2019 HighlightsLast week, I covered CDPQ's 2019 results and this week, we get a glimpse into what other large Canadian pensions are reporting.OMERS, the defined benefit pension plan for Ontario’s municipal employees, reported a 2019 investment return of 11.9%, net of expenses. The 2019 performance exceeds last year’s net return of 2.3%, which was impacted by more challenging stock market conditions. OMERS funded status on a smoothed basis improved to 97% in 2019.
- Net return of 11.9% or $11.5 billion
- Funded status of 97%
- Net assets of $109 billion
“Our high-quality, well-diversified portfolio produced strong results for our members in 2019,” said Michael Latimer, CEO, OMERS. “All asset classes generated positive returns, led by public equities. Over the past five years, we have earned $9.8 billion of net investment income over the amount required to fund our pension obligations.”
“OMERS funded status has improved for the seventh consecutive year,” said Jonathan Simmons, CFO. “The 2019 improvement in our funded status primarily reflects our five-year net investment return of 8.5%.”
OMERS paid pension benefits of $4.6 billion in 2019 to more than 170,000 members.
In closing, Michael Latimer said, “Similar to many pension plans across the globe, OMERS is experiencing demographic and social shifts that will make our future different from our past. Our strategy is focused on making OMERS a sustainable, affordable and meaningful Plan, while managing challenges across the pension landscape.
“I want to thank all OMERS employees around the world for their diligence and commitment to our members in everything they do.”
About OMERS
Founded in 1962, OMERS is one of Canada’s largest defined benefit pension plans, with $109 billion in net assets as at December 31, 2019. OMERS is a jointly-sponsored pension plan, with 1,000 participating employers ranging from large cities to local agencies, and over half a million active, deferred and retired members. OMERS members include union and non-union employees of municipalities, school boards, local boards, transit systems, electrical utilities, emergency services and children’s aid societies across Ontario. Contributions to the Plan are funded equally by members and employers. OMERS teams work in Toronto, London, New York, Amsterdam, Luxembourg, Singapore, Sydney and other major cities across North America and Europe – serving members and employers and originating and managing a diversified portfolio of high-quality investments in public markets, private equity, infrastructure and real estate.
Similar to CDPQ, OMERS does not release its annual report at the same time as it releases its results, most likely because it covers Ontario public sector workers and the annual report needs to be reviewed and approved by the Ontario government.
Still, we can get a glimpse into how the major asset classes performed across public and private investments:
Not surprisingly, Public Equity was the top-performing asset class as stocks came roaring back in 2019 after the huge selloff in Q4 2018.
Some of you may have noted the S&P 500 gained 32% total return last year, which is correct, but OMERS and other large Canadian pensions don't just invest in US stocks, they invest in global stocks.
In private markets, I note that Private Equity returns fell sharply from 2018, registering a gain of 4.6% last year after delivering a gain of 13.5% in 2018.
OMERS' PE head, Mark Redman, recently departed the organization and was replaced by Michael Graham. I don't know Mr. Graham but someone I trust told me "he's very nice and solid".
I also don't know if Mark Redman's departure had anything to do with the poor showing in Private Equity but one thing I can share with you is OMERS Private Equity always touted its "purely direct" approach and I always found this peculiar.
Importantly, when I look at Canada's leader in Private Equity, CPPIB, its approach of fund investing along with sizable co-investments to lower fee drag, is what makes the most sense to me over the long run in developing a successful private equity program.
And it's not just CPPIB, Ontario Teachers', CDPQ, BCI, AIMCo, virtually every large pension in Canada that has a successful PE program has gotten it through fund investing and co-investing, not through purely direct deals (they do some but it's a minuscule fraction of their overall PE portfolio, most direct investing comes through co-investments).
Why did CDPQ deliver 10.5% in Private Equity last year while OMERS didn't make half that gain? I suspect because OMERS did a lot of purely direct deals which delivered paltry gains.
To be fair, I need to look at 5-year results but they're not available yet, which is also peculiar. At the very least, OMERS should follow CDPQ and release its 5 and 10-year results in every major asset class, as well as the benchmark results.
Infrastructure and Real Estate results were steady in 2019 but below 2018 gains, registering gains of 8.7% and 8.3% respectively. Not bad but nothing great as returns are coming down.
However, I must say, compared to CDPQ's Ivanhoé Cambridge, OMERS'Oxford Properties looks really good.
Why? I'm still struggling to understand how Real Estate registered a 2.7% loss at CDPQ last year. Obviously they took massive write downs but someone told me that "something is desperately wrong when a pension fund like CDPQ loses that kind of money in Real Estate."
Yes, CDPQ is over-exposed to Canadian shopping malls but something else is going on there and when I find what it is, I will discuss it in detail (the folks at Ivanhoé Cambridge can contact me directly to discuss their 2019 "bomb").
Again, I am pointing out things that others are grumbling about and when you see such vast discrepancies in any asset class, especially Real Estate, you need to ask some very tough questions.
In terms of asset mix, you can view the changes at OMERS below:
- Inflation-Linked Bonds fell from 4% to 2%
- Government Bonds fell from 6% to 3%
- Credit fell from 19% to 17%
- Public equity fell from 33% to 29%
- Private Equity fell from 15% to 14%
- Infrastructure increased from 18% to 19%
- Real Estate fell from 18% to 16%
- Short-term instruments (meaning debt) went from -13% to 0%
I invite my readers to read OMERS 2018 Annual Report here for more details and wait until the 2019 Annual Report comes out in April.
Last April, I covered the Caisse and OMERS' 2018 annual reports here and discussed compensation:
The summary compensation table available on page 93 of the 2018 Annual Report (click on image):But while everyone is curious about how much retiring CEO Michael Latimer and incoming CEO Blake Hutcheson made, I focus on long-term resultsand the fact that OMERS is one step closer to being fully funded (it is for all intensive purposes), and this despite being one of the only large Canadian pensions (along with OPTrust) to offer guaranteed as opposed to conditional inflation protection.
As you can see, compensation at OMERS is higher than the Caisse but I encourage you read the annual report to get a full discussion on compensation to really understand the details.
Given the record drop in rates, I personally believe it's only a matter of time before OPTrust and OMERS join Teachers', HOOPP, CAAT Pension Plan and others in adopting conditional inflation protection (in my opinion, this change should have been implemented years ago to ensure inter-generational equity).
Lastly, I note that at the beginning of the year, OMERS announced the consolidation of the Metropolitan Toronto Pension Plan (Metro Plan) into OMERS. The Metro Plan is one of the pension plans managed by the City of Toronto:
This is the fourth plan managed by the City of Toronto to do so. Throughout 2019, The Corporation of the City of York Employee Pension Plan, The Toronto Civic Employees’ Pension Plan and The Metropolitan Toronto Police Benefit Fund were successfully consolidated into OMERS.Good move by the city of Toronto and I suspect others will follow in joining OMERS.
These consolidations will not impact existing OMERS members’ benefits or contribution rates.
Below, earlier this year, Blake Hutcheson, incoming CEO of OMERS, talked about staying the course on the fund's investment strategy and how geopolitical issues factor into it. I wonder what he thinks of the Caisse's 2019 Real Estate results.
Also, a clip from a Milken Institute panel discussion which took place last year featuring CPPIB's Alain Carrier, Cathay Financial Holdings' Sophia Cheng, Neil Cunningham of PSP Investments and Blake Hutcheson. I've referred to this panel discussion before, take the time to watch it.