Questions and Answers

• When the value of a defined benefit (DB) pension plan’s assets is worth more than its estimate of pension obligations to its members, the plan is considered to be in surplus.
• On the other hand, when a plan’s estimate of pension obligations is greater than the value of its assets, the plan is considered to be in deficit.
• Over time, DB plans such as OMERS will cycle through periods of both surplus and deficit.
• Full funding means that a plan’s assets equal or exceed its obligations.

• OMERS continually assesses the value of its assets against an estimate of its pension obligations to members.
• OMERS carefully monitors its funding status by conducting a comprehensive actuarial Plan valuation every year.
• As part of the plan valuation, OMERS pension obligations are carefully mapped out for years into the future -- for all plan members.
• OMERS may serve a single plan member for 70 years or even more – from the time they begin employment, throughout their career, for their life in retirement and for their eligible spouse – so it is critical to carefully assess projected obligations to our members over the long-term.

AVCs (Additional Voluntary Contributions) are invested in the OMERS Fund and are not affected by the funded status of the defined benefit (DB) plan. AVCs are member’s retirement savings separate and apart from the DB plan funding.

• Under Ontario law, OMERS must file a detailed actuarial valuation at least once every three years with the regulator.
• Pension plans must take action to address any deficits arising from the actuarial valuation.
• OMERS reports its assets on both an actuarial “smoothed” (5-year) and market-value basis. The smoothed value of assets is used for valuation reporting, while the market value is used in financial statements.
• Smoothing is a method to spread the impact of investment losses or gains from any single year over a longer period of time.
• Smoothing of assets buffers the pension plan from having to make sudden drastic changes to contribution rates or benefits because of significant investment gains or losses in any one year.
• OMERS Sponsors Corporation has a policy, the Statement of Plan Design Objectives and Strategy, that governs decisions on contribution rates and benefits during cycles of deficit and surplus.
• This Statement outlines strategies for deficit management (less than 100% funded), reserve management (100-110% funded) and surplus management (more than 110% funded). For more information.

• The OMERS Plan has $55 billion in net assets and its current funding deficit on a smoothed basis stands at $7.3 billion (Dec. 31, 2011).
• The Plan is approximately 89% funded – that is, it has $89 in assets for every $100 of long-term pension obligations.

• OMERS is on course with a three-part strategy to return the plan to full funding.
• First, OMERS has a strategy designed to earn consistent risk-adjusted net returns in the 7-11% range on average going forward:
  • OMERS continues to shift capital into private market assets that can generate predictable and sustainable returns; private markets will account for 47% of OMERS asset mix against 53% in public markets.
  • Over the last eight years since OMERS began the strategy to shift capital into private market assets, the fund has earned close to a 7.5% gross annual average return.
• The second and third components of the strategy involve decisions on temporary contribution rate and benefit changes. In 2010, OMERS SC announced temporary contribution rate increases for 2011, 2012 and 2013, and temporary benefit changes starting in 2013 that impact only Plan members who leave their employment before they are eligible for retirement. The measures will remain in effect until the Plan returns to full funding.
• The three-part strategy along with principles set out in the Statement of Plan Design Objectives and Strategy will continue to move the Plan back to full funding.

• Current projections show the funding deficit peaking at around $10 billion in 2012 before it starts to decrease.
• Based on expected returns, combined with the temporary contribution rate increases and benefit reduction, the Plan is expected to return to surplus within 10 to 15.
• In the meantime, OMERS continues to carefully monitor any pressures on the funding of the Plan.

Many important financial and demographic factors are considered when estimating OMERS long-term pension obligations and funded status.

Financial factors include:

• Market conditions and the economic outlook;
• Member salary trends;
• Interest rates;
• Inflation expectations; and
• Asset values taking into account smoothing and its impact on assets in the prior five years.

Demographic factors include:

• Increases in life expectancy;
• The aging of plan membership; and
• Retirement trends, including early retirement patterns.