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1. Is my pension secure?
Yes, your pension is secure. The Ontario Teachers’ Federation (OTF) and the Ontario government are changing the pension plan’s cost-of-living provision to help manage future funding challenges.
The cost-of-living change will apply only to pension credit earned after 2009. Pensions being paid to retired members, including full inflation protection, and the value of pension benefits already earned by working members are protected by legislation.
2. How will the current market turmoil affect my pension?
| While the pension plan is not immune to current market conditions, your pension is secure. Today’s market conditions will not affect the pensions of retired members or pension benefits already earned by working members. Unlike other retirement savings vehicles, such as RRSPs, your pension is defined by a formula that takes into account your years of service and average salary.
The fund is highly diversified and the investment team is well experienced to handle market swings. However, the fund may experience short-term setbacks. For example, the plan lost money in 2001 and 2002, but its long-term performance remains high.
We are closely monitoring our investments, as always, to manage through this market cycle. We will continue to take an appropriate level of risk and invest in a manner that is consistent with our long-term objective of paying teachers’ pensions. Long-term performance counts the most for pension plans that may be paying benefits to members 70 years or more from now.
We report investment performance at the portfolio level once a year. You will see how we fared during this difficult period when we release our annual audited financial statements in April 2009. The results will be presented, as usual, in our annual report and in the summary Report to Members.
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3. Did the change in the cost-of-living provision eliminate the funding shortfall?
The change in the cost-of-living provision paved the way for the elimination of the $12.7 billion shortfall by allowing for a change in a key assumption used to value pension plan assets in the 2008 funding valuation.
The cost-of-living provision, introduced by the OTF and the Ontario government, reduced the level of risk in the pension plan. This allowed the pension plan to revise the expected rate of return on plan investments, which balanced plan assets and liabilities (the cost of future pensions). The change in the return assumption increased the asset side of the pension balance sheet. The change in the cost-of-living provision did not change the liability side of the balance sheet because the plan intends to pay 100% inflation protection on future pension credit whenever it has sufficient funds.
The cost-of-living provision gives plan management a new tool to address possible future funding deficiencies. As a result, investment managers can increase the plan’s investment risk tolerance to accommodate earning the higher returns required to pay pensions. If returns are not as high or if liabilities grow faster than assumed, the negative experience can be absorbed by changing the level of inflation protection for pension credit earned after 2009.
The preliminary valuation in January 2008 used the yield of long-term Government of Canada real-return bonds, plus 1%, to project the plan’s assets. The final 2008 valuation filed with the pension regulator on Oct.1 used a higher rate of return assumption – the real-return bond rate, plus 1.5%. The 0.5% difference wiped out most of the shortfall and was prudent. This change in the cost-of-living provision made it possible for the pension plan to use a higher rate of return assumption.
4. Didn’t contribution rate increases take care of the shortfall?
Contribution increases in 2007 and 2008, as well as a scheduled increase in 2009, eliminated the $6.1 billion pension shortfall reported in 2005.
However, despite strong investment returns, pension liabilities (the cost of future pensions) continued to grow faster than plan assets, causing another shortfall in 2008. At the beginning of 2008, pension plan assets, including future contributions, equalled $134.9 billion, while liabilities (the cost of future pensions for current members) totalled $147.6 billion. This gap between plan assets and liabilities represented a $12.7 billion funding shortfall.
The 2008 shortfall, which has now been eliminated, stemmed from the same conditions that led to the deficit in 2005, including low interest rates, increased life expectancy and projected modest long-term investment returns.
By making cost-of-living increases conditional on the financial health of the pension plan for pension credit earned after 2009, the pension plan now has the flexibility to manage future funding deficiencies.
5. What is plan maturity and how does it affect the financial status of the pension fund?
| Three ratios sum up the significance of being a mature pension plan: |
| 1. |
The declining ratio of active members to pensioners means there are fewer people contributing to the plan, compared to the number drawing pensions. There are currently 1.6 teachers to every pensioner, compared with 4 to 1 in 1990.
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| 2. |
Benefit payments exceed contributions received. In 2007, the pension plan paid $4 billion in pension benefits, $1.9 billion more than it received in contributions. As a result, investment returns play an increasingly critical role in the plan’s ability to meet its obligations.
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| 3. |
Future contributions represent a shrinking percentage of plan assets. In 1990, the value of future contributions comprised 42% of plan assets; now they represent only 27%. Consequently, the required increase in contribution rates to cover a 10% loss on assets would be more than double what it was in 1990. |
| The plan’s maturity has two important impacts: |
| 1. |
It becomes more difficult to use contribution increases alone to offset insufficient investment returns or large increases in pension liabilities that may cause funding shortfalls.
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| 2. |
This, in turn, reduces the amount of investment risk the pension plan can take to earn the returns required to pay pensions. |
To address the problem, the OTF and the Ontario government are changing the cost-of-living provision for pension credit members will earn after 2009. This change provides a new tool, in addition to contribution rate increases, to help manage any future funding deficiencies.
For more information on the significance of plan maturity, consult our annual report. |
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