The sponsors of the Ontario Teachers' Pension Plan are considering taking early action, such as boosting contributions or cutting benefits, to tackle a growing shortfall in funding.
The gap between the pension fund's assets and the amount of benefits it has promised to pay in coming decades will be almost impossible to eliminate through investment returns alone, a fact made clear Tuesday when the plan reported its 2010 results.
Although Teachers' investment portfolio posted record income above its target benchmarks during the year, that wasn't enough to stop its funding deficit from growing to $17.2-billion from $17.1-billion, as liabilities outpaced assets.
Now the fund's investment professionals are in a bind. "Just at a time when we need greater returns, we can't take the risk to do it," said Teachers chief executive officer Jim Leech.
While unsettled financial markets are compounding the fund's headaches, its biggest problem is demographics. And the issues it is grappling with are ones that many other pension funds around the world will soon find themselves facing as well, Mr. Leech said.
"This is a plan that is maturing. We've been saying that for a decade, and now we're seeing it in front of our eyes," he told reporters at a press conference in Toronto.
As a group, teachers have been at the forefront of a number of major demographic and lifestyle shifts; a slew of them were hired to educate the baby boomers, meaning that the profession over all skews older than most. In addition, teachers in general tended to quit smoking and adopt better eating and exercise habits earlier than other workers, Mr. Leech said.
As a result they are living longer, even while retiring earlier. And the profession has more women than most, adding to the longer lifespan.
On average, Teachers' members now draw a pension for 30 years, after working 26 years. In 1990, on average, they received benefits for 25 years after working 29 years. About 45,000 Ontario teachers who are members of the plan are expected to retire over the next decade.
Those trends, coupled with losses stemming from the financial crisis, have created a problem that needs to be addressed quickly. While the pension plan is solid and could pay benefits for years to come even with no changes, its sponsors - the Ontario Teachers' Federation and the provincial government - must come up with a plan to ensure there will be money to pay pensions to the province's young teachers decades from now.
"The investment department did exceptionally well, but we are still saddled with a $17-billion deficit," said Mr. Leech, whose total compensation amounted to $3.9-million in 2010, up from $2.3-million a year earlier.
The plan's sponsors are required to make a filing with regulators by 2012 demonstrating how they will bring the plan into balance. Since 2005, they have taken actions to shore up the plan, including special contribution increases, but it has become clear that this is not a short-term situation. Having spent the better part of two years thinking about the issue, the sponsors are now considering making that filing this year, ahead of schedule, a move that would give it a jump start on tackling the problem. No decision has been made yet, and to make a filing this year, the sponsors would have to do so by September.
Along with demographics, a good portion of the pension plan's problems relate to trouble in the economy and financial markets. The fund posted a $19.03-billion investment loss in 2008, and low interest rates are continuing to cause headaches.
A 1-per-cent change in the plan's real interest-rate assumption has about a $25-billion impact on its funding valuation. It takes $900,000 in assets to finance a typical $40,000 pension when real interest rates are 1.5 per cent, compared with $735,000 when they are 3 per cent.
Shortfalls are causing more pain for young teachers because there are fewer working teachers paying into the plan and more retired teachers drawing benefits than in the past. That means Teachers' investment team can't take large risks. The percentage of its assets in equities, a relatively riskier asset, dropped to 45 per cent in 2010, from 61 per cent in 1994.
The pension plan's assets now stand at $107.5-billion, below the peak of $108.6-billion in 2007. The plan took in $2.7-billion in contributions last year while paying $4.5-billion in benefits, leaving a gap of $1.8-billion that is projected to grow in coming years.