OTF and government address funding challenges with change in cost-of-living provision
	The Ontario Teachers’ Federation (OTF) and the Ontario government have advised pension plan management of a change in the way cost-of-living increases will be determined after you retire. The change in the cost-of-living provision paved the way for the elimination of the $12.7 billion funding shortfall reported earlier this year. Inflation increases for pension credit earned after 2009 will range from 50% to 100% of the change in the cost of living, depending on the plan’s funding status. The change does not affect current pensioners, who will continue to receive full cost-of-living increases. Pensions being paid to retired members and the value of pension benefits already earned by working members are protected by legislation. How cost-of-living increases will be determined Under existing provisions, a retired member’s pension automatically keeps pace with changes in the cost of living, as measured by the Consumer Price Index (CPI).
	Under new provisions, annual cost-of-living increases for future retirees will be based on two components: 1. The portion of a member’s pension credit earned before 2010 will still be 100% protected against changes in the cost of living. 2. The portion of a member’s pension credit earned after 2009 will be 100% protected against cost-of-living changes as long as the plan has sufficient assets. If the plan has insufficient assets: • Cost-of-living increases for pension credit earned after 2009 will be between 50% and 100% of the change in the CPI, depending on how much the plan can pay. Any reduced inflation payment will remain in effect until a financial assessment, called a funding valuation, shows there are sufficient funds to provide full inflation protection again. If there is enough surplus, pension payments could be further increased to the amount they would have been with full inflation protection. • The Ontario government and designated employers that participate in the plan will continue to share pension costs by making extra payments equal to any inflation increases members forgo due to a funding deficiency. The combined effect of members receiving smaller cost-of-living increases and the government contributing matching funds will help mitigate future funding deficiencies.
	Jim Leech, President and CEO of the Ontario Teachers’ Pension Plan, said the change in the cost-of-living provision will help the pension plan manage future funding challenges stemming from low interest rates, increased life expectancy and the risk that investment returns could fall short of the growth in plan liabilities. “This new tool enables us to construct an asset mix that is better able to earn the long-term returns required to pay teachers’ pensions and to better absorb periods of volatility,” he said. Member survey showed support for cost-of-living change A survey conducted last year showed that of three possible options, members preferred making cost-of-living increases conditional on the financial health of the pension plan, if required to address a funding shortfall after contributions rates reached their maximum preferred level. The other options tested in the survey included increasing the 85 factor to a 90 factor and reducing pension benefit levels for future service by 10%. If the OTF and government had resolved the funding shortfall with contribution increases alone, members and the government would each be required to contribute more than 16% of salary to the pension plan, far beyond the 12.3% maximum members cited in the survey. No rate hike beyond 2009 scheduled increase The OTF and the government also advised of their decision to limit contribution rate increases to the 0.8% hike scheduled for Jan. 1, 2009. That increase, announced more than two years ago to help eliminate a 2005 funding shortfall, will increase average contributions to 11.1% of salary from 10.3%. The Ontario government and designated employers that participate in the pension plan will continue to match total employee contributions.
	More information: • Read the OTF’s Pension Update • Read the Top 5 inflation Q&As • Read the Top 5 funding Q&As • Find out how plan maturity affects plan funding

	Posted October 2008	TOP