Deficit management

As Trustees we have been closely monitoring the Plan’s funding status and the implementation of the deficit management strategy that was put in place in 2009. 2010 saw OPTrust continue to implement this strategy with the first of three annual contribution increases taking effect.

As expected, the Plan remains in a deficit position in 2010 and is expected to continue to run a deficit for some time to come. The Plan enjoyed a second year of strong investment results, moving from deferred investment losses in 2009 to deferred gains. Under our funding policy, we smooth investment returns by deferring portions of investment gains or losses to future years. In the short term, this means that plan members will not immediately realize the full benefit of strong investment results, but over the long term this approach reduces fluctuations in asset values to promote stability in the Plan’s financial position.

During the year, we strengthened the Plan’s actuarial assumptions for mortality to better reflect the fact that members are living longer and collecting a pension for a longer period of time. This in turn increases the Plan’s liabilities so it is critical to factor this in when looking at future funding requirements. The immediate result of these assumption changes and recognition of deferred losses from 2008 is that the Plan’s deficit increased to $586 million at the end of 2010. Over the long term, strengthening our assumptions is a prudent strategy which will reduce the risk of adverse events impacting the Plan’s funding in the future.

One key tool for managing the Plan’s deficit is the member and employer rate stabilization funds, which the sponsors prudently set aside from past funding gains. In 2009, the sponsors earmarked $606 million from these reserves to pay down the Plan’s 2008 funding deficit over a maximum, of 15 years. This allowed OPTrust to manage the funding impact of the Plan’s 2008 investment losses while maintaining the value of members’ future pension benefits and moderating the impact on members’ and employers contribution rates. At the end of 2010, the rate stabilization funds totalled $843 million. These reserves are sufficient to cover the increase in the deficit identified in the 2010 funding valuation, at the discretion of the Plan’s sponsors.

The Board also thoroughly examined the possibility of eliminating the final contribution increase in 2012. In the end, we concluded that implementing all three phased increases as planned was critical to the long-term financial health of the Plan.

We remain committed to maintaining the value of members’ future pensions and to keeping the pension promise to our retired, current and future members. In the meantime, we will continue to regularly conduct funding valuations to examine the financial state of the Plan and determine if there are future opportunities to readjust contribution rates downward.