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The Globe and Mail

Ontario nearing deal with teachers on pension-spending restraint

Jim Leech, President and CEO of the Ontario Teachers' Pension Plan, is pictured in November, 2011. Ontario is closing in on a deal with teachers to overhaul their pension plan, in what would be a landmark agreement for governments struggling to contain the costs of public-sector pensions.

Tim Fraser/The Globe and Mail

Ontario is closing in on a deal with teachers to overhaul their pension plan, in what would be a landmark agreement for governments struggling to contain the costs of public-sector pensions.

The agreement would freeze pension contributions for five years, sources told The Globe and Mail – meaning a greater proportion of pension-fund shortfalls would come out of teachers' future benefits instead of provincial coffers.

If finalized, the agreement with one of Canada's largest funds would be a significant development in the battle to limit government exposure as the country confronts a looming pension crisis, which is being accelerated by an aging population and sluggish investment returns.

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Governments at all levels are trying to reduce the cost of public-sector retirement plans that are ultimately paid for by taxpayers – many of whom have less generous employer-backed pensions or none at all.

Sources on both sides of the table said a deal has not been signed, but they confirmed that negotiators have been in advanced discussions, having recently returned to the table. Talks had fallen apart at the height of labour unrest between Ontario and its teachers' unions.

For Ontario, in particular, limiting how much it spends on pensions is especially urgent in light of its $12-billion deficit. Similar deals to freeze contributions were reached in late 2012 with Ontario unions representing health-care workers, civil servants and community-college employees, but the $117-billion Ontario Teachers' Pension Plan – which covers about 300,000 current and former teachers – represents much greater cost pressures.

Last year's Ontario budget allocated $1.46-billion to match teachers' contributions to their plan in 2012-13 – a number that has risen steadily in recent years because of funding shortfalls. Since 2006, both government and employee contributions have gone from 8.9 per cent of teachers' annual income (above maximum pensionable earnings under the Canada Pension Plan) to 12.75 per cent; that percentage will rise to 13.1 per cent by next year, under an agreement reached prior to the current negotiations.

The province and the unions said a recent agreement to stop guaranteeing that benefits will receive some inflation protection has eliminated the $9.6-billion unfunded liability as of Jan. 1, 2012.

But Ontario Teachers' Pension Plan CEO Jim Leech has said he expects the plan to show a deficit, albeit a much smaller and more manageable one, when it next reports its results for the latest year – and bigger shortfalls could arise again in the future.

If so, the effect of the deal in the works would likely be to further reduce benefits, rather than asking either the province or teachers to pay more.

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If the deal mirrored the agreements with smaller unions last fall, future benefits that plan members would receive could be cut by as much as 20 per cent before contributions were put back on the table.

Such an arrangement would more or less follow the recommendations of last year's government-commissioned report by economist Don Drummond, who singled out the teachers' pension as unsustainable.

"Further increases in contribution rates would affect both parties' ability to pay," Mr. Drummond cautioned. "For the province, it would mean fewer financial resources to fund other programs. For individual teachers, it would mean lower disposable income and more personal financial resources to fund current benefits."

Some teachers would welcome restrictions to further contribution increases, because the amounts coming off their paycheques are already unusually high. But the fact that benefits already earned would not be affected could contribute to worries among younger teachers that they are paying for generous pensions they themselves won't be able to enjoy.

As a result, there is no guarantee that union members will ratify the deal likely to be sent to them soon. But their leadership appears to be counting on an awareness that too much push-back could lead to future governments taking a harder line.

Seeking to capitalize on the perception that the public sector has been shielded from economic realities facing other Ontarians, Progressive Conservative Leader Tim Hudak has proposed that employees be moved from defined benefit to defined contribution plans, and that the retirement age be raised.

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While Kathleen Wynne's governing Liberals have stopped well short of those sorts of changes, sources familiar with the negotiations suggested that the prospect of Mr. Hudak's party winning office may have helped bring the teachers back to the table to strike a deal now. And even the Liberals hinted in last year's budget that they might legislate pension-spending restraint if unions did not co-operate – another prospect that might have weighed on negotiators' minds.

Governments in Canada have adopted various measures aimed at limiting public-sector pension costs. New Brunswick has perhaps gone the furthest, moving toward a hybrid system in which base benefits are protected but additional ones are subject to market forces; others have settled for pooling plans in hopes of finding efficiencies. All concerned will likely be monitoring the impact of deals struck in Ontario.

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