The discount rate plays a key role in assessing whether the pension plan has enough assets to meet its future pension obligations. The discount rate reflects what the plan's assets can reasonably be expected to earn over the long term. From this are subtracted the cost of running the pension plan and provisions for plan maturity as well as major adverse events, such as the 2008 financial crisis and the tech bubble in 2001.
The discount rate is approved annually by the plan's board members. The process to set the discount rate is robust to ensure this assumption is reasonable and appropriate for the plan.
The discount rate must be realistic to avoid masking plan funding issues that could impact future generations of retirees and plan members. For example, if the assumption is too high and investments earn less than expected, a funding shortfall could result, requiring younger and future plan members to contribute more to the pension plan, receive lower benefits, or both. If the assumption is too low, current members could pay more than necessary for their pensions or benefits may be reduced more than necessary.
Discount rates used in recent funding valuations follow.
|Valuation||Discount Rate/Inflation Rate|
|Jan. 1, 2018: Filed||4.80% (2.75% real, 2.0% inflation)|
|Jan. 1, 2017: Filed and Preliminary||4.80% (2.75% real, 2.0% inflation)|
|Jan. 1, 2016: Filed and Preliminary||4.80% (2.75% real, 2.0% inflation)|
|Jan. 1, 2015: Filed and Preliminary||4.85% (2.85% real, 2.0% inflation)|
|Jan. 1, 2014: Filed and Preliminary||4.95% (2.85% real, 2.1% inflation)|
|Jan. 1, 2013*: Preliminary||5.00% (2.75% real, 2.25% inflation)|
|Jan. 1, 2012: Filed||5.30% (3.1% real, 2.2% inflation)|
|Jan. 1, 2012: Preliminary||5.05% (2.85% real, 2.2% inflation)|
|Jan. 1, 2011: Filed||5.40% (3.25% real, 2.15% inflation)|
|Jan. 1, 2011: Preliminary||5.30% (3.15% real, 2.15% inflation)|
Discount Rate Review
The plan sponsors can request a review of the discount rate used for a funding valuation in certain circumstances. The board's discount rate has been independently reviewed two times in recent years and each time was confirmed to be valid and reasonable.
The last review was conducted by Don Smith, a partner at Western Compensation & Benefits. He was appointed as hearing officer by the plan sponsors – Ontario Teachers' Federation and the Ontario government – and the Ontario Teachers' Pension Plan Board to conduct an independent review of the discount rate assumed by the board for the 2012 preliminary funding valuation. See the 2012 Discount Rate Review for an executive summary of the hearing officer's report and the board's response to it.
See the 2011 Discount Rate Review for the board's and sponsors' response to the review of the discount rate used in the plan's 2011 preliminary funding valuation.