Why do we have another projected shortfall?

May 15, 2012

Most members know that increased life expectancy is one of the factors driving up pension costs. While demographics such as this weigh heavily on the plan's funding status, there are three primary drivers to the 2012 preliminary shortfall. These include, in addition to demographics, historically low interest rates and the absorption of investment losses from 2008.

Assets required for a typical $40,000 pension

Real Interest Rate Amount Required
1.0% $970,000
1.5% $900,000
2.0% $835,000
3.0% $730,000
4.0% $645,000
5.0% $575,000

When interest rates drop, the plan needs to set more money aside to pay future pensions. Interest rates are at the lowest levels since the 1950s and 1960s. To put this into context, it costs 50% more to secure a typical pension today than it did in 1990.

The plan's investment loss during the height of the financial crisis in 2008 is being smoothed over five years. Smoothing is an accepted practice that allows plan managers to spread gains or losses on investments over a few years. By doing so, they are able to avoid having to make frequent adjustments to benefits or contribution rates.

In 2011, Teachers' absorbed $5.2 billion of the 2008 loss, and will absorb another $5.2 billion in 2012. However, these losses are being largely offset by investment gains over the last few years. For example, despite tough markets, the Teachers' pension plan generated $11.7 billion in investment income in 2011.

"Economic, investment and demographic conditions have changed radically since 1990. We are faced largely with a systemic problem, and not a one-time anomaly. We've had recurring shortfalls for several years," says Jim Leech, Teachers' President and CEO.

"We are committed to working with the Ontario Teachers' Federation and the Ontario government for fair and equitable solutions – to be introduced over time; well-researched, well-informed decisions in our members' best interests. We are all living longer and that is great – we just need to adjust to our new reality. A course correction now will have a major impact tomorrow," says Jim.

"This plan will evolve – all plans have to evolve given the environment. It may look slightly different in the future but the pensions will be there for the teachers of Ontario."