Dominion Bond Rating Service is confirming its counterparty rating of AAA to the Ontario Municipal Employees Retirement System, but the ratings agency notes that contribution rates may have to rise, or the pension plan may need to curtail future benefits.

DBRS says that the AAA rating is based on the financial strength and liquidity of OMERS, one of Canada’s largest pension funds. The fund has 217,593 active members, and total net assets of over $32 billion as of December 31, 2003.

The rating agency reports 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%. However, it notes that “Improved fund performance was offset by the continued effects of the smoothing reserve and the escalating cost of providing pensions. As a result, OMERS reported a significant decrease in their funding position.” The fund’s surplus slipping to $0.5 billion at year end, compared with $2.5 billion a year ago.

“In the absence of material, sustained interest rate increases, DBRS believes that some combination of contribution rate increases, and future pension benefit changes may be necessary,” it says.

Nevertheless, the current rating recognizes: the superior financial strength, flexibility, and liquidity of OMERS; the full reinstatement of contributions, which should improve the financial position of the fund; and, OMERS’ strong relationship with municipal sponsors, members, and the Government of Ontario.