A stigma around the use of leverage by a pension plan is magnified if the organization is facing funding issues, said Brandon Weening, executive vice-president of corporate and capital markets finance at the Ontario Municipal Employees’ Retirement System, during a session at the Canadian Investment Review’s Global Investment Conference.
The skepticism around note offerings is due to pension plans’ in other countries reliance on borrowing to help fund the benefits they’re responsible for, he added.
“Of course that’s trouble. When we sit across from [investors] and we show them our funded status, . . . they immediately understand [and say], ‘OK, you’re just acting like any other investor would, trying to enhance your returns a little bit through the prudent use of leverage and you’ve got that strong credit rating behind it.’”
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Weening noted he’s only seen a handful of potential investors walk away from participating in the OMERS’ offerings and it was due to being U.S.-based investors that “are more familiar with the state and the city pension plans that aren’t in the similar position as the Maple 8.”
The investment organization made its first official note launch offering in 2019, but the work and preparation to be ready started back in 2018, he said, noting the note offerings have significant allocations to infrastructure and real estate assets, which are well suited to fixed term debt.
“By borrowing at the top of the house, we have a natural match that way and we’re able to deploy more and more capital into those asset classes, which is important for us.”
Another reason the OMERS has the term note program is its commercial paper program and how it’s used to warehouse short-term funding, said Weening. Once it has enough, it will be offered anywhere between three years, 10 years and even — on some occasions — out to 30 years.
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Participants join the OMERS’ offerings because of security and confidence, he added, noting its independence from any government mandate adds significant qualifiers to distinguish its offerings for potential investors.
The OMERS issues about $2 billion worth of notes per year and needs to cover interest and repay principle purely through the cashflow its assets generate.
“We’ve earned a 7.1 per cent rate of return over the last 10 years and some of that comes from the AAA financing that we’re able to achieve through this term note program.”
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