administration Corporation through a robust and transparent
nominating process.
• The OMERS Administration Corporation requires a board of directors
that has competencies aligned with the scope and complexity of an
increasingly global pension-based enterprise under professional
management.
• OMERS existing governance structure requires clarifi cation of
the roles and authorities between the fi duciary board and the
non-fi duciary board.
• OMERS governance structure must be fl exible to accommodate future
employers and plan members, recognizing that plan membership
growth is essential to the continued long-term sustainability of the
OMERS Primary Pension Plan.
KEY POINTS
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PG 6 – Key Points with bleedsOAC bleed pgs Aug25.indd 1OAC bleed pgs Aug25.indd 1 8/27/12 3:13:30 PM8/27/12 3:13:30 PM
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A BRIEF CONTEXTUAL HISTORY
The Ontario Municipal Employees Retirement System Review Act, 2006 requires a
review of the efficiency, effectiveness and fairness of the actual governance and
administration of OMERS since 2006. The scope of the review also includes an
evaluation of the efficiency and effectiveness of the decision-making by the Sponsors
Corporation (the SC) and its impact on the governance of the Pension Plan. This
submission focuses primarily on governance of OMERS Administration Corporation (the
OAC) and its relationship with the SC.
Governance History
OMERS governance has evolved since the first municipal members joined the Pension
Plan on January 1, 1963. Until 1967, direct taxpayer representatives dominated the
OMERS Board with three provincial officials, two municipal councilors and two
municipal treasurers, and only two plan members on the board.
Over time, provincial representation diminished. By 1980, one provincial official served
on the OMERS Board, a situation that continued until 2006. The presence of provincial
officials on the OMERS Board reflected Ontario’s funding obligation until plan changes
in 1992 required members and employers to share funding shortfalls or surpluses
equally, i.e. joint sponsorship.
Throughout most of OMERS history (1963 until 2006), two municipal councilors (or
local board members) served as directors, representing taxpayers. The requirement
that two board members be municipal treasurers changed in 1967 to any municipal
official and by 1980 expanded to four municipal officials.
On the employee side, plan member representation increased from two to five
directors by 1991, plus a retiree. By this time, the OMERS Board consisted of one
provincial official, two municipal councilors (or local board members), four employer
officials, five plan members and a retiree. The composition of the 13-member board
remained until the dual-corporation structure was introduced in the OMERS Act 2006.
Under the bi-cameral model introduced in 2006, the SC identified 13 designated
sponsors with the right to appoint members of the SC Board and the OAC Board. On
the SC employer side, the designated sponsors are associations with the exception of
the City of Toronto. On the SC employee side, three are employee or retiree
associations and four are unions.
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Today, the OAC Board has 14 directors1 with equal voting rights, and board decisions
are made by a simple majority vote. Seven directors are appointed by employer
sponsors, six directors by organized plan members and one director by retirees.
Critical Definitions
A good place to begin in examining the efficiency, effectiveness and fairness of OMERS
bi-cameral model is by defining two critical pieces:
i. OMERS defined benefits pension plans (collectively, the Pension Plan) that is a
financial arrangement or agreement to deliver the pension promise to plan
members; and
ii. the large and complex corporation, the OAC, that is the plan administrator and
the pension fund trustee.
Prior to 2006, a single corporation and fiduciary board governed OMERS. Among its
responsibilities, the single corporation and board recommended changes in
contribution rates and benefit levels, consistent with the requirements of OMERS
funding policy, to the Ontario government. The OMERS Board also notified the
government of pending board vacancies and the Ministry of Municipal Affairs and
Housing contacted sponsor groups directly to solicit their nominees, who were
subsequently appointed by the Ontario government.
The 2006 devolution of Ontario government powers to the OAC and the SC has added
a layer of governance complexity, largely due to the overlap of certain responsibilities
between the boards.
The Pension Plan as a Financial Agreement
The assets of the Pension Plan are held in trust for the benefit of plan members and
the Pension Plan is obligated to make benefit payments to retired members every
month. Payments may be required earlier than assumed due to early retirements, or
for a longer duration than assumed if retirees (and their survivors) live longer than
projected by mortality tables. The obligation to the youngest plan members today
could easily span 70 years.
1 13 designated sponsors appointing 14 directors is not symmetric because two sponsors have multiple appointments, one employee sponsors group alternates appointments between two unions, and two employer groups alternate an appointment
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Since the OMERS Act and its Regulations were introduced on January 1, 1963, this
financial arrangement or agreement (that is, the Pension Plan) has been a living
document that has required periodic amendments to OMERS enabling legislation. Prior
to the OMERS Act 2006, the legislation was amended 19 times and since 2006 three
times, and the Regulations were amended 76 times. Opening the legislation from time
to time has kept pace with the evolution of OMERS investment and plan administration
policies.
The OAC as Pension Plan Administrator
Under the OMERS Act 2006, the OAC is the plan administrator. It has the primary
responsibility for delivering the pension promise because it has the fiduciary
responsibility to the entire plan membership as required by the Pension Benefits Act.
The OAC as Pension Fund Trustee
Under the OMERS Act 2006, the OAC is the pension fund trustee. It invests the plan’s
funds to ensure that net assets (that is, investments and projected contributions by
employers and plan members) are sufficient over the long term to make benefit
payments when plan members retire.
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The management of the Pension Plan’s assets and liabilities over the long term must
be seen in the context of membership demographics and plan maturity on the liability
side, and employer and employee contributions, the investment strategy and future
expected investment returns on the asset side. The OAC is (and through its
predecessor corporation has been historically) responsible for the Pension Plan’s
funding policy because it has the sole statutory authorities for establishing the
actuarial methodology and assumptions, appointing the external actuary and
developing and implementing the investment strategy.
In the event there is a funding surplus or deficit, the OAC informs the SC (as it did the
Ontario government between 1963-2006) so that the SC can make decisions on
adjusting contribution rates and benefit levels within the parameters (such as
regulatory requirements) set by the OAC funding policy.
Common Law Fiduciary Duty
To fully understand the role of the OAC as plan administrator and pension fund
trustee, it is important to appreciate the meaning of common law fiduciary duty in the
pension plan context. A widely accepted definition by a distinguished Canadian
regulator (now a Court of Appeal judge) is as follows:
“The result of one person being held to be a fiduciary in respect of another is
that the first person owes a duty of loyalty to the other. In the pension plan
context, the duty of loyalty translates into an obligation on behalf of those
administering the plan to act honestly, prudently, diligently, even-handedly,
with strict candor and confidentiality and strictly in the best interests of the plan
members. The duty of loyalty precludes those administering the plan from
making unauthorized profits, from delegating their responsibilities and from
placing themselves in a position of conflict of interest”.2
2 Eileen E. Gillese, “Fiduciary Responsibility – A Regulator’s Viewpoint” (1995), PCOP Bulletin, Vol. 6, Issue 2
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Section 22 of the Pension Benefits Act imposes a similar fiduciary obligation on the
OAC and the OAC Board.
Fiduciary duty, also described as one of “utmost good faith”, results in the actions of the fiduciary being “viewed with a strictness unknown to most other areas of law”.3
Moreover, the trust relationship is the most exacting of fiduciary relationships in terms
of accountability and associated liability.
In the case of OMERS, this means that the OAC must always: (i) act strictly in the
best interests of all plan members in its administration and oversight of the pension
plan assets and liabilities; and (ii) act in an evenhanded manner with respect to all
classes or categories of members and participating employers.
OAC/SC Relationship
How does the SC relate to the Pension Plan and its administrator and pension fund
trustee (the OAC)?
The SC is a special entity created in 2006 by the Province of Ontario to assume its
pre-2006 responsibilities for making plan design decisions, plan amendments, setting
contribution rates and appointing directors to the OAC. The intent of the legislation is
to separate the entity that sets the terms of the pension plan text (impacting only the
employer/employee relationship) and the fiduciary body that acts as the plan
administrator and pension fund trustee.
The SC is not an administrator or a trustee. It does not hold plan assets and does not
have fiduciary duties to plan members. Under the OMERS Act 2006, its key
responsibilities are to make plan design changes and set contribution rates (both
within the context of the OAC funding policy) and to file an actuarial valuation report
more frequently than required under the PBA.
The OMERS Act 2006 also gave the SC Board exclusive authority to appoint OAC
Board members and set their compensation and expense reimbursement policy.
The Governance Challenge
Given its responsibility and obligation to act as the pension plan administrator and
pension fund trustee, the OAC requires professional management which, in turn,
requires informed governance oversight by a board of directors that has the requisite
level of expertise and the ability to always act in the best interests of the entire plan
membership. The OAC Board’s directors are required to be independently minded and
to be at arm’s length from the influence of those that appointed them.
Reinforcing this point of law for all stakeholders will go a long way to clarifying the
roles and responsibilities of the OAC and SC – and thus improve the efficiency,
effectiveness and fairness of the governance model.
3 Regal Hastings Ltd. V Gulliver (1942) 1 All E.R. 378 at 381
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WHAT NEEDS TO BE GOVERNED?
In addition to examining the governance of the SC as specified in the Review Act, a
central issue for the Reviewer to consider is the kind of governance appropriate for a
large and complex global pension-based corporation like the OAC.
The OAC is one of Ontario’s largest corporations and touches the social and economic
health of every community in the province. One in 20 Ontario employees is an OMERS
member. Together these members contribute more than $1 billion annually to the
Pension Plan. Every municipality and other participating public sector employers in
Ontario communities also contribute tax dollars exceeding $1 billion annually.
Approximately 420,000 members (and their surviving dependents) rely on OMERS for
retirement income and most of it will be paid from investment income.
As an economic force, OMERS has approximately $54 billion invested in Canadian
businesses that employ well in excess of 10,000 people (with $26 billion invested
outside Canada).
OMERS is a major investor in Bruce Power’s six operating nuclear units and the
refurbishment of two nuclear units which have been laid up for 17 years, which (in
aggregate) provides 25% of Ontario’s electricity supply; Teranet that manages
Ontario’s electronic land registry; LifeLabs that processes more than one-third of
Ontario’s medical testing for patients and physicians; the Detroit River Tunnel that
handles up to $20 billion of annual goods traded between Canada and the United
States; Enwave that provides green technology cooling to Toronto’s commercial and
institutional buildings; and Husky International Ltd. – headquartered in Bolton,
Ontario – with global sales exceeding $1 billion.
OMERS owns and manages 20% of Toronto’s Class A office space, three super-
regional shopping malls in the Greater Toronto Area, 2,300 long-term care facilities in
12 Ontario communities, hospitals in three Ontario cities, 5,000 residential units in 10
Ontario cities and the Metro Toronto Convention Centre. New properties are being
developed to meet Toronto’s future commercial growth.
Photos: 1. 5,000 residential units 2. Teranet: Ontario electronic land registry 3. Husky Injection Molding Systems 4. LifeLabs 5. Metro Toronto Convention Centre 6. Office towers in downtown Toronto 7. Bruce Power nuclear plant 8. Toronto super-regional malls 9. Porter Airlines 10. Detroit River Tunnel
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The OAC employs more than 1,000 professionals in plan administration, fund
investing, asset management and corporate functions. This corporation has an
enormous wealth of talent in employees as diverse as corporate executives, actuaries,
accountants, lawyers, engineers, customer service specialists, stock pickers, portfolio
managers, securities and foreign currency traders, risk managers, IT specialists and
teams in asset classes like private equity, real estate, infrastructure and oil and gas
properties.
Keeping such a diverse professional management team accountable for proper
management of the Pension Plan is the primary role of the OAC Board, which asserts
its authority by controlling OMERS strategic direction, demanding regular and detailed
reporting, setting pre-determined results in exchange for performance-based
incentives and monitoring compliance with behavioral policies and procedures. The
role the OAC Board plays matters to the province and its local communities, to active
plan members, retirees and employers, and to the OAC’s investment partners.
A corporation of such vital importance to Ontario should be an exemplar of best
governance practices in its public sector and among Canada’s largest pension plans.
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THE OAC TODAY AND TOMORROW
OMERS is a well-structured organization with three cornerstones: Pension Services,
Investment Entities and the Corporate Office. The nature and scope of the core
businesses highlight why the governance of such a large and diverse organization
requires directors with specialized knowledge and expertise.
Pension Services
Pension Services deals with regulatory, actuarial, funding policy, plan administration
and plan member services and is an innovator in developing savings products for plan
members. It has its fingers on the pulse and concerns of employers, active members
and retirees through more than one million electronic and face-to-face contacts per
year with stakeholders in Ontario. The customer service organization is watched over
by the OAC Board’s Member Services Committee, which oversees the Pension Plan’s
liabilities and regulatory framework; ensures Management accountability for funding
and actuarial matters; recommends the appointment of the external actuary, actuarial
methods, assumptions and valuations; reviews strategic initiatives for new products
and services; and oversees plan administration.
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Plan administration and pension services expanded following the Pension Plan’s
inauguration for municipal employees on January 1, 1963 as the government decreed
new employers and employees eligible to join – utility commissions and children’s aid
societies in 1966, all new municipal employees in 1968, municipal councilors in 1972
and any organization providing local government services (known as associated
employers) since 1998. A diversified multi-employer plan emerged, bringing together
tax-funded employers and unionized and non-unionized employees throughout
Ontario.
Today, the Pension Plan has 950 employers, although only 25 employers have more
than 1,000 plan members. On the employee side, the Pension Plan has 420,000
members (including retirees). Active members are represented by 36 unions and
associations, of which six unions/associations have more than 7,500 plan members
each.
A Professionally Managed Customer Service Organization
In the past five years, Pension Services has evolved from a traditional transaction-
based plan administrator into a full-fledged and professionally managed customer
service organization. It employs about 170 professionals with diverse talents,
including benefits processors, customer service representatives, project managers,
information technology specialists, operations managers, actuaries, lawyers and
policy, government and stakeholder relations and communications specialists.
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Stakeholders and plan members are engaged through an extensive outreach program
including 340,000 inbound and outbound calls per year; 1,000 education sessions for
20,000 stakeholders and plan members annually; two annual stakeholder information
meetings; presentations to stakeholder organizations; and relations with Canadian
governments and non-government organizations in the financial, pension, public
policy, educational and union sectors. The OAC web site has 770,000 visits annually
and fully discloses OMERS financial information through an electronic annual report
that combines information for the OAC and SC. All members also receive a simplified
annual report.
On the regulatory front, tenacious effort over many years culminated in the
elimination or reduction of regulatory barriers to growth contained in the Federal
Investment Regulations that are incorporated in Ontario’s Pension Benefits Act. In
2011, after three years of effort, the OAC gained exemption from solvency funding as
a jointly sponsored pension plan, to the benefit of all stakeholders as well as giving
OMERS a competitive advantage for pension plans lacking solvency relief.
Technological Sophistication
Pension Services installed most of its current pension systems 15 years ago to
improve productivity, service standards and data integrity, positioning the OAC as an
industry leader in customer service. Today, it is preparing for a new era of potential
growth with a pension system incorporating advanced technologies, such as cloud
storage of pension data and data mining and analytics, to design better products and
outreach strategies.
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The new Pension Services IT system, scheduled for completion in 2014, is flexible,
sustainable and scalable. It will provide increased functionality and flexibility to handle
growth in new services and products and accommodate new employers and their
pension plans.
An Innovative Customer-Focused Business
For many years, plan members asked OMERS to provide savings products. OAC
responded with the Additional Voluntary Contributions (“AVCs”) program. The program
allows plan members to make additional contributions to the Pension Plan and transfer
RRSP funds into an AVC account. AVCs were first offered in 2011 and in two years
7,000 plan members have contributed $152 million. In the next five years, AVCs could
raise as much as $1 billion. The AVC program has sparked member interest in buying
back past service to enhance pension benefits and transfers into the Pension Plan.
Buybacks also have raised about $150 million of capital in the last two years.
The Plan’s Funding Policy
Pension Services is responsible for the Pension Plan’s funding policy, including the
actuarial methods and assumptions, based on recommendations by the external
actuary appointed by the OAC. Senior management, with the assistance of the
actuarial and legal teams, provides extensive technical support to the SC. This support
was critical in assisting the SC Board in making knowledgeable decisions about
contribution rates and benefit changes to address the Pension Plan’s funding
deficiency; played a critical role in the development of the SC’s Statement of Plan
Design Objectives and Strategy setting out protocols for future contribution rate or
benefit changes; and clarified the methodology for contribution rate allocations
between different membership classes (NRA 60 and NRA 65) within the Pension Plan.
Plan Membership Growth
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Pension Services discusses consolidation opportunities with Ontario public pension
plans lacking scale and sufficient internal resources in plan administration and
investing. Current discussions include three major municipalities regarding their closed
plans and other municipally related plans that fall within Section 5 of the OMERS Act.
The OAC’s Strategic Plan emphasizes plan membership growth beyond Sections 5 and
6 employers. To facilitate this membership growth, at the direction of the OAC Board,
Management has undertaken extensive research to develop potential new benefit
classes within the Pension Plan that should appeal to plans seeking more flexible
terms than the current plan text allows. This growth would support OMERS
sustainability by allowing for the most efficient risk pooling (for assets and liabilities)
across broad groups that over time would reduce contribution rate volatility and
reduce administration costs and enhance investment returns.
While there are risks in plan membership growth, they are overshadowed by the risks
to OMERS staying with the status quo and the public perception that defined benefit
plans are financially unsustainable. Public policy discussions at both the federal and
provincial government levels are leap-frogging other public policy issues as
governments come to terms with an aging population and a pension system with little
flexibility for needed and important change.
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The Investment Enterprise
With $80 billion of capital under management, including $55 billion of Pension Plan net
assets, the OAC invests in a wide diversity of assets around the world. It has
specialized investment platforms that originate and actively manage investments.
Many transactions are complex and individually very large, often deploying advanced
investment techniques.
The OAC Board is committed to protecting OMERS Triple A credit rating by complying
with legislation that requires pension funds to invest prudently and avoid excessive
use of debt. On June 27, 2012, Standard & Poor’s affirmed OAC’s ‘AAA’ long-term
issuer credit and ‘A-1+’ short-term ratings and stated:
”The affirmation reflects our view of OMERS very strong net asset base;
continued participation of Ontario municipalities, local boards, including school
boards (non-teaching staff only) and their employees; and solid long-term
investment performance. The stable outlook reflects our expectations that in
the next two years, the fund will continue increasing its strong net asset
position and maintain its very strong liquidity levels, pension contribution
inflows will continue to be stable, and investment performances meet or
exceed their benchmarks.”
OAC is one of a handful of Canadian institutions with a Triple “A” credit rating – fewer
than 10 institutions. Besides the Federal Government, no Provincial Government has a
Triple “A” credit rating other than Alberta. No Canadian chartered bank has a Triple
“A” credit rating.
OMERS Triple “A” credit rating is the result in part of the OAC Board’s decisions to
expand the OAC’s direct professional management of the Pension Plan’s assets and
diversify the asset base by entering new asset classes.
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It is the breadth, depth and complexity of this professional management that requires
informed governance. This directly led to the OAC Board passing a resolution in 2008
to move toward a board on which sponsor directors would be augmented by external
directors with investment, financial experience and other required board skill sets.
This composition has been recommended to the SC Board which controls the
appointment process.
Liabilities Drive the Investment Strategy
The investment strategy is liabilities driven, based on the financial agreement to
deliver $64.5 billion of pension benefits to all current plan members over their
retirement years. The present value of liabilities is expected to grow by 35% to exceed
$87 billion by 2016.
Many organic factors drive liability costs, such as enhanced permanent benefits
approved more than a decade ago when the Pension Plan was in surplus and the
persistence in recent years of historically low interest rates. The plan is aging. As
members get closer to retirement, benefit costs increase due to the time value of
entitlements and new benefits earned since the last actuarial valuation (required every
three years). The baby boom generation will retire over the next 20 years and the
average age of the membership base will not return to today’s level (46 years old)
until 2034. Retirees are living longer and since 1995 the average lifespan of a retired
member has increased by almost two years. For every additional year of life
expectancy for the current membership, expected liabilities could increase by
approximately 2%.
Aging and life expectancy demographics are included in actuarial assumptions in
estimating liability costs, though there is a risk that continuous aging could result in
more stringent actuarial valuation standards with respect to mortality assumptions,
which would increase liabilities further. Another risk is fiscal decisions by municipal
governments and other local employers to downsize their workforce and privatize
services to new employers who do not join the Pension Plan. Forced early retirements
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will increase benefit costs. If younger workers are laid off, the Pension Plan will age
faster. Currently, the Pension Plan has 2.3 active members for each retiree, compared
with a 3.8:1 ratio 20 years ago.
The growing cost of liabilities puts increased pressure on investment performance to
finance the pension promise at a time when traditional assets like stocks and bonds
are an unreliable source of sufficient investment income. The Pension Plan’s funding
shortfall will remain around $10 billion in the short term. Under the SC policy of
temporary contribution rate increases and benefit adjustments, and based on the
actuarial requirement of a 6.5% annual investment return, the Pension Plan should
return to surplus by approximately 2028.
The investment strategy, approved by the OAC Board (which is embedded in the OAC
Strategic Plan) and being implemented by OAC investment professionals, is designed
to return the Primary Pension Plan to surplus 10 years sooner.
The Search for Consistent Investment Returns
The current liability-driven investment strategy has been in place since 2004 in
response to the Pension Plan’s funding position going from a $6 billion surplus in 1998
to a $3 billion deficit in 2003. This dramatic reversal in just six years followed a
mandatory contribution holiday under the Income Tax Act for a pension plan with what
was then deemed to be “excessive” surplus, decisions by the sponsors to make
permanent benefit enrichments that continue today, and the steep 2000-2002 decline
in the stock market when the dot.com bubble burst. In 2004, the OMERS Board
decided to allocate a substantial portion of future capital to private market
investments so that the Pension Plan would be less vulnerable to another stock market
catastrophe. (Unfortunately, the Pension Plan had barely regained break-even in 2007
when the 2008 global credit crisis and stock market meltdown drove it back into
funding deficit.)
The Pension Plan’s liability profile determines the OAC asset mix policy that in turn determines the probable long-term investment returns to underwrite the financial agreement with plan members. The current asset mix policy, coupled with the strategy of directly owning and actively managing assets, suggests risk-adjusted net investment returns in the 7% to 11% range for the foreseeable future. The asset mix policy calls for a shift of capital from public to private markets with 53% of the total fund allocated to public market investments and 47% to private market assets. The
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objective is to acquire quality investments in public markets to generate dividends, interest and capital gains from a diversified portfolio and strong cash-yielding investments in infrastructure, real estate and private equity assets.
Progress in earning acceptable investment returns is best measured since the OAC
Board approved shifting capital to private market investments in 2004:
• exposure to public markets has decreased from 82% in 2004 to 58% in 2011,
with private market assets growing from 18% to 42%;
• the value of public market assets grew by 9% from $29.5 billion in 2004 to
$32.1 billion in 2011, while private market assets almost quadrupled from
$6.7 billion to $23.6 billion; and
• the Pension Plan has earned an eight-year annualized return of 7.5% – above
the 6.5% actuarial investment return requirement to achieve full funding.
The goal is to earn consistent returns above the actuarial requirement by investing
prudently as required by the OAC Board in compliance with the PBA.
Growth in Capital Under Management
Capital under management is projected to more than double in the next few years
from $80 billion in 2011 and will consist mostly of equity and related debt on the
Pension Plan’s balance sheet, supplemented by third-party capital not included in the
Pension Plan or its funding position. A strategic goal is to attract third-party capital so
that OAC can increase investment income from large-scale assets that it would
otherwise be unable to acquire because of the current capital size of the pension fund
and the risk management associated with a large financial exposure to a single
investment. Managing third-party capital will also generate fees to reduce investment
expenses.
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The investment strategy includes a migration to global investments to achieve
diversification by asset class and geographic market. A decade ago, 28% of net assets
were outside Canada. By 2011, foreign holdings were 33%, a shift slowed by major
infrastructure, real estate and private equity investments in Canada. It is important,
therefore, that the OAC Board keep pace with the shift to global investing in terms of
board experience and knowledge.
Generally, OAC makes investments in developed nations that are democratic and
support free market principles and the rule of law. It now has market perspectives
from offices in Toronto, Calgary, London and New York as well as through
relationships with investors, governments, asset owners and financial, legal, operating
and other intermediaries in developed and developing economies. The OAC Board, as
part of the OAC Strategic Plan, is examining with Management opening offices in other
global markets.
Direct Investing and Active Asset Management
In-house professionals have expertise across all asset classes and manage virtually all
investments internally (rather than contracted out to external fund managers). The
transformation to internal management since 2008 has produced cumulative net
savings of $74 million in operating costs. These savings, which are net of staff and
related overhead costs, are expected to grow to $365 million within five years.
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PUBLIC MARKETS INVESTMENT STRATEGY
The global economic outlook, with its prospect of subdued investment returns for the
foreseeable future, is changing OMERS traditional approach to investing in public
markets. Historically, asset/liability studies established relative return objectives for
the asset classes managed by OMERS Capital Markets (“OCM”). Relative returns
measure performance against market index benchmarks. Earning minus 5%, for
example, when the benchmark return is minus 10% is interpreted as “value add” –
but beating a negative benchmark return does not pay pensions. Only positive
absolute returns pay pensions – and absolute returns are OCM’s focus.
Between 2008 and 2011, OCM established five investment teams, each with specific
capital allocations. Most teams manage portfolios incorporating beta (earning market
index returns) and alpha (earning positive absolute returns under all market
conditions). The Multi-Strategy team invests in equities, sovereign bonds, inflation-
linked bonds, corporate bonds, gold and other commodities and currencies (beta and
alpha investing). The Quantitative team invests in Canadian, U.S. and foreign equity
market indexes (beta investing). The Global Equities team is primarily focused on
picking stocks (alpha investing). The Hedge Fund team, based in New York, does pure
alpha investing. The Fixed Income and Foreign Exchange team has beta and alpha
components in federal, provincial and municipal government bonds, corporate bonds,
real return bonds, Canadian commercial mortgages and foreign currency trading.
Under the new strategy, OCM is pooling all beta investments in a single portfolio and
all alpha components in a separate portfolio, each with dedicated investment teams.
The beta portfolio uses risk parity and economic leverage. Risk parity adjusts the risk
exposure of different asset classes so that their return profile is approximately equal.
Once asset class returns and risk profiles are equalized, the more diversified beta
portfolio is better able to weather sharp declines in equity markets. Achieving risk
parity across asset classes involves economic leverage. For example, buying futures
contracts on margin, rather than for cash, frees up capital to create more risk
exposure in fixed income and produce a return profile that is similar to equities. With
the return streams and risk profiles of different asset classes equalized, a portfolio can
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be constructed that performs better across different economic environments, reduces
overall portfolio risk and improves the consistency of investment returns.
The alpha portfolio is being structured on a standalone basis with investment teams
assigned risk budgets in specific asset classes (such as commodities, foreign currency
and sovereign debt) or global economic sectors (such as healthcare, consumer
products and energy) to meet pre-determined absolute return targets.
OCM’s risk managers make allocation adjustments to the beta and alpha portfolios to
take on more risk under certain economic conditions and reduce risk under other
economic conditions to find the best absolute return opportunities.
INFRASTRUCTURE INVESTMENT STRATEGY
OMERS created Borealis Infrastructure in 1997 to pioneer pension fund investing in
what was then a new asset class. Few organizations in the world have the built-in
proprietary expertise of Borealis to pursue, finance and acquire large-scale
infrastructure assets on a sustainable basis against increasing market participation.
OMERS is a co-owner of Associated British Ports, which has 21 marine ports in the U.K.
To learn the business, Borealis began by making small investments of $10 million to
$25 million in hospitals, schools and utilities. Today, as one of the world’s largest
infrastructure asset management firms, it writes equity cheques of $1 billion and
more. Borealis has $19 billion of capital under management, all of which is on the
Pension Plan’s balance sheet. These investments have an enterprise value exceeding
$50 billion when the capital of co-investors is included. Today, it employs 68
investment professionals, including 14 in London and New York.
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Borealis’ strategy is to build platform businesses that are non-GDP dependent, have
regulated or semi-regulated revenue and other income protections, and have strong
management teams that participate in performance results. It is focused on high-
quality large-scale infrastructure assets with stable and predictable returns and cash
yields, often under 30 to 50-year concessionary contracts. In evaluating acquisitions,
Borealis conducts in-depth operational, financial and legal due diligence that includes
determining the optimal leverage assumptions in line with the underlying economics of
the business. Although it may pursue deals on its own, Borealis often partners with
investors that share OMERS long-term commitment to managing assets.
Borealis illustrates the benefits of owning and actively managing equity positions in
large-scale assets. In 2011, the $9 billion of net operating assets owned by OMERS
generated $722 million of gross investment income. By 2016, this income is expected
to exceed $1.5 billion. Borealis is a reliable and consistent contributor in delivering the
pension promise.
OMERS and Ontario Teachers’ own HS1 Limited, Britain’s high-speed rail line between London and the Eurotunnel
Borealis invests in developed markets where governments and corporations are
looking to sell off assets as they deleverage their balance sheets. Preferred markets
are Canada, the United States and Europe. Borealis is exploring and beginning to
pursue assets outside its traditional markets in, for example, South America. It has
historically avoided emerging markets where assets and regulatory environments have
not matured sufficiently. This has begun to change as political and regulatory systems
have entered an unprecedented period of stability.
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REAL ESTATE INVESTMENT STRATEGY
Few pension plans in the world own a full-service real estate company. In 2001, the
OMERS Board approved the acquisition of Oxford Properties, one of Canada’s most
successful real estate companies. Founded in Calgary in 1960, Oxford absorbed
OMERS previous real estate interests and today is an international company with $20
billion of capital under management and employs 41 investment professionals,
including 21 in London and New York. It also employs 1,300 people in corporate and
property management across Canada. Oxford is a reliable and consistent contributor
to the Pension Plan.
Through Oxford, OMERS owns a large portfolio of Class A office properties, with
dominant positions in downtown Toronto and downtown Calgary, and three large
properties in London; mega shopping malls in the Greater Toronto Area; seven five-
star resort hotels in Ontario, Quebec, Alberta and British Columbia; multi-residential
apartment buildings; and thriving business parks.
Through Oxford, OMERS owns Class A Office towers in downtown Toronto (and other Canadian cities)
Oxford’s strategy is to own and manage high quality and diversified commercial real
estate and undertake select development and redevelopment projects to strengthen
the portfolio and enhance long-term returns. Its primary markets are Canada, the
United States and United Kingdom. Oxford’s properties have high occupancy by
creditworthy tenants on long-term leases in large part due to exceptional property
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management, attentive tenant services and the unrelenting commitment to energy
conservation, reduced carbon emissions and operational efficiencies.
Oxford is generating growth with major development projects underway in Toronto,
Calgary, Vancouver, London and New York in the industrial, office, retail and multi-
residential property classes. The largest development project is Hudson Yards in New
York. This strategic investment has put Oxford “on the map” in the U.S. and a major
office lease has already been signed. When this undeveloped property in Manhattan is
completed, Hudson Yards will include six million square feet of office, retail and
hospitality, and an additional six million square feet of residential density. Another
major project is in London, where Oxford is a co-investor with British Land to build a
52-storey office and related retail project at a key intersection in the City of London,
with more than 30% of the space pre-leased.
Oxford is a partner in Manhattan’s Hudson Yards development project
Canada remains the primary market and Oxford recently acquired a multi-residential
complex in Toronto, an industrial property in Brampton, co-ownership of a shopping
centre in Richmond Hill, 64 acres for industrial development in Burnaby and the Metro
Toronto Convention Centre Complex, including the InterContinental Hotel.
In addition, the London team recently acquired a 190-acre master planned business
park with 1.3 million square feet of Grade A office space near London. Oxford is
monitoring high-quality core opportunities in France and Germany that will likely
become available at attractive prices.
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PRIVATE EQUITY INVESTMENT STRATEGY
OMERS owns its own self-built private equity firm that is emerging as a successful
international player. For most of its history, OMERS invested in private equity through
externally managed funds. In 2008, the OAC Board approved a change in strategic
direction – to directly own private companies and actively engage in strategic planning
with the management of these companies.
Today, the private equity company, OMERS Private Equity (“OPE”), is focused solely
on direct active investing in North America and Europe. The strategy is to acquire for a
minimum equity investment of $100 million majority control of companies with an
enterprise value of $200 million to $1.5 billion. OPE also considers joint control
investments with like-minded partners for companies of a greater size. The direct
investment program represents 57% ($3.6 billion) of the OPE total portfolio. The
remaining assets are investments in and commitments to externally managed funds
that are gradually being wound down or divested.
OPE has built a strong team to originate and manage the expanding portfolio of direct
investments, as well as legacy fund investments. It employs 26 investment
professionals, including 16 in London and New York. The switch to direct investing has
generated substantial savings for the Pension Plan that more than offset the costs of
internal investment management. By investing directly, OPE avoids paying carried
interest to external managers, typically 20% of investment income when assets are
sold, as well as annual management fees.
OPE owns more than 30 private companies in Canada, the U.S. and the U.K. Unlike
typical private equity firms that seek to cash in their value gains within 7 to 12 years,
OPE is a patient investor with no set exit deadlines so that it can help its investee
companies attain sustainable long-term growth and profitability.
OPE has had very strong returns over the last eight years and expects to continue this
performance as it withdraws from externally managed funds and their associated fees
and delivers the full amount of investment returns to OMERS through active
management.
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The Corporate Office
The corporate office provides enterprise-wide executive leadership including risk
management, policy compliance, financial disclosure and strategic planning and
deploys advanced human resources leadership training and customized IT systems to
administer the plan and monitor and value investments on a daily basis.
Cross-enterprise teams bring executives together from different work environments to
find improvements in enterprise-wide management. A committee led by the CFO with
Investment and Pension Services members has enhanced IT infrastructure, security
and overall connectivity across the enterprise. An Investment Tax Committee, chaired
by the CEO, examines the tax risks of investing in foreign jurisdictions. An Emerging
Markets Committee, chaired by the CIO, is studying the legal, political, economic and
ownership risks of investing in emerging markets.
The Corporate Office manages strategic and operational risks. The CFO chairs the 11-
member Cross-Enterprise Risk Management Committee and the CIO chairs the 12-
member Investment Risk Management Committee. Each business unit also has a risk
management committee. These resources are backed by technologies and systems
that track, quantify, analyze and measure 54 specific risks with detailed quarterly and
annual reports to the OAC Board.
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The Corporate Office leads the development of all strategic initiatives, including
initiatives to raise third-party capital. A potential strategic opportunity is the federal
proposal, supported by several provinces, to allow financial institutions, notably banks
and insurance companies, to offer Pooled Registered Pension Plans (“PRPPs”) to
Canadian workers lacking workplace pension plans. The OAC Board has approved in
principle securing a designation for public sector plans to be eligible administrators for
PRPPs to keep OAC’s options open and to allow OMERS to decide at a later date
whether to proceed. This initiative would raise capital outside the Pension Plan.
The Corporate Office has been working for several years on offering investment
contracts to Canadian pension plans choosing to invest with OMERS. The OMERS Act
gives the OAC powers to offer plan administration and pension fund investment
services to other pension plans/pension funds, federal and provincial governments and
their agencies and crown corporations, as well as colleges, university endowments,
corporations and charitable organizations.
The Corporate Office is also responsible for a pioneering initiative in the pension
industry to form an alliance with global investors to invest with OMERS in multi-billion-
dollar infrastructure assets that generate large and sustainable annuity-like cash flows
to pay pensions. To date, two Japanese institutional investors have committed to the
alliance.
Finally, the Corporate Office is responsible for OAC enterprise strategic planning with
the OAC Board.
Like the board of any public or private sector corporation, the OAC Board holds
Management accountable for performance and strategic progress and through board
committees monitors its compliance with a wide array of governance policies.
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ENHANCING OAC GOVERNANCE
The best way for the OAC to deliver on its mandate under the OMERS Act is to follow
best corporate governance practices within a jointly sponsored multi-employer pension
plan context. With this in mind, the OAC Board has worked hard to improve its own
governance within the limits of its statutory authorities.
A governance reform project in 2008 updated how the OAC Board conducts its affairs
and its relationships with board committees and Management. Early in 2012, the OAC
Board took actions to reduce the governance burden that has arisen under the bi-
cameral structure, culminating in 2011 in 85 board and committee meetings by the
OAC and SC Boards, including joint meetings. Starting in July 2012, the OAC Board
will hold board and committee meetings every other month over a two-day period.
There is, however, unfinished business on the governance front. A priority is to
configure the composition and competencies of the OAC Board to higher standards
aligned with the scope and complexity of the OAC. The OAC Board has been working
on this mission since 2008.
The SC Board alone has legal authority over the appointments to the OAC Board under
the OMERS Act 2006. That a single entity, the SC, has the sole statutory authority to
appoint all directors is unusual among large Canadian pension plans. The OAC Board is
of the view that the sponsors should have a clear, direct and legal appointment
authority.
The OAC requires governance competencies quite different from those at the SC
because it is a different enterprise with a different purpose and different
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accountability. The primary fiduciary duty of the OAC Board is informed oversight of
the OAC and its Management and ultimately oversight of the assets and liabilities of
the Pension Plan.
Accountabilities
The sufficiency of accountabilities under the bi-cameral governance model is identified
as a topic for examination under the Review Act. Active plan members, retirees and
employers are specifically mentioned. Sponsors representing employers and
employees are almost invisible under the Review Act and OMERS Act. A missing
ingredient is a roadmap for accountabilities among sponsors, the OAC and the SC and
their respective boards. For example, the OMERS Act provides little direction on the
accountability of the OAC and OAC Board, or the SC and its board, to sponsors.
An effective governance structure should clarify these accountabilities, leading to a
clearer understanding of the responsibilities of the OAC Board.
OAC Board Competencies
In 2007 and 2008, the OAC Board spent considerable effort studying the composition
and competency requirements of the OAC Board with an eye to matching composite
competencies with the requirements of overseeing a large and complex corporation.
As spelled out in a resolution it passed on June 19, 2008, the OAC Board’s Governance
Committee considered:
1. A representational model, under which identified parties have the power to
appoint a person to the OAC Board and there is no formal consultation process
for evaluating the overall needs of the OAC Board.
2. A competency-based model requiring a regular review of the needs of the
OAC Board in light of the priorities of the OAC to ensure the OAC Board has
the skills and expertise required.
3. A hybrid model responsive to both the representational model and the
competency model with some of the OAC Board appointed on a
representational basis and the rest based on a competency model approach.
The Governance Committee also considered several key factors:
• the range of competencies identified as important for the OAC Board and the
competency model;
• the increasingly complex and global nature of investments that require board
stewardship and strategic oversight in such an environment; and
• the fact that, while a representational model may be appropriate and
desirable at the sponsors’ level, requirements for the OAC are different.
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The 2008 resolution states: “In today’s global investment environment, a competency-
based board would translate into an OAC Board with not only the pension, human
resources, compliance and other expertise that exists today, but also deep
competencies in areas such as international finance and global capital markets risks.”
The OAC Board endorsed a competency-based hybrid model as optimal for the
composition of the OAC Board and forwarded its recommendation to the SC for its
consideration in preparing a new by-law for the composition of the OAC Board, as
contemplated by Section 33 of the OMERS Act.
The same sentiments were set out in a detailed February 19, 2009 letter to the then
Minister of Municipal Affairs and Housing. In that letter, the OAC Board acknowledged
that its legacy would be elevating the OAC Board’s composition of skills, knowledge
and experience.
In a lengthy February 29, 2012 letter to the SC Board, the OAC Board elaborated on
its recommendations with the emphasis on a competency-based hybrid board and
robust appointment process. Under the OAC Board’s definition, the OAC Board would
consist of some representational and some expert appointments, with the latter filling
out investment, finance competency and global business requirements.
In support of the OAC Board recommendations, the OAC Board letter documented the
best governance practices researched and recommended by bodies as diverse as the
Treasury Board of Canada, the Conference Board of Canada, the Canadian Coalition
for Good Governance, the International Centre for Pension Management and the
Ontario Secondary Schools Teachers’ Federation. In addition, the OAC Board retained
Deloittes to provide an independent report on the required skills and competencies of
the OAC Board.
Impartial observers of public and private sector governance have expressed
knowledgeable opinions that are relevant to the future governance of OMERS. One
example is the Canadian Coalition for Good Governance (of which OMERS is a
founding member) that states in its governance guidelines:
“We believe the single most important corporate governance requirement is to
have directors of quality, both individually and as a whole … A number of directors
should have direct experience in the industry or industries that the company
operates in, to make sure the board asks for the right information from
management, asks knowledgeable and insightful questions and has the
background it needs to take appropriate positions.”
This submission is consistent with the OAC Board’s long-standing belief in the
importance of a hybrid board consisting of sponsors representatives and external
directors with competencies relevant to the scope and complexity of plan
administration, fund investing and the performance of the OAC under the OMERS Act.
In August, 2012 the Co-Chairs of the SC Board invited the OAC Board Chair and OAC
Governance Committee Chair to join the Co-Chairs and the SC Governance Committee
36
Chair to discuss for the first time the competency needs of the OAC Board. The
purpose of this SC nominating committee meeting was to share OAC Board
competency requirements with six sponsors whose current appointments were due to
expire at the end of 2012. This was a positive step in beginning a discussion on the
governance needs of the OAC Board as a whole.
OAC Board Compensation
Director compensation and expense policy are related to enhancing board
competencies.
The OAC Board believes that its directors should be fairly compensated for the work
they do at rates consistent with fiduciaries at public sector pension organizations in
Canada. Introducing a fair and market-based compensation policy for OAC directors
would make it easier to attract individuals with expertise relevant to OAC activities
who make all or a good part of their living from serving as professional directors.
Governing a large customer service and investment organization that competes in
public and private markets at home and abroad is not an act of benevolent public
service, especially in view of the risks and liabilities implicit in delivering a multi-
billion-dollar pension promise to 420,000 Ontarians.
OMERS policies of transparency and full disclosure will keep all stakeholders informed
annually on the remuneration and expenses of OAC Board members.
Introducing a Robust Nominating Process
Identifying the ongoing competency needs required by the OAC Board only matters if
they are supported by a robust nominating process. A robust nominating process does
not currently exist for the OAC Board.
To be robust, the nominating process should:
• actively and directly engage employer and employee sponsors;
• include an influential role for the OAC Board (through its Governance
Committee) because it knows the gaps in the OAC Board competencies;
• consider the competency needs of the OAC Board as a whole so that the OAC
Board’s Governance Committee can provide guidance to sponsors on the
quantitative attributes required when vacancies occur; and
• consider engaging a search firm to assist sponsors and the OAC Board in
identifying, evaluating and recruiting potential directors with requisite
competencies.
The objective is to strengthen the overall composition of the OAC Board to ensure it
can provide independently minded oversight of the OAC trust assets and properly
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represent the best interests of the entire plan membership. This is a particularly
sensitive subject as some employees have no sponsor affiliations.
Since 2006, a majority of sponsors groups have continued to appoint “one of their
own” to the SC and OAC Boards. This may continue to be appropriate for certain
sponsors. The reason for emphasizing OAC Board competency requirements and a
robust nominating process, however, is to broaden sponsors’ perspectives of
appropriate appointments while preserving their right to decide who governs OMERS.
For example, employers have a contingent interest in the Pension Plan’s funding
surplus or deficit. Their priorities are to ensure that the OAC Board has the right
balance of expertise to protect the taxpayer interest and to ensure the Pension Plan’s
financial viability. This perspective by employers recognizes that:
• municipalities and their agencies, including police service boards and utilities,
make approximately 65% of employer contributions to the Pension Plan. They
are all supported by municipal taxpayers; and
• provincially supported agencies, such as school boards and children’s aid
societies, and certain municipal programs, such as housing authorities and
health units, make about 35% of employer contributions. They are all
supported by provincial taxpayers.
Flexibility for Future Growth
The current governance structure does not provide sufficient flexibility to
accommodate plan membership growth, which is critical to the Pension Plan’s
continued sustainability.
It is impossible for a large pension plan to give everyone a seat at the boardroom
table. An efficient, effective and fair nominating and appointment process should,
however, engage as many employers and employee groups as possible. Under the bi-
cameral model, 13 designated sponsors have appointment rights. On the employer
side, all are associations with the exception of the City of Toronto. On the employee
side, three associations and four unions collectively represent 78% of the plan
membership.
For membership growth to occur, plans considering consolidation with OMERS Pension
Plan must see a clear path to participating in its governance, a situation that does not
exist today. For example, if a large employer/employee group were to join the Pension
Plan neither the employer nor the new plan members would have a seat on or
appointment rights to the OAC Board.
In its 2012 budget, the Ontario government addressed improving efficiencies in
pension fund management and noted the importance for pension funds to have access
to large-scale investment opportunities. The 2012 budget repeated the policy
objective of facilitating access by smaller Ontario defined benefits pension funds to the
investment expertise of the larger Ontario public sector pension funds. If the Ontario
38
government enables plan consolidations with large plans like OMERS, the restricted
access to governance under the bi-cameral model would have to be addressed.
Commitment to Governance Excellence
Governance standards in the corporate and public sectors increasingly emphasize the
competencies and independent mindedness of directors. Other best practices deal with
clear term limits, board self-evaluation and renewal practices, and public transparency
on management accountability to the board for performance, policy compliance and
compensation. The Ontario Pension Benefits Act does not really address the
governance expectations and standards for public sector pension plans, many of which
are among Canada’s most influential financial institutions.
Best practices include:
• set and staggered terms for directors, with a limit on eligibility for
reappointments to ensure board regeneration over time;
• a multi-year term for the OAC Board chair, instead of a one-year term;
• governance leadership training for representational directors;
• expanding the current annual process for evaluating the performance of the
OAC Board and its committees to include annual assessments through
confidential board member questionnaires summarized by an independent
consultant for review by the OAC Board to determine how governance should
be enhanced; and
• a confidential annual peer review to assist each director in identifying self-
development initiatives and provide guidance on reappointment
recommendations.
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CLARIFYING ROLES AND AUTHORITIES
The OMERS Act 2006 has created inevitable tensions and inefficiencies between the
two boards by not clearly delineating and separating authorities in two key areas. As a
result, operational inefficiencies and extra costs occur through duplication of effort and
resources. It is imperative that the OAC and SC Boards work together to clarify
authorities in the best interests of all plan members and employers.
One area of inefficiency and overlap concerns investment capital outside the Pension
Plan. The OAC Board believes that the OAC should be responsible for decisions to raise
third-party capital for investment purposes where the capital raised does not affect
the Pension Plan’s contribution rates or funding. Examples of non-pension plan capital
growth initiatives include investment contracts offered by an OAC subsidiary, OMERS
Investment Management Inc., so that Canadian pension plans can invest their capital
alongside the Pension Plan in OMERS total asset mix or in contracts that earn the
returns of OMERS infrastructure, real estate and private equity portfolios.
An even more complex area relates to inter-corporate confusion over the Pension
Plan’s funding policy. The funding policy has resided with the fiduciary board since
1992 when the Ontario government made plan changes to shift responsibility for
sharing funding shortfalls or surpluses on plan members and employers.
The OAC’s sole responsibility for the Pension Plan’s funding policy is clearly enunciated
in the OMERS Act 2006. The purpose of a funding policy is to establish a framework
for funding a defined benefit pension plan taking into account factors relevant to the
plan, the contributing employers and the plan members. There is an inextricable
connection between development of the funding policy and pension fund investing.
The OAC has the historical and continuing responsibility for pension investments and
investment policy. As the fiduciary, it is always required to act in an evenhanded
manner with respect to all categories or classes of members and participating
employers. All told, the OAC must be responsible for the funding policy. This is
particularly important in a jointly sponsored pension plan where funding obligations
are pooled over a large and diverse group of employers and plan members.
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Other specific authorities assigned to the OAC reinforce its responsibility for the
funding policy, such as:
• determining the actuarial methods and assumptions to be used for purposes
of administering the pension plans and pension funds, based on
recommendations from the actuary;
• appointing the OMERS external actuary;
• appointing the OMERS external auditor;
• filing actuarial valuations as required by the PBA;
• providing the SC with actuarial advice and cost estimates on the impact of
plan amendments or other changes on contribution rates; and
• providing the SC with advice on administrative or other issues arising from
proposed plan changes.
The OAC Board’s retention of these authorities is important to ensure that the growth
in benefit levels does not outpace reasonable contribution rates and the ability of the
OAC to generate reasonable risk-adjusted investment returns. This means ensuring
that contribution rates are set and benefits managed within the parameters of the
funding policy, which will mitigate potential conflicts of interest for sponsors.
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CONCLUSION
The OAC Board has not made any specific recommendations in this submission for two
reasons. The first is that OMERS is a very large and complex organization and it is
important that all points of view be expressed before conclusions are reached. The
second reason is that the OAC Board has every confidence that the Reviewer will take
a dispassionate and objective view on behalf of Ontario and its provincial and
municipal taxpayers.
Turning to the OMERS Administration Corporation, this brief portrays a corporation
that is innovative in meeting the pension promise to plan members, clear on its
accountability to the entire membership and responsive to the social and fiscal needs
of public policy with respect to public sector pension plans. The OAC Board and
Management have demonstrated governance leadership in crafting the annual OAC
Strategic Plan since 2008 that anticipates the world in which the OAC must operate
and compete five years ahead and incorporates initiatives to sustain and grow plan
membership, generate stable and consistent cash returns, manage strategic risks and
optimize investment and capital growth opportunities.
The role and legal rights of the fiduciary board as the plan administrator and pension
fund trustee are clear and do not require amendment. While the OAC Board has
enhanced its own governance, it has reached the limits of its statutory authority in
elevating the competencies of the OAC Board as a whole, aligning those competencies
with the scale and complexity of the OAC and seeking a robust nominating process
that engages all employer and employee sponsors groups directly. In addition, the
submission draws the attention of the Reviewer to the need to clarify certain OAC and
SC authorities that have given rise to tensions and inefficiencies. Making progress on
these points alone will go a long way toward enhancing the efficiency, effectiveness
and fairness of OMERS governance.
The Reviewer has promised constructive and inclusive consultation after the
September 4, 2012 deadline for written submissions. The OAC Board, through its
Chair, looks forward to engaging the Reviewer in such discussions and to re-address
any of the issues raised in this submission.