Top 10 Funding and Financial Questions
	1.	Is my pension secure?
		Yes, your pension is secure. It’s not unusual for pension plans to have shortfalls in some decades and surpluses in others. However, your pension plan is facing ongoing funding challenges because of continuing low interest rates, increasing life expectancy and a declining teacher-to-pensioner ratio. If required, the Ontario Teachers’ Federation (OTF) and the Ontario government, which sponsor the pension plan, can change contribution rates, pension benefits or both to keep the pension plan balanced. Pensions being paid to retired members and the value of pension benefits earned to date by working members cannot be reduced under Ontario’s Pension Benefits Act. For more information, read Pension Security.
	2.	Why does the plan have another shortfall?
		A preliminary funding valuation of the pension plan as of Jan. 1, 2008, shows a $12.7 billion shortfall between plan assets and liabilities (the cost of future benefits). The valuation is based on the plan’s current Funding Management Policy, adopted by the OTF and the government, and the valuation assumptions approved by the pension plan’s board. The shortfall exists because the cost of future pensions is growing faster than plan assets. Continuing low interest rates, increased life expectancy and a declining teacher-to-pensioner ratio have created this ongoing funding challenge. Low interest rates When real (after inflation) interest rates are low, bond yields are low. As a result, the cost of future pensions is higher because the pension plan needs more money today to earn the value of pensions to be paid in the future, as shown in the chart below. Assets required for a typical $40,000 pension Real interest rate Amount required* 2.0% $855,000 3.0% $745,000 4.0% $660,000 5.0% $585,000 *For retirement at age 58 Plan maturity The teacher-to-pensioner ratio is declining. That means a smaller proportion of the plan’s members bear responsibility for keeping the plan fully funded. As the chart below shows, an investment loss could have a larger impact on contributions for working teachers than it would have had in the past The plan’s maturity has two important impacts: 1. It becomes more difficult to use contribution increases alone to offset insufficient investment returns that may cause funding shortfalls, therefore 2. It reduces the amount of investment risk the pension plan can take to earn the returns required to pay pensions. If financial markets should fall significantly, it would be difficult, if not impossible, to make up the difference through higher contributions alone. Declining ratio of working-to-retired members 1970 1990 2008 Contributing members per retiree 10:1 4:1 1.6:1 Future contributions as a percentage of plan assets* 93% 42% 26% Increase in contribution rate required if assets decline 10% 0.56% 1.9% 4.4% * assuming the plan is fully funded For more information on the significance of plan maturity, consult our annual report.
	3.	Won’t scheduled increases in contribution rates take care of the shortfall?
		Contribution rate increases in each of 2007 and 2008, as well as planned increases in 2009, were introduced to eliminate the $6.1 billion shortfall in the plan as of Jan. 1, 2005. However, a preliminary valuation conducted Jan. 1, 2008, shows another shortfall of $12.7 billion because key conditions that led to the 2005 shortfall still exist, including low interest rates, continued increases in life expectancy and projected modest investment returns.
	4.	Now that you’ve reported a preliminary shortfall, what happens next?
		The OTF and the Ontario government must file a balanced funding valuation with the provincial regulator by Sept. 30, 2008. A balanced valuation shows the plan has the estimated amount of money required 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 preliminary shortfall in preparation for the filing of the valuation. (During discussions for the filing of the 2005 funding valuation, the board agreed to a one-time increase in one of the assumptions used in the valuation, which lowered the size of the shortfall, and the OTF and government agreed to other steps that offset the risk of using this higher assumption on a one-time basis. To close the remaining gap in 2005, the OTF and the government increased contribution rates.)
	5.	How will the shortfall be addressed?
		The OTF and the Ontario government will decide how to resolve the shortfall. As sponsors of the pension plan, the OTF and the government are responsible for the plan’s contribution rate and benefit levels, and any required modifications. In reviewing their options, the OTF and government may consider the results of a contributions and benefits survey conducted with a randomly selected, representative group of members in 2007. The survey results showed members would be willing to pay an average maximum of 12.3% of their base earnings to preserve their current pension package. Making cost-of-living increases conditional on the plan’s financial health (with the understanding that inflation protection would resume when the plan could afford it) was the preferred of three options tested in the survey to address funding shortfalls if contributions were already at their maximum preferred level. More research is being conducted on this option, which has been used by other Canadian pension plans.
	6.	What is the Funding Management Policy?
		The OTF and the Ontario government adopted a Funding Management Policy in 2003. Under the policy: • If assets are up to 10% greater than liabilities, the plan is in balance and no change is required. • If assets are more than 10% greater than liabilities, the plan has a surplus that can be used to reduce contribution rates or improve benefits. • If liabilities are greater than assets, the plan has a shortfall. A shortfall could be addressed with an increase in contribution rates, a reduction in pension benefits to be earned in the future, or a combination of the two to bring the fund back into balance. Only the OTF and the Ontario government can change contribution or benefit levels.
	7.	How much do you need to pay pensions?
		At the end of 2007, the plan had $108.5 billion in assets and an annual pension payroll of $4 billion. That means the plan has enough money to pay pensions for many years. But pension plans are required to show, through periodic funding valuations, that they have sufficient assets to pay pensions to current members who may be collecting benefits in 50, 60 or 70 years or more from now. To assess the funding status, the pension plan’s board hires an independent actuary to conduct annual funding valuations. The valuation assesses the plan’s long-term financial health by comparing plan assets (stocks, bonds, contributions, etc.) to liabilities (the amount required to pay pensions to all current members). The funding valuation shows whether, at a particular point in time, the plan is fully funded and is likely to have enough money to cover the cost of future pensions promised to all current plan members.
	8.	Is the rate of return assumption appropriate?
		The pension plan’s assumed long-term rate of return is one of the key economic assumptions used in the valuation. The rate of return assumption, prescribed in the current Funding Management Policy, is based on the plan’s funding status: • When the plan has a surplus, it uses Government of Canada 30-year real-return bonds, plus  0.5%. • When the plan has a shortfall or is in balance, it uses Government of Canada 30-year real-return bonds, plus 1%. Real-return bonds are a good starting point for the growth in the plan’s liabilities because teachers’ pensions are protected against inflation. An independent panel of pension and actuarial experts conducted an extensive analysis of the valuation assumptions on behalf of the OTF, the government and the pension plan’s board. Their resulting report does not state what the assumptions should be, but rather offers guidance on how assumptions should be set to effectively meet the plan’s objectives of benefit security, contribution rate stability and intergenerational equity. The panel confirmed the need to strengthen the plan’s mortality assumptions to account for the increased longevity of members. The report provides an objective, evidence-based opinion on the assumptions, which can be used in preparation for the final 2008 valuation. For more information, read Assumptions Review.
	9.	Why are your investment returns and benchmark different than many other plans?
		Every pension plan chooses a distinct asset mix and investment strategy to deliver the returns required to meet its own pension obligations over the long term. It then benchmarks or measures its performance against the markets in which it invests. For example, we measure the plan’s portfolio of Canadian equities against the S&P/TSX Composite Index returns. Our total fund benchmark includes all these index returns, weighted according to our allocations of assets. Teachers’ asset mix includes 45% equities, which is less than most other large pension funds. This asset mix suits the plan’s risk tolerance. Returns from equities are more volatile than returns from other instruments we hold. With only 1.6 working teachers to every pensioner, the pension plan’s managers cannot justify assuming more risk, which could result in bigger investment losses that working teachers would have to cover through higher contributions, lower future benefits, or both. Pension plans with higher allocations to equities have higher risk and higher market returns when equity markets produce superior results to other asset classes. Because of our lower exposure to equities, our overall performance may lag other pension plans when equity markets are strong. To maximize returns within its asset mix constraints, Teachers’ investment managers try to earn additional returns above the benchmark. In 2007, the fund earned a rate of return of 4.5%, nearly double the total fund benchmark. For pension plans, it is the long-term performance that counts. The fund has earned an 11.4% averate rate of return since 1990.
	10.	How much were your investments impacted by the credit crunch?
		We weren’t immune from the summer of 2007 credit crunch. Although we did not invest directly in the types of investments that gave rise to what is known as the subprime crisis, we did have indirect exposure to credit risks through other investments. As a result, the value of some of our fixed income investments has been impacted materially by the global credit crisis. For more information, read the investment section in our annual report.

	Posted April 2008	TOP