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| quote: | Originally posted by Skipper
Teachers is definitely a good place to make that career change to! |
Ontario Teachers' Pension Plan faces $12.7B shortfall
TheStar.com - Business - Ontario Teachers' Pension Plan faces $12.7B shortfall
Fund has only 1.6 active teachers for each pensioner
April 01, 2008
THE CANADIAN PRESS
The Ontario Teachers' Pension Plan's managers, the provincial government and the federation representing 278,000 active and retired teachers are faced with a daunting math problem – how to resolve a $12.7-billion shortfall between assets and liabilities.
The shortfall, which has long been anticipated but not resolved, will have to be dealt with through higher contributions from employers and employees, reduced benefits for retirees, a revision of the plan's underlying assumptions or a combination of these.
The shortfall arose despite the plan's 4.5 per cent return on its investments for 2007, a solid result by one of Canada's largest and most-active capital pools in difficult markets.
Teachers said Tuesday its assets at Dec. 31 were $108.5 billion, up by $4.7 billion on the year but representing a $12.7-billion shortfall between the plan's assets and its liabilities – in essence the payments it's currently obliged to make to retirees in future.
Last year, the fund paid out $4 billion in benefits while receiving $2.1 billion in contributions from active teachers and employers .
Jim Leech, chief executive of the Teachers fund, said a balanced valuation plan must be filed with the provincial regulator by September and work on that is already well progressed.
"The fortunate thing is – we've seen this coming for a number of years and we spent the last year getting more and more intelligence and informing ourselves better," Leech said in an interview.
He said the plan that he oversees has been "doing very well" at making money and the asset shortfall, while important, has to be put into context.
"Certainly, you wouldn't want to frighten people to think their pensions are not secure. I mean, we have $108 billion in assets. . . . We can pay pensions for a long time. But you want to solve the problem and make sure (the plan) is in balance, forever."
He said it's up to the sponsors – the Ontario Teachers Federation and the Ontario education ministry – to decide in the coming months what to do about the contribution and benefits.
It will be up to the plan managers to reassess the plan's assumptions and maximize returns on investments.
But Teachers is being hampered by low after-inflation interest rates, which were 1.9 per cent at the end of 2007 and are now down to 1.7 per cent, and by increased longevity of retirees.
"That raises the costs. People live longer and you're paying the pensions for longer and that's one of the factors that has led to the deficit," Leech said.
"The other factor, of course, is interest rates. The higher the interest rate, the lower the cost of providing somebody with a pension."
For example, to provide a pension paying out $40,000 per year it would cost of that stream of payments is $855,000 if real interest rates are two per cent. It would cost only $585,000 if the real interest rates were five per cent.
"All defined-benefit pension plans worldwide face this challenge."
Teachers said its public and private equity holdings totalled $50 billion at year-end after a negative 0.1 per cent investment return during 2007.
Inflation-sensitive assets such as infrastructure and real-return bonds were valued at $39.3 billion, returning seven per cent.
Fixed-income assets amounted to $18.7 billion after a 5.4 per cent return.
Overall, Leech said, "our fund cannot afford the investment risk that it once did." He noted that equities have declined to 47 per cent of total assets, compared with 65 per cent in 1995.
"Diversification has always been a hallmark of our investment program," he added, "and our real estate, private equity and infrastructure assets led the way with our tactical asset allocation and absolute return strategies in producing a 4.5 per cent total fund return, decisively outperforming the 2.3 per cent composite benchmark."
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