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needs more money today to earn the value of pensions to be paid in the future.
For example, when real interest rates are 2%, $855,000 is needed to pay a typical $40,000 annual pension for a teacher retiring at age 58. If real rates were to climb to 4%, the plan would need only $660,000 to provide the same pension benefit.
3. Will scheduled contribution increases take care of the shortfall?
Contribution increases in each of 2007 and 2008, as well as planned increases in 2009, will eliminate a $6.1 billion shortfall reported in 2005. However, many of the same conditions that led to the 2005 funding shortfall, including low real interest rates and increased life expectancy, have created another gap between assets and liabilities. This $12.7 billion gap, or shortfall, is based on a preliminary valuation in January 2008.
4. How much do you need to pay pensions?
To answer that question, the pension plan’s board hires an independent actuary to conduct a funding valuation. The valuation assesses the plan’s long-term financial health by comparing plan assets (stocks, bonds, etc.), plus future contributions, to liabilities (the cost of future pensions).
With an annual pension payroll of about $4 billion, the Teachers’ plan has enough money to pay pensions for many years. But to protect all members, the valuation must show there are sufficient funds to pay pensions to current members who may be collecting benefits in 50, 60, 70 or more years from now.
A preliminary funding valuation shows the Teachers’ plan needs $147.6 billion to pay future pensions to all current members. That’s $12.7 billion more than the value of plan assets and future contributions as of Jan. 1, 2008.
The preliminary valuation was conducted using the current funding management policy that prescribes, among other things, the interest rates used to value the cost of future pensions. The interest rates have a significant impact on funding valuations, and can mean the difference between a shortfall and a surplus.
5. Now that you've reported a preliminary shortfall, what happens next?
The Ontario Teachers’ Federation (OTF) and the Ontario government, which jointly sponsor the pension plan, must file a balanced funding valuation with the provincial regulator by Sept. 30. A balanced valuation shows the plan has enough money to cover the cost of future pensions for all current members.
The pension plan’s board, the OTF and the Ontario government are discussing the funding management policy and the preliminary shortfall in preparation for the filing. The three parties are working together to find a solution, not just for this filing year, but for the many filing years to come.
6. How will the shortfall be addressed? What options are on the table?
The OTF and the Ontario government will decide how to resolve the shortfall, while the pension plan’s management will provide information to aid in their decisions. Once a solution is reached, it will be communicated to members.
7. Are my pension benefits secure?
Yes, your pension is secure. The value of the pension you have earned to date is guaranteed under Ontario’s Pension Benefits Act. Only that portion of your pension you will accumulate in future years could change.
No decision has been made to change benefits, but to give you an idea of what is protected, here’s a hypothetical example: Let’s say the pension plan changed after you had built 20 years of credit. If you contributed to the plan for five more years and then retired, the change would affect only that portion of your pension based on the five years after the change was introduced.
Pensions being paid to retired members cannot be changed under the Pension Benefits Act.
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