Questions and Answers: The deficit, contribution rates and your OPTrust pension

Posted: December 3, 2009

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Why does the Plan have a deficit?
Why is a contribution increase necessary?
How will the increase affect my pension contributions?
How will my biweekly contributions be calculated?
Are my pension contributions tax deductible?
Will the deficit affect the value of my OPTrust pension?
What are "rate stabilization funds"?
How will the rate stabilization funds be used?
What is a funding valuation?
Why is OPTrust filing a funding valuation now?
Will contributions be reduced if the Plan has a surplus in the future?
Could another contribution increase be needed in the future?
Is my OPTrust pension secure?

Answers

Q. Why does the Plan have a deficit?: Like most pension plans and other large institutional investors, the OPSEU Pension Plan experienced a significant investment loss in 2008 as a result of the global financial crisis.

The Plan’s loss for the year was 16.2%. This was better than the average 18.4% loss for Canada’s major pension plans, but well below the 6.75% return the Plan is expected to achieve over the long term.

As a result, the Plan’s funding valuation identified a shortfall of $1.8 billion at December 31, 2008, before any increase in contribution rates.
The sponsors’ decision to phase in a 3% contribution rate increase over three years will reduce the deficit to $606 million. This remaining deficit will be paid down through a series of payments from the Plan’s rate stabilization funds over a 15-year period. Another $927 million in smoothed investment losses will be recognized between 2009 and 2012.
Q. Why is a contribution increase necessary?: When the Plan has a deficit, OPSEU and the Government of Ontario have a number of options, in their role as sponsors. These include increasing contribution rates, reducing pension benefits for members’ future service and/or drawing on the Plan’s rate stabilization funds.

To manage the current shortfall, the sponsors have approved:

i) a 3% increase in member and employer contribution rates, to be phased in over three years, and

ii) annual payments of $64 million from the Plan’s rate stabilization funds to pay down the remaining deficit over a maximum of 15 years.

Together these measures will provide the increased funding the Plan requires to manage the current deficit, while avoiding any reduction in pension benefits.
Q. How will the increase affect my pension contributions?: The contribution rate increase will be phased in gradually over the next three years, starting in January 2010. This will help reduce the immediate impact on members’ take-home pay.

The increase means your contributions will go up by 1% of your pensionable salary in January, 2010. Contributions will rise by another 1% in 2011, and again in 2012. The matching contributions paid by your employer will rise by the same amount.

An average OPTrust member who earns $55,000 per year currently contributes approximately 6.7% of his or her salary to the Plan. With the increase, this will rise to approximately 7.7% in 2010, 8.7% in 2011, and 9.7% starting in 2012.
Your own contributions to OPTrust will depend on your actual pensionable salary. The table below provides examples of how members’ contributions will increase over the next three years. Employer contributions will go up by a matching amount.
Q. How will my biweekly contributions be calculated?: Every two weeks, your employer will calculate your pension contributions, deduct them from your pay and remit them to OPTrust along with the employers’ matching contributions.

Your OPTrust contributions will be paid on an “annualized” basis. This means your employer will calculate your annual contributions based on your regular salary rate, then divide this by the number of pay periods in the year. As a result, you will pay level contributions throughout the year, based on your pensionable salary.
Your contributions will still be integrated with the Canada Pension Plan. This means you will still pay lower contributions on your earnings below CPP’s “Year’s Maximum Pensionable Earnings.” For example in 2010 you will pay 7.4% of earnings up to the YMPE and 9.0% above the YMPE. However, with the move to annualization, your OPTrust contributions will no longer rise once your actual earnings reach the YMPE partway through the year.
Q. Are my pension contributions tax deductible?: Yes. The increase in members’ pension contributions will reduce your taxable income. This will help reduce the impact on your take-home pay.
Q. Will the deficit affect the value of my OPTrust pension?: A. No. OPTrust’s deficit management strategy is designed to address the Plan’s funding shortfall without affecting members’ and retirees’ pension benefits.

If you currently receive a pension from OPTrust, the deficit will have no impact on your monthly pension, including the annual inflation adjustment you receive each January.

In fact, for all OPTrust members and retirees, the value of the pension you have already earned for your past service cannot be reduced under Ontario pension legislation. This protection applies to:

the pensions paid to current retirees and survivors

the deferred pensions of former and divested members

the pensions active OPTrust members have earned so far in their careers.

Under OPTrust’s deficit management strategy, active members’ pensions for future service will also remain unchanged. As a result, your future pension will continue to be calculated using OPTrust’s current pension formula. The Plan’s inflation protection will also continue unchanged.
Q. What are “rate stabilization funds”?: A. Past funding valuations have identified surpluses resulting from OPTrust’s strong investment returns. In their role as sponsors, OPSEU and the Government of Ontario prudently set aside part of these gains in separate “rate stabilization funds” for members and employers.
When the Plan experiences a deficit, the sponsors can use these funds to help reduce any required increase in members’ and employers’ contribution rates.
At the end of 2008, the rate stabilization funds totalled $820 million: $411 million in the employer fund and $409 million in the member fund.
Q. How will the rate stabilization funds be used?: A. OPSEU and the Government of Ontario have agreed to use part of these funds to pay down $606 million of the Plan’s current shortfall. This will be done through annual payments of $64 million (including interest) over a 15-year period. This will help limit the size of the contribution rate increase to 3%.

This approach will also preserve part of the rate stabilization funds, which the sponsors can use if the Plan experiences another shortfall in the future.
Q. What is a funding valuation?: A. A funding valuation is a report prepared by OPTrust’s actuaries. Funding valuations are used to determine if the Plan’s assets are enough to cover the projected cost of members’ and retirees’ future pensions.

Under Ontario’s Pension Benefits Act, pension plans must file a funding valuation with the provincial regulator at least once every three years.
Q. Why is OPTrust filing a funding valuation now?: A. OPTrust filed the Plan’s 2007 funding valuation in September 2008. As a result, we are not required to file our next valuation until 2011.

However, filing our 2008 valuation in 2009 means OPTrust and the plan sponsors can begin addressing the Plan’s deficit starting in 2010. This will reduce the risk of larger deficits and further contribution increases in the future. Filing in 2009 also allows another year for investment markets to recover before the Plan’s next valuation is due in 2012.
Q. Will contributions be reduced if the Plan has a surplus in the future?: A. As sponsors, OPSEU and the Government of Ontario are responsible for decisions on how to allocate any Plan surplus.
Assuming that there is a modest recovery in the financial markets over the next five years, the 3% contribution increase plus the use of the rate stabilization funds should be enough to meet the Plan’s funding requirements.

If investment returns recover more quickly than expected, the sponsors will have the option of paying down the deficit more quickly, increasing the stabilization reserves or reducing future contribution rates.
OPTrust has recommended that the sponsors consider reducing contributions to their current rates before using any future surplus to enhance pension benefits.
Q. Could another contribution increase be needed in the future?: A. We expect the 3% contribution increase – together with the use of part of the rate stabilization funds – will be enough to meet the Plan’s funding requirements, provided there is a modest recovery in the financial markets over the next five years.
The approach taken by the Plan’s sponsors also preserves a margin of flexibility in case investment returns are lower than projected.

For example, filing the Plan’s funding valuation in 2009 allows another year for investment markets to recover before the Plan’s next valuation is due in 2012.

And if a future valuation identifies a further deficit, the sponsors can use the balance of their rate stabilization funds to help reduce the impact on members’ and employers’ contribution rates.

However, if investment markets fail to recover over the next several years – or experience another sharp downturn – further steps could be required. In this case, the options available to the sponsors would include:

increasing contribution rates and/or

reducing pension benefits for active members’ future service.
Q. Is my OPTrust pension secure?: A. Yes. Your pension is supported by an $11 billion investment fund and the future contributions of OPTrust’s approximately 48,000 active members and their employers.
OPTrust’s deficit management strategy is designed to address the Plan’s current funding shortfall without reducing pension benefits.
The strategy will allow OPTrust and the Plan’s sponsors to meet the Plan’s current funding requirements, while reducing the risk of further contribution increases in the future.

For more information

i)	a 3% increase in member and employer contribution rates, to be phased in over three years, and
ii)	annual payments of $64 million from the Plan’s rate stabilization funds to pay down the remaining deficit over a maximum of 15 years.