The OMERS pension plan, which manages pensions for Ontario municipal employees, says its projected long-term funding shortfall widened by nearly $3 billion last year as its workforce ages and retires.

The Ontario Municipal Employees Retirement System said Friday it had a record $55.1 billion in net assets at the end of last year.

Although the fund had a $300 million surplus in 2011, as it collected about $2.7 billion in contributions and paid out $2.4 billion in benefits, its projections for long-term funding have dimmed as the expected cost of future pensions grows more rapidly than its projected assets.

The fund — depleted from the fallout of the financial crisis — faces growing obligations in the coming years along with a demographic shift.

OMERS, which manages the fund for about 420,000 people, said its funding deficit grew to $7.3 billion last year, up from $4.5 billion a year earlier.

"Like that of many other pension plans, OMERS funding deficit position primarily reflects the continuing impact of the 2008 global economic downturn and increasing actuarial liabilities due to plan demographic shifts," said Patrick Crowley, OMERS chief financial officer.

The projected shortfall comes as the workforce ages and more baby boomers retire, leaving more people drawing from the funds and fewer contributors paying in.

It is a crisis affecting plans across Canada and the world. Both the Canadian and provincial governments are seeking solutions to help reduce the burden of retirement benefits on public coffers.

Ontario's deficit problems weigh heavily on public employees

The Ontario government, which is struggling to tame a $16-billion deficit, released a report last week by economist Don Drummond, who made 362 recommendations on how to cut spending, including reducing pension benefits for teachers, nurses and other civil servants.

The report found that public sector pensions will cost the government some $3 billion in 2012-13, rising to $4.2 billion by 2017-18.

Drummond recommended that the Ontario government cut pension benefits rather than increase the contribution rates that current employees pay in. He also said the government should axe inflation indexing, early retirement benefits and lump sum payments to teachers upon retirement.

As debate rages inside and outside the House of Commons about the Harper Government's idea to raise the age to collect Old Age Security from 65 to 67, companies are also dealing with pension funding shortfalls due to recent losses on stock markets and interest rate declines.

OMERS expects that it will be able to return to a surplus in the next 10 to 15 years based on expected investment returns and temporary contribution increases and benefit reductions.

Contribution rates have been raised for 2011, 2012 and 2013 and benefits have been reduced starting in 2013 for those who retire early. The measures will remain in effect until the plan becomes fully funded.

It also expects to increase average investment returns from three per cent in 2011 to between seven and 11 per cent on average.

Based on its current projections, OMERS deficit is expected to peak in 2012, and then will begin to shrink until it is eliminated over the next 10 to 15 years.

OMERS had about $12 billion more in assets at the end of 2011 since the 2008 global credit crisis nearly wiped out the value of many investments, bringing pension fund levels down with it.

"Our view of risk is shaped by prudent use of debt, stringent investment criteria and rigorous discipline in all our investment decisions. This view is in line with protecting capital and ensuring liquidity for our plan members in turbulent market conditions," said Michael Nobrega, OMERS president and CEO.

Positive return on private market strength

It generated an investment return of 3.17 per cent in 2011, with a return of 8.2 per cent in its private market portfolio and a negative 0.22 per cent return from its public market portfolio.

OMERS has been working to shift its asset mix more heavily into private market investments. A poor performance on global stock markets last year, largely due to worries about government debt, further battered already sunken share prices.

Meanwhile, real estate, infrastructure and private equity assets are providing strong cash flows at the fund.

"The strength of its private market investments helped the plan generate a positive investment return in 2011 despite the impact of difficult macroeconomic conditions, including the European sovereign debt crisis, on public equity markets around the world," OMERS said in a statement.

"Regarding the public markets, 2011 was truly a tale of two halves. The markets started the year strong, building on the momentum of 2009 and 2010. This changed dramatically in the latter half of the year where we saw daily market volatility reminiscent of the last recession," Nobrega said.

At the end of 2011, about 58 per cent of OMERS investment were in public markets and 42 per cent in private assets, compared with 82 per cent in public markets and 18 per cent private in 2003.