Deficit management strategy

Like almost all other pension plans, OPTrust has faced serious challenges as a result of the global financial crisis in 2008. The Plan suffered a $2.4 billion investment loss that year, which in turn had an extremely adverse effect on the Plan’s funding situation.

Since that time, OPTrust has worked diligently with the Plan’s sponsors to implement a multi-faceted deficit management strategy designed to address the funding shortfall, maintain the future value of members’ pension benefits and moderate the requirement for increased contributions as much as possible.

One aspect of this strategy was to smooth investment losses over a period of time by deferring some of the losses to later years. Although pension regulations would have allowed the Plan to defer as much as 80% of the loss, the Trustees made the decision to recognize half of the loss in 2008 at the recommendation of the Plan’s actuaries. At the time, they felt it was unrealistic to expect investment gains to be large enough during the next four-year period to offset the shortfall and therefore a large deferral would only have delayed dealing with the situation for the Plan.

Another key decision made by the Plan’s sponsors was to ensure that future benefits would not be reduced. However, to avoid reducing future benefits, the Plan needed to make up the projected shortfall through a combination of contribution rate increases and the use of the Plan’s rate stabilization reserves.

A series of three 1% increases in members’ and employers’ contribution rates is being phased in over three years. The first took effect at the beginning of 2010, the second in January 2011 and the third increase will occur at the beginning of 2012.

The strategy of increasing contribution rates substantially impacted the funding deficit, reducing it, at the time, from $1.8 billion to $606 million. The remaining deficit could then be repaid over a period of 15 years from rate stabilization reserves that the sponsors had prudently set aside during previous years when investment gains had exceeded funding requirements.