 | Home > Plan Funding > |  |
 |
2011 shortfall addressed
The pension plan was brought back into balance in the summer of 2011. OTF and the Ontario government, which jointly sponsor the Teachers’ pension plan, announced changes in June 2011 to address a projected $17.2 billion funding shortfall.
However, long-term funding challenges continue because the cost of future pensions is growing faster than plan assets.
Historically low interest rates, the impact of the pension plan’s 2008 investment loss, uncertain global economic conditions and member demographics are four key factors placing continued stress on the long-term financial outlook of the Teachers’ pension plan.
Member demographics have changed dramatically during the past 20 years. For example, a typical teacher retiring today can expect to collect a pension for 30 years, about four years longer than she contributes to the pension plan. Pensions simply cost more as retirees live longer.
- 2. How did OTF and the Ontario government address the 2011 shortfall?
OTF and the Ontario government made three changes to address the 2011 shortfall:
- A 1.1% contribution rate increase, phased in over 2012, 2013 and 2014
- Slightly smaller annual cost-of-living increases for teachers who retired after 2009
- Recognizing the current contribution rate as the permanent base rate
In addition, the pension plan board changed a key assumption used to value projected pension assets, which reduced the size of the shortfall.
- 3. Did OTF and the government consider other options to address the 2011 shortfall?
To address any funding shortfall, OTF and the Ontario government can:
- increase contribution rates;
- invoke conditional inflation protection for pension credit earned after 2009;
- reduce pension benefits members will earn in future years; or
- adopt a combination of these options.
The plan sponsors considered several solutions before agreeing on the changes noted in the previous answer.
- 4. Why did OTF and the government resolve the 2011 shortfall earlier than they had to?
OTF and the government concluded it was advantageous to members to address the shortfall in 2011 because the pension plan’s funding status was projected to deteriorate in 2012 due to low interest rates, recognizing 2008 investments losses and other factors. They filed a balanced funding valuation with the provincial pension regulator one year earlier than required by law.
An earlier filing avoided potentially more dramatic changes that likely would have been necessary if a 2012 valuation were filed, and provides time for possible improvements in factors, such as interest rates, that affect pension costs.
A balanced funding valuation must be filed with the regulator at least once every three years. A filed valuation must show future assets and future liabilities are in balance – there cannot be a shortfall.
The next valuation is required by the regulator by 2014 at the latest.
- 5. Why did the pension plan use a higher rate of return assumption to help resolve the shortfall?
This change was made possible by measures agreed to in order to resolve the 2011 shortfall (see question 2 above), which reduced the plan’s funding risk. The rate of return assumption, also called the discount rate assumption, plays a critical role in projecting whether or not the pension plan has enough assets to meet its future pension obligations. A lower rate of return assumption increases the projected cost of pensions; a higher assumption lowers this cost.
BACK TO TOP↑
Contribution increase for teachers
- 6. How much are rates increasing?
Members will contribute an additional 1.1% of their salary to the Teachers’ pension plan to help cover the 2011 funding shortfall. The increase will be phased in over three years, with members contributing 0.4% more in 2012 and 0.35% more in each of 2013 and 2014. All rate increases go into effect Jan. 1.
- 7. What are the new contribution rates?
|
Year
|
Up to CPP limit*
|
Above CPP limit*
|
Increase**
|
|
2011
|
10.4%
|
12.0%
|
N/A
|
|
2012
|
10.8%
|
12.4%
|
0.4%
|
|
2013
|
11.15%
|
12.75%
|
0.35%
|
|
2014
|
11.5%
|
13.1%
|
0.35%
|
|
Total increase
|
1.1%
|
||
*The Canada Pension Plan (CPP) limit is the maximum earnings on which CPP contributions and benefits are based. The limit, which changes annually, is $50,100 in 2012.
** As a percentage of salary
- 8. How much more will I contribute?
For an average teacher earning $80,000, the 0.4% increase translates into an extra $320 in annual contributions in 2012. This increase will be partially offset by lower taxes because pension contributions are tax deductible.
- 9. Why are contribution rates increasing?
OTF and the government agreed to increase contribution rates to help offset the 2011 funding shortfall.
- 10. Will the government also contribute more to the pension plan?
Yes. The Ontario government will continue to match total annual contributions from members working in publicly funded schools. Other employers that participate in the pension plan, such as private schools, will also match their employees’ contributions at the new higher rates.
BACK TO TOP↑
Inflation changes for recent retirees
- 11. Why is the level of inflation protection changing for certain pensioners?
OTF and the government have agreed to invoke conditional inflation protection to cover part of the 2011 funding shortfall. For the next three years, pensioners who retired after 2009 will receive 60% of the annual cost-of-living increase on the portion of their pension credit earned after 2009. Increases for the portion of their pension credit earned before 2010 will continue to match 100% of the annual change in the cost of living.
- 12. How will this change affect recent retirees?
The change for affected pensioners will be minimal. They will forego about $2 in monthly inflationary increases for three years.
- 13. Why doesn’t the change apply to all pensioners, instead of only those who retired after 2009?
Conditional inflation protection was introduced at the end of 2009 and only applies to pension credit earned after then. Anyone who retired before 2010 is not affected. Under current Ontario legislation pension benefits cannot be reduced retroactively.
- 14. Does this change affect the government?
Yes, the Ontario government and other employers that participate in the Teachers’ pension plan will make extra contributions to the pension plan equal to the total cost of annual inflation increases that retirees forgo. The government will also match the new, higher member contribution rates.
- 15. Didn’t the plan sponsors introduce conditional inflation protection a few years ago? Why is this provision impacting pensioners now?
OTF and the Ontario government introduced conditional inflation protection to pave the way for the elimination of a previous funding shortfall in 2008, but never invoked it. They have agreed to use this measure to address the 2011 shortfall.
- 16. Does invoking conditional inflation protection now have any effect on the pensions working teachers will receive?
No. Annual inflation adjustments (also called cost-of-living adjustments) are calculated only after a member retires, based on the plan’s funding health at the time. Working teachers do not accumulate a specific percentage of conditional inflation protection on their pension credit. This means the act of invoking 60% conditional inflation protection for three years has no effect on the future cost-of-living increases working teachers will receive.
Future cost-of-living adjustments for the portion of pension credit earned after 2009 will be 50% to 100% of inflation, depending on the plan’s financial health during retirement – not today. The plan’s financial health is evaluated at least every three years, which means determining the level of inflation protection is an ongoing process that happens after you retire.
Remember, the goal is to pay 100% inflation protection and conditional inflation protection only applies to pension credit earned after 2009. Inflation adjustments for the portion of pension credit earned before 2010 will continue to match 100% of the annual change in the cost of living.
Planning to retire soon? 60% conditional inflation protection will be in effect for the next three years because funding valuations are due to the pension regulator at least every three years. If you retire before 2014, you will receive slightly smaller cost-of-living increases for the portion of your pension credit earned after 2009.
Consult the chart to find out whether conditional inflation protection affects you.
|
Member
|
Does it affect you?
|
|
Retired before 2010
|
No
|
|
Retired after 2009
|
Yes, but only for pension credit earned after 2009
|
|
Retiring in the next three years
|
Yes, only after you retire and only for pension credit earned after 2009
|
|
Retiring more than three years from now
|
Conditional inflation protection provision applies to pension credit earned after 2009, but you are not affected by it being invoked now
|
BACK TO TOP↑
- 17. Will there be another funding shortfall? Is the problem solved?
The 2011 shortfall has been addressed. However, funding challenges continue because the cost of future pensions is growing faster than plan assets.
Historically low interest rates, the impact of the pension plan’s 2008 investment loss, uncertain future economic conditions around the world, and member demographics are four key factors placing continued stress on the financial health of the Teachers’ pension plan.
- 18. How are age demographics contributing to recurring funding shortfalls?
Member demographics have changed dramatically during the past 20 years. For example, the pension plan pays about $1.8 billion more in pensions than it collects in contributions each year. In addition, a typical teacher retiring today can expect to collect a pension for 30 years, about four years longer than she contributes to the pension plan. Pensions simply cost more as retirees live longer.
- 19. Should I change my retirement plans?
No. Teachers’ pensions are defined by a formula based on years of pension credit and average earnings. Basic pensions do not depend on the size of the pension fund or the funding status of the plan when you retire.
See also:
BACK TO TOP↑