Article

Pension Plan Changes to Come into Effect in January (OTF Report)

Hilda Watkins

My first year as OTF table officer has been both rewarding and challenging. At the forefront of the challenges were pension negotiations, which were complicated by historically low interest rates and an escalating actuarial deficit. Nevertheless, on June 30, 2006 the Ontario Teachers’ Pension Plan (OTPP) filed a valuation with the provincial regulators that showed a fully funded pension plan.

The History

The  Teachers’  Superannuation  Fund  became Ontario   Teachers’  Pension  Plan  in  1989  and at that time the plan’s  partners – OTF and the Ontario  government –  became  responsible  for it, determining pension benefits and setting the contribution rates. The Ontario Teachers’ Pension Plan Board (OTPPB) administers the plan, invests its assets, and determines  the economic assumptions on which it is valued. In 1998 pension benefits were enhanced when the retirement factor was reduced from 90 to 85. However, contribution rates have remained constant since 1990.

The Challenge

In  June  2005,  the  OTPPB  reported  assets  of $90  billion.  Despite  this  stellar  performance, the plan’s  liabilities were greater than its assets, thereby creating an  actuarial funding shortfall. To  be  considered fully  funded  the  plan  must have sufficient assets to pay pensions to all  current and retired members over a 70-year span. Low  interest rates, the declining ratio of active to retired members, and the longevity of retirees are all factors affecting the cost of pensions.

 

The Solution

By law the plan must file a valuation with provincial regulators every three years. Although not compelled by  legislation to file until 2006, the partners agreed to file the 2005 valuation, as the shortfall for 2005 was significantly less than the shortfall for 2006. To eliminate the $20 billion

actuarial deficit for the 2005 valuation a number of measures were taken.

  • The OTPPB revisited and revised assump- tions to reflect current retirement rates and salary increases.
  • Current benefit levels, including the 85 fac- tor and indexing were maintained.
  • Ontario government contributions will increase by 2 per cent on January 1, 2007, and by 1.1 per cent on January 1, 2008.
  • Members’ contribution rates will increase

by 2 per cent on January 1, 2007, and by an additional 0.3 per cent on January 1, 2008. The 2008 increase has been offset by a $76 million credit from a 1998 surplus.

As well, the partners have agreed to form a work group to review the assumptions used by OTPPB. The work group intends to survey plan members  to  ascertain their  views about  what action it should take should  there be another funding  shortfall.  The  next  evaluation  –  due in  2008  – will determine the need for  adjust- ments. They could be pension rate contribution increases, benefit reductions or both.

You will be fully informed of all the changes that are taking place. At its annual meeting in August the OTF Board of Governors approved a commu- nication program to make members aware of the various issues impacting their pensions.

During this coming year, as OTF president, I will continue to work hard on your behalf to make sure that  your pension plan continues to work for you.