OSSTFFEESO Leadership 2010 Conference August 2010 Jack Jones

OSSTF/FEESO Leadership 2010 Conference August 2010 Jack Jones Sheila Vandenberk OMERS Sponsors Corporation OMERS Administration Corporation

Agenda § OMERS Plan and Governance § Funded Position and Projections § History of Changes § Options Considered § Approved Changes Ø Ø Ø Contributions Benefits SPDOS § OAC Investment Strategy 2

OMERS § Defined Benefit Pension Plan Ø Ø Ø Primary Plan Supplementary Plan (Police, Fire, Paramedics) Retirement Compensation Arrangement (RCA) § Jointly governed and funded by employers and members § Multi-employer plan – 928 employers § Membership – 400, 077 members 290, 573 active, inactive and deferred members Ø 109, 504 retired members Ø Represented by more than 40 unions and associations Ø 3

OMERS Active Members Affiliation As at December 31, 2009 4

Dual Governance – Responsibilities § § OMERS Administration Corporation (OAC) Ø Administer OMERS Plan Ø Invest Plan assets Ø Perform actuarial valuations OMERS Sponsors Corporation (SC) Ø Set contribution rates Ø Set benefit levels Ø Decide whether to file actuarial valuation Ø Set composition and compensation of both boards 5

OMERS Pension Payments § 30% is funded from contributions § 70% is funded from investment income + + = As plan demographics change, there is more pressure on investment performance 6

The OMERS Return $941, 400 Pat retired with an unreduced pension at age 55 $200, 000 annual inflation: 1. 5% § 30 years of service $67, 400 spousal § “Best five” earnings are $45, 000 $404, 000 age 65 to 84 $270, 000 $81, 900 Contributions + interest over working life age 55 to 65 Total benefits paid out

Funded Position of OMERS Primary Plan § Surplus of $82 million at end of 2007 § Deficit of $0. 3 billion at end of 2008 Ø § Contribution rates raised January 1, 2010 NRA 65 from 6. 3% / 9. 5% to 6. 4% / 9. 7% NRA 60 from 7. 7% / 12. 8% to 7. 9% / 13. 1% Deficit of $1. 5 billion at end of 2009 8

Income Tax Act Has Changed ITA changed the rule for excess surplus for shared-cost plans like OMERS Ø During the excess surplus period in late 1990 s, contributions (from both members and employers) had to stop when funded ratio was over 110% Ø Now contributions have to stop when the funded ratio is over 125% 9

Past Surplus Management § Contribution Holidays Ø § Partial to full contribution holiday from 1998 to 2003 Benefit Improvements Ø Initial ad hoc top-up above the 70% contractual indexation; subsequent permanent change to 100% contractual indexation Ø Temporary early retirement window from 1998 to 2004 Permanent reduction of CPP offset from 0. 7% of average 3 -year YMPE to 0. 675% of average 5 -year YMPE Ø Permanent change to surviving spouse’s benefits from 60% to 66 2/3% Ø § Establishment of reserves 10

Why we have a deficit? #1. Investment Losses § In 2008 with the downturn in global markets OMERS investments lost 15. 3% or $8 billion § In 2009 with the economic recovery investment returns increased 10. 6% or $4. 4 billion § Five-year investment return: + 6. 6% (2005 to 2009, including 2008 loss) Ø Not all losses are recognized right away – they are recognized over 5 years – this is called asset smoothing Ø At the end of 2009 there is still $5 billion to be recognized over the next few years. 11

Why we have a deficit? #2. Actuarial Assumptions § Actuarial assumptions reviewed periodically to ensure that the Plan costs reflect reality of the Plan Ø 2009 study reviewed the assumption for future salary growth § Ø $0. 5 2010 study is taking place this summer to review other assumptions, including the age at which members retire § § Adjustments resulted in an increase in liability of approximately billion - thus an increase in the underlying cost of the Plan. An increase in liability of approximately $2 billion is already included in projections, and a further increase in the underlying cost of the Plan can be expected, pending completion of review. Normal Costs continue to rise as population ages 12

Filing Actuarial Valuation § § § Ontario pension plans must file an actuarial valuation at least every three years It is the previous year’s actuarial valuation that is filed Filing triggers changes that take effect January 1 st of the next year OMERS filed the 2008 valuation in 2009 Rates were increased January 1 st, 2010 OMERS SC Board had the following options: 1) 2009 valuation 2) 2010 valuation File 2010 File 2011 Changes take effect January 1, 2012 Must file 2011 valuation if previous two are not filed: So if don’t file 2009 valuation or 2010 valuation, must file 2011 valuation Changes would take effect January 1, 2013 13

Where is the deficit heading? § Deficit is projected to grow to Ø $5 billion by the end of 2010 Ø $8 billion by the end of 2011 Ø $12 billion by the end of 2012 § Reasons Ø Continued recognition of the 2008 loss Ø Changes to actuarial assumptions Ø Interest on deficit Ø Aging of Plan membership 14

Scenarios - Short Term Investment Returns Scenario 2010 2011 2012 2010 – 2012 Positive 13. 5% 13. 8% 13. 6% TW Baseline 6. 5% Negative -0. 4% 0. 7% 0. 2% The actuaries say there is roughly a 50% chance that the actual investment returns will fall between the Positive and the Negative scenarios. 15

Towers Watson Projections – Primary Plan 16

Towers Watson Projections – Primary Plan A Funding Target of 3% to 4% per side over the next few years is required 17

What can OMERS do about the deficit? Options Ø Increase contribution rates Ø Reduce future benefits Ø Adjust investment strategy Ø A combination of the above 18 18

Changes to Contribution Rates and Benefits § Changes to contribution rates and benefits are called Specified Plan Changes Ø Proposed changes are tabled each year Ø SC must make decisions by end of June Ø Changes require a 2/3 majority of SC 19

2010 Plan Change Proposals 10 Proposals Put Forward for Consideration Ø 3 multi-year approaches Ø Increase contributions and file 2009 valuation Ø Rescind cap on contributory earnings Ø NRA 60 for Police Civilians and Paramedics Ø 2 RCA funding changes Ø Contributions during periods of reduced pay/hours 20

2010 Plan Change Proposals § SC carefully considered all options § Decided to address growing deficit now rather than later § Multi-year approach with contributions and benefit changes phased in over a period of time § Impact less severe § Temporary changes until Plan returns to surplus § Manage the health and long- term viability of the Plan

2010 Approved Changes § Temporary Contribution Increases Ø Average increase of 2. 9% per side phased in over 3 years 1. 0% in January 2011 1. 0% in January 2012 0. 9% in January 2013 Ø Overall this is a 30 – 40% increase in actual contributions § Temporary Benefit Changes Ø 0. 4% in benefit reduction for future service (after Jan 1, 2013) for members who terminate before early retirement eligibility: – Elimination of pre-retirement indexing and early retirement subsidies on termination – No change to benefits of current retirees or active members who stay in Plan until early retirement

Additional SC Decisions § File 2009 Valuation § Opt out of “Grow-In” rights Ø Grow-in would increase Plan liabilities by providing new benefits to terminated employees § Statement of Plan Design Objectives and Strategy Ø SPDOS will set out the framework for effective decision -making regarding the funding of the Plan

Contribution Rate Increase in. Example Contribution Rates

Increase in Contribution Rates The table below shows the approximate impact of an average increase of 1% in the contribution rate for each side for sample earnings of $25, 000, $40, 000 and $70, 000. Illustration of Increase in Annual Contribution Per Side Contributory Earnings § § Current Annual Contributions Average Annual Increase Per Side NRA 65 $ Increase $25, 000 $1, 600 $250 $40, 000 $2, 560 $400 $70, 000 $5, 232 $700 Net after-tax impact is less due to tax deductibility of contributions Actual rates to be determined 25

Benefit Changes

Temporary Benefit Changes § Eliminate pre-retirement indexing and early retirement subsidies for members who terminate before retirement Ø Only impacts service accrued or earned after 2012 Ø For NRA 65 members – only impacts those who terminate before 55 § No change to benefit entitlements or pensions of current retirees, member survivors or active members who stay in the plan until early retirement § Reduces long-term liability to the Plan § Temporary until the Plan is back to full funding § More information and examples www. omers. com

Grow-in Under New Pension Legislation

Grow-in Under New Pension Legislation § A costly benefit OMERS does not currently have § All members whose employment is terminated by the employer without cause would be entitled to grow-in benefits if they met the “Rule of 55”at termination ( age + service = 55+) § Grow-in means the service the member would have received if he/she had not been terminated is taken into account to satisfy the eligibility for an unreduced pension. § SC has decided to opt out of this costly benefit 29

Statement of Plan Design Objectives and Strategy (SPDOS)

Purpose of SPDOS § Sets out the framework for effective decision-making regarding the funding of the Plan § Desired balance between competing funding objectives (e. g. equity, security of benefits, sustainability, affordability) § Objectives may be stated as a set of principles, guidelines or specific targets regarding the interaction of contribution and benefit changes § Objectives could also capture principles concerning establishment of a Reserve and discretionary filings 31

OMERS Funding Plan Process § § OMERS Funding Plan Process is made up of 2 elements Ø OAC Funding Policy Ø SC Statement of Plan Design Objectives and Strategy (SPDOS) SPDOS needs to address 3 fundamental questions Ø What is the SC Funding Target? Ø What are the Triggers requiring SC action? Ø What happens when a Trigger is activated? 32

SPDOS may address such matters as: § Equity § Sustainability § Affordability § Flexibility § Utilization of surplus § Retirement of unfunded liabilities § Establishing reserves § Key specified plan change priorities 33

Investment Strategy

OMERS Investments n Total assets of $62. 0 billion; net assets of $47. 8 billion (as of December 31, 2009) n 66% of the assets in Canada; 34% in foreign jurisdictions n Invest in public markets (stocks and bonds) n Invest in private markets (real estate, infrastructure, private equity) 35

2009 Asset Mix (as at December 31, 2009) % Infrastructure Private Equity Real Estate Public Markets Private Markets 36

OMERS Investment Strategy Create value through § Asset mix Shifting to private market investments to support long-term growth and moderate volatility of equity markets § Direct drive active management (from 80. 8% at the end of 2009 to 90% by 2012) § Increased access to capital Includes working with other large international funds via a global strategic investment alliance § Growth in membership § Third-party fund management § Other growth initiatives Including additional voluntary contributions (AVCs – January 2011) 37

OMERS Alternative Investments 38

Summary n SC decisions support health and long-term viability of the Plan – ensure sustainability n Phased-in approach n Temporary changes until Plan is fully funded n Ongoing monitoring n Develop strategy for future decisions (SPDOS) n Consider growth options 39

Questions?