An Independent Assessment

Determining the Discount Rate

The first step in the Comprehensive Plan Review was to determine – given both the Plan’s improved financial health and emerging challenges – if there is really anything to worry about. Specifically, the Board wanted to determine whether OMERS could continue to provide the existing Plan design at current contribution levels – while fully recognizing the risks and realities the Plan faces over the longer term.

We began the assessment by working with a leading, independent actuarial adviser selected through a formal RFP process managed by OMERS in-house procurement team, to identify an appropriate long-term discount rate for design and modeling purposes (rather than for annual regulatory filing purposes used to determine minimum funding requirements). As defined, the discount rate is the Plan’s anticipated long-term rate of return less a margin for conservatism. Practically, it is a measure of how much risk and obligation the Plan is willing to push into the future – that is, onto future generations.

Reducing the discount rate automatically increases both plan liabilities and the normal cost (i.e., the cost of current benefits earned), but helps to reduce funding risk over time. More to the point, it provides
for more stable benefit and contribution levels – which is one of the fundamental objectives of the Comprehensive Plan Review. It is also the reason why the OMERS Administration Corporation (OAC) has, in consultation with the SC, reduced our discount rate by 25 basis points over the past two years alone.

Using a robust methodology – and the OMERS 2020 strategy as a starting point – our advisor has recommended that our nominal discount rate for design and modeling purposes should drop slowly but steadily between now and 2050. This controlled reduction will help to reduce funding risk without disadvantaging one generation over another.

The immediate challenge for the SC is to determine how far the discount rate should drop – and over what period. This will be determined through the upcoming modeling exercise (see page 4 for details). Regardless, the intent of the Comprehensive Plan Review is to design a plan that is both resilient and flexible enough to address these foreseeable events on a proactive and positive basis.

Considering the Options: Making OMERS a leading model for DB plan sustainability