A soaring funding shortfall at the Ontario Teachers' Pension Fund hit $17-billion at the end of 2009 despite double-digit investment returns last year.
Canada's third-largest public pension fund reported yesterday it earned 13 per cent on its investments in 2009, boosting its assets to $96.4-billion from $87.4-billion at the end of 2008.
The returns beat several other major public pension funds that have reported 2009 results, including the Caisse de dépôt et placement du Québec, which earned 10 per cent last year, and the Ontario Municipal Employees Retirement System (OMERS), which posted a 10.6-per-cent return.
But Teachers chief executive officer Jim Leech said 2009 was "confounding" because the strong returns did little to stop a soaring funding deficit.
At the end of 2009, Teachers estimated its pension funding shortfall was $17.1-billion, up 580 per cent from just $2.5-billion at the end of 2008. The shortfall is the difference between the plan's estimated long-term funding costs and the value of its assets.
"The great news is we made back a fair amount of what we lost in 2008. The bad news is that our deficit has increased," Mr. Leech said yesterday.
The rapid growth in the shortfall was due to falling interest rates last year, which caused the fund's liabilities to rise. Pension funds measure their long-term liabilities based on interest rates.
Paul Forestell, retirement group leader at pension consulting firm Mercer, said pension funds that offer indexing to inflation - typically public sector funds - have been hit over the past year by declining real interest rates. Real interest rates are interest rates less the rate of inflation.
Most corporate pension funds are not indexed to inflation and have not experienced the same hit, Mr. Forestell said.
Last month, OMERS, which invests pension money for Ontario municipal workers, reported its funding deficit grew over 400 per cent to $1.52-billion at the end of 2009 from $279-million in 2008.
Mr. Leech said every percentage point reduction in real interest rates increases Teachers' pension costs by $25-billion. With real rates falling 0.6 per cent last year, it added $15-billion to liabilities, he said.
The funding shortfall also grew because Teachers is a mature plan that pays out more in pension benefits to retirees each year than it brings in from contributions, he added. That means the fund paid retirees about $1.7-billion more last year than it took in from members, so those costs must also be funded through investment returns.
Mr. Leech said a new sustainability working group has been struck by the unions representing fund members, the Ontario government and staff from Teachers to discuss whether the fund needs to make changes to reduce its shortfall position. Its recommendations are due mid-year.
"There's no immediate problem here. We still have close to $100-billion in assets and we can pay pensions for a long time," he said.
Mr. Leech said it is too early to know what changes may be made, but said they would likely be small "corrections" that would have a big effect over a 70- or 80-year time frame. Shortfalls are typically corrected by sponsors increasing contributions or reducing future benefits.
He said plan members cannot count on improved investment returns to erase shortfalls, however.
"It would be imprudent to believe that investment results alone can close that gap," he said.
Teachers fund members have faced several contribution increases in recent years to try to eradicate growing deficits in the generous pension plan. In 2008, for example, plan sponsors modified the guarantee to provide pensions that are fully indexed to inflation, and increased the basic contribution rate to 9 per cent from 8 per cent.
Janet McFarland