Funding Gains Frequently Asked Questions"
Posted: July 12, 2002
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What are “gains” in the OPSEU Pension Plan?
A gain is money that exceeds the amount needed to cover the current and projected cost of
OPTrust members’ and pensioners’ benefits. At OPTrust, an independent study was
conducted by professional actuaries, taking a long-term view of the plan’s assets and
liabilities. This “actuarial funding valuation” tests whether there is enough
money for future pensions. The funding valuation is conducted every three years.
How did the current gains come about?
When the OPSEU Pension Plan was established, its sponsors - the Government of Ontario and
the Ontario Public Service Employees Union (OPSEU) - agreed that any gains or losses would
be shared between the Government and the Plan’s members and pensioners. Gains come
from investments and from the cost of benefits rising more slowly than assumed. For
example, wages in 1999 - 2001did not rise at the rates assumed and inflation was lower
than assumed.
How much are the gains?
The OPSEU Pension Plan has recorded gains of $867 million at December 31, 2001 - the end
of the three-year valuation period. However, some of the money has already been used. The
“unallocated” or unused gains are $764 million. The members’ and
pensioners’ share of unallocated gains is $467 million. The Government’s portion
of the unallocated gains is $297 million.
What can gains be used for?
Member and pensioner gains can be used to improve benefits, reduce member contributions or
establish a contribution stabilization fund. A contribution stabilization fund would be
used if future valuations show an overall loss in the OPSEU Pension Plan and contributions
had to be increased above normal levels.
Who decides how to use these gains?
OPSEU decides how to allocate the member and pensioner share of gains. The Government of
Ontario decides how to allocate its share of gains. If decisions require a change to the
text of the OPSEU Pension Plan, both Sponsors must sign the amendment.
What happens if there are losses, instead of gains?
If there are losses in the future, the cost would be shared between members and employers
through an increase in their respective contributions. Any loss must be paid off over time
to ensure the money is there to pay for pensions in the future. In addition, both OPSEU
and the Government can set aside a portion gains in contribution stabilization funds.
These funds would be used in the event of a funding loss to reduce any contribution
increases.
Why are the gains lower than the previous valuation?
The gains are considerably lower than the $1.34 billion from the 1996 - 1998 valuation,
largely due to the lower investment returns. Poor market conditions in 2001 led to the
Plan’s 3.5% investment loss. In addition, the OPSEU Pension Plan has revised plan
assumptions upward to better secure long term funding of the pension plan.
You say there are gains in the OPSEU Pension Plan but you
also say there is a “deferred loss.” How does this work?
OPTrust uses a technique called “actuarial smoothing.” Smoothing involves
recognizing - or spreading - each year’s investment returns over a four-year period.
This cushions the impact of short-term fluctuations in investment earnings, providing a
more stable base for the Plan’s long-term pension obligations.
In 2001, smoothed earnings from previous years more than offset the recognized portion of the Plan’s 2001 investment loss. However, the Plan also had $192 million in deferred losses, which loss must be accounted for when the OPSEU Pension Plan has its next valuation. This loss could be eliminated by good investment returns or it could remain or increase if markets continue to be poor.
When is the next funding valuation?
The next funding valuation, covering the years 2002, 2003 and 2004, will be completed in
mid-2005.
For more information on the gains in the OPSEU Pension Plan, please see: