Skip to main content
ARTICLE

OTPP Introduces Conditional Indexing

Hilda Watkins
December 2008

Tags

In years to come, pension  aficionados  will  identify  significant changes in the history of Ontario teachers’ pension plans. Undoubtedly, their reflections will include the establishment of the  Ontario Teachers’ Pension Plan (OTPP) as a fund jointly sponsored by the Ontario Teachers’ Federation (OTF) and the Ontario government in 1990 and the 2008 pension settlement that eroded the pension promise.

In its 2007 Annual Report to Members, the OTPP reported:

  • $108.5 billion in net assets
  • investment income of $4.7 billion
  • a rate of return in excess of the fund’s composite benchmarks.

Despite this stellar performance, the January 2008 funding valuation showed a preliminary estimated shortfall of $12.7 billion. The Pension Benefits Act requires the OTPP to file a valuation with the Financial Services Commission of Ontario every three years. To balance the plan, the partners (OTF and the government) can increase contributions, reduce future benefits, or use a combination of the two.

Eliminating the 2008 shortfall using contribution rates alone would have required a contribution rate of slightly over 16 percent of gross salary. (The net effect would be less as pension contributions are tax deduct- ible.) Members may recall the 2006–07 OTF pension education program that characterized pension contributions not as lost income but as funds matched by the government and invested for your future.

In September OTF endorsed the following proposal for addressing the 2008 funding deficit:

  • As of January 1, 2009, pension contributions will increase as pre- viously scheduled by 0.8 percent. Accordingly, members will con- tribute 10.4 percent of that portion of salary up to the Canada Pension Plan (CPP) limit and 12 percent on the portion of salary above the CPP limit.
  • Pension credits earned in 2009 will continue to be 100 percent indexed; that is, benefits will be increased according to the increase in the Consumer Price Index (CPI).
  • For service earned after 2009, 50 percent of the cost of living increase is guaranteed. The remainder of the cost of living increase depends on the plan's financial health: pensioners may receive all, a portion, or none of the remaining 50 percent.

Although it is the intent of the Plan that future benefits will be fully indexed, this cannot be promised.

ETFO  was  the  only  Ontario  teacher  federation opposed to the pension proposal. ETFO believes the settlement to be shortsighted and flawed, in that:

•      It ends the promise to provide fully indexed pensions to all retired teachers.
•       It creates two classes of retirees, those with fully indexed pensions and those with partially indexed pensions. Such disparity is reminiscent of the unjust treatment of teachers on the grid during the Social Contract years.
•      It creates a conflict between active teachers and retirees.

Clearly our  pension plan  faces challenges. The historically low real return bond rate (RRB) has put considerable pressure on plan liabilities. This pressure has been exacerbated by changing demographics  and  improved  mortality  rates. There is an ever growing number of retirees as compared with the number of active teachers, and  they  are  living  longer. Nevertheless,  the assumptions used by the OTPP for the valuation of our pension remain a source of concern for ETFO.

Pension matters tend to  be complex, and you should remember that:

  • your pension will not decrease during your retirement
  • you should not alter retirement plans based on this information.

The OTPP 2008 valuation found in the multimedia webcasts section of the ETFO website provides  additional   information.  Go  to  etfo. ca>Multimedia>webcasts.

The pension officer at ETFO or the OTF director of pension and economic affairs can provide information  pertinent  to  your  situation.