Ontario Fund Dives into Alternative Investments

February 24, 2004 (PLANSPONSOR.com) - Following the lead of numerous other pension funds, one of Canada's largest pension funds is moving much more heavily into alternative investments such as private equity in a continuing search for more robust returns.

The Ontario Municipal Employees Retirement System (OMERS) announced that it is doubling its position in alternative investments over four to five years to 35% from 18% while easing back on stocks and bonds from the current 80% to 60%, according to a Canadian Press report.

The pension fund has $13.3 billion invested in publicly traded stocks, $13 billion in bonds, including real return bonds, and about $300 million in “absolute return” investments.

Like other pension programs, OMERS, which has 340,000 active and retired members, will face ballooning obligations in coming years as the baby-boom generation retires.

At the same time, continuing low interest rates for fixed-income investments, such as bonds, as well as declines on the volatile stock markets in recent years have put OMERS on track for a pension shortfall next year.

In its asset allocation announcement, OMERS said it will gradually increase its focus on alternatives to publicly traded stocks and bonds – investing in such things as real estate, power utilities, bridges and sewage treatment plants. OMERS chairman Frederick Biro said these types of investments suit the pension plan’s needs for a reliable, long-term source of income that’s “somewhat independent of the vagaries of the public equity market,” according to the Canadian press report.

That income flow is increasingly critical since the fund estimates it will have to pay as much as $7 billion in annual benefits by 2025, a five-fold increase over the $1.4 billion it currently pays.