The Financial Services Commission of Ontario has begun an inquiry into OMERS, seeking to ensure that it has followed the rules governing pension plans.

Debbie Oakley, senior vice president corporate affairs at OMERS, Thursday confirmed news reports this week of the regulatory review, noting that it is focusing on the pension giant’s investment in Borealis Capital Corp. (its private equity arm that was partly spun out in 2001, and bought back under the plan’s full control earlier this year). Oakley said that firm is cooperating with FSCO, and that it’s confident it has complied with the law.

FSCO spokesperson, Rowena McDougall, confirmed that it is looking at OMERS’ compliance with the applicable pension legislation, but she refused to
elaborate.

Widely known as OMERS, the Ontario Municipal Employees Retirement Board is one of Canada’s biggest pension funds. It represents about 340,000 current and former employees of various municipal agencies, including governments, school boards, libraries, police and fire departments throughout Ontario. It currently runs about $32.7 billion in net assets.

In 2001, OMERS spun out most of Borealis, retaining a 27% stake. The rest was held by other corporate entities and the Borealis management team (other major shareholders were the CPP Investment Board and Kilmer Van Nostrand Co. Ltd.).

In early 2004, OMERS announced that it would increase its exposure to alternative assets and that it would restructure parts of its investment organization by buying back the remaining Borealis shares for $49.9 million. The fund said that it expects to recoup the net cost of the purchase in approximately one year through the elimination of third party asset management fees, overhead cost synergies and increased revenue.

It said it made sense to bring the management of these assets under OMERS’ control, “where they could conduct business as separate entities with clear lines of accountability and enhanced governance.” At the time, 95% of the assets Borealis managed were owned by OMERS anyway. In addition, it noted that the transaction enables it to implement the new asset mix policy and to begin the process of adopting a new holding company model.

Under the new structure, OMERS created Borealis Infrastructure Corp. to handle its global infrastructure investing. Michael Nobrega, Borealis managing principal and president, was appointed CEO of the new company. It manages OMERS’ $1-billion infrastructure portfolio that includes interests in an oil export pipeline system, nuclear power facilities, Confederation Bridge linking Prince Edward Island and New Brunswick, the Detroit River Tunnel train and truck trade-way corridor, municipal energy companies, and long-term health care facilities.

OMERS-owned Oxford Properties Group now manages the $6.7 billion of OMERS-owned office properties and shopping centres that were managed by Borealis. Michael Latimer, Borealis managing principal and chief operating officer was appointed Oxford president and CEO.

The plan’s private equity strategy is now being run by the OMERS’ private equity group. Ian Collier, Borealis managing principal and CEO, was tapped CEO of the group. The private equity group manages its $1 billion private equity portfolio.

Dominion Bond Rating Service rates the plan AAA, based on its financial strength and liquidity. It notes that OMERS’ investment returns improved from -7.1% in 2002 to 12.7% in 2003, but were still below the market benchmark of 15.5%.

Improved fund performance was offset by the continued effects of the smoothing reserve and the escalating cost of providing pensions. It notes that its surplus slipped to $0.5 billion. And, it cautioned that without material, sustained interest rate increases, “DBRS believes that some combination of contribution rate increases, and future pension benefit changes may be necessary”.