In this issue
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The OPSEU Pension Plan experienced a net funding loss of $255 million in
2002 and 2003, according to OPTrust’s most recent actuarial funding
valuation. Despite this loss, member contributions are not expected to rise
above the Plan’s normal rate of 8% of salary for at least the next three
years.
The actuarial loss, or “unfunded liability,” reflects the Plan’s investment
losses for 2001 and 2002. Like most other major investors, OPTrust was
affected by a general market downturn during this period.
At the same time, the projected cost of members’ pensions continued to
increase in 2002 and 2003. These two factors combined to produce the $255
million funding loss, despite the Plan’s strong 17.3% investment return for
2003.
Shared Risks and Rewards
Because OPTrust is jointly sponsored by OPSEU and the Government of Ontario,
members and employers share equally in both the Plan’s investment risks and
the potential rewards. The Government is the Plan’s largest participating
employer.
As a result, members and employers are each responsible for paying down half
of the unfunded liability, through a series of payments over the next 15
years. With interest, these payments equal $14 million per year for both
members and employers. Normally, this would mean an immediate contribution
increase of about 1% of salary above the Plan’s normal rate, for both
members and employers.
Stabilizing Contributions
Fortunately, OPSEU and the Government have each set aside a portion of the
Plan’s funding gains from 1999-2001 in separate funds to stabilize member
and employer contributions. At the end of 2003, the members’ fund stood at
$185 million. This includes a $13 million increase, due to the decision to
return member contributions to the normal rate on January 1, 2005 – 11
months ahead of schedule. The employer fund totalled $338 million.
The sponsors have agreed to use the stabilization funds to cover the annual
unfunded liability payments, starting this year. As a result, member and
employer contributions will not rise above the normal rate before the Plan’s
next funding valuation, expected in 2007.
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Liability Management & OPTrust’s Funding Outlook
The timing of OPTrust’s funding valuation is part of an enhanced liability
management strategy, adopted by the Board of Trustees in 2003. A key goal of
this strategy is to manage the impact of the Plan’s investment losses from
2001-2002, while ensuring the security of members’ and retirees’ pensions.
Liability Management
The Trustees’ decision to file the valuation with pension regulators this
year – one year sooner than required – helps meet this goal by spreading the
impact of our past investment losses over two funding valuations. Why?
Because like most major pension plans, OPTrust “smoothes” its investment
gains or losses over a period of several years.
As a result, the contribution stabilization funds that OPSEU and the
Government of Ontario prudently set aside from previous gains are enough to
pay down the current funding loss with no increase in contributions above
the normal rate.
OPSEU has approved using the members’ contribution stabilization fund to
cover $14 million in annual unfunded liability payments. As a result, member
contributions are expected to stay at the Plan’s normal rate at least until
the next funding valuation, currently scheduled for 2007.
* Member contributions are reduced for 2004.
Looking Ahead
The “smoothing” of investment returns also means that the Plan still has a
deferred investment loss of $568 million from 2001-2002. These losses will
be recognized over the next four years. The Plan may therefore face an
additional funding loss when the next valuation is filed, no later than
2007. The size of this loss – and the potential impact on contribution rates
– will depend on OPTrust’s investment results over the next two or three
years.
Under OPTrust’s liability management strategy, members and employers will
still have access to significant contribution stabilization reserves when
the next funding valuation is filed. Based on current projections, if the
Plan earns an annual 7.5% investment return, the members’ current
stabilization fund should be able to prevent a contribution increase until
at least 2009.
In the meantime, OPTrust and the Board will closely monitor the Plan’s
investment performance and funding status, to help reduce the unfunded
liability, ensure the Plan’s ability to meet our pension promise, and manage
contribution levels.
Want more information on OPTrust’s liability management strategy? Please see
our 2003 Annual Report.
Facts About… Funding Valuations
OPTrust’s funding valuation is an independent report by our external
professional actuaries. Its purpose is to confirm whether the Plan’s assets
are enough to cover the future cost of members’ and retirees’ pension
benefits. By law, OPTrust must file a funding valuation with Ontario’s
pension regulator at least once every three years.
Actuarial Assumptions
The valuation uses a series of estimates – or “actuarial assumptions” – to
project the growth of the Plan’s assets and the cost of members’ future
benefits. These assumptions cover a range of factors, from interest and
inflation rates and investment returns to members’ projected service, salary
increases and life expectancy.
Gains and Losses
Next, the actuaries compare the Plan’s actual experience to these
assumptions. If investment returns are higher than expected – or the cost of
members’ pensions increases more slowly – the result is an actuarial “gain.”
Actuarial “losses” occur when investment results are lower than expected or
the cost of members’ pensions rises more quickly.
Funding gains and losses are shared between plan members and the Government
of Ontario. Gains can be used to pay for benefit improvements, reduce
contributions or set aside contribution stabilization funds. If there is a
funding loss, the shortfall must be made over no more than 15 years, through
contribution increases and/or the use of stabilization funds. |
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New Contribution Formula Starts in January
Starting in January 2005, OPTrust members may notice two changes to their
OPSEU Pension Plan contributions.
First, members are returning to the Plan’s normal contribution rate of 8% of
salary, following five years of reduced contributions. This change, which
was announced in the Spring 2004 issue of OPTions, will help OPTrust manage
the Plan’s current funding shortfall while reducing the risk of future
contribution increases.
Second, OPTrust is introducing a new two-step contribution formula. This
will simplify the way your OPTrust contributions are “integrated” with the
Canada Pension Plan (CPP). CPP integration means that you pay lower OPTrust
contributions on part of your earnings, to reflect the fact that you also
contribute to CPP.
Both changes take effect on January 1, 2005, and are the result of
amendments to the Plan text approved by OPSEU and the Government of Ontario
this spring.
Unlike the return to the normal contribution rate, however, the new formula
will have little impact on the Plan’s revenue or funding status. While it
will streamline the way contributions are calculated and administered, the
move to a two-step formula is revenue neutral from the Plan’s perspective.
New Contribution Formula
Under the new formula, your OPTrust contributions – and those paid by your
employer – will be calculated in two steps:
- For your earnings up to CPP’s Year’s Maximum Pensionable Earnings (YMPE),
your contributions will equal 6.4% of salary.
- For earnings above the YMPE, your OPTrust contributions equal the full
8.0%.
The YMPE is the limit on annual earnings covered by CPP. For 2004, the YMPE
is $40,500. The 2005 YMPE will be announced by the Canada Revenue Agency
later this fall.
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OPTrust’s new 2-stage contribution formula takes
effect for members and
employers starting in January 2005.
|
Impact on Members
The new two-step formula is designed to have as little impact as possible on
individual members’ annual contributions. However, it may mean a small
change in your total contributions, depending on your annual earnings.
For example, when the new formula takes effect, members who earn less than
$32,000 per year will pay slightly less than under the old formula. A member
who earns $25,000 per year will pay about $13 less per year.
Members earning over $32,000 will pay slightly more. The maximum difference
- about $20 per year in 2005 – will apply for any member earning more than
the YMPE.
Start Date for New Formula
Both the new two-step formula and the return to the 8% member contribution
rate will take effect for the full pay period that includes January 1, 2005.
As a result, the start date for these changes depends on your employer’s
payroll schedule.
Most members – including those in the Ontario Public Service and at the LCBO
– will see the change reflected on their January 13, 2005 pay date. For
members at the Centre for Addiction and Mental Health and the Ontario
Teacher’s Pension Plan Board, the first pay dates under the new formula are
January 6 and January 19, respectively.
2004 Contributions
During the rest of 2004, the Plan’s old three-step formula will remain in
effect. For employers, contributions will continue at the Plan’s normal 8%
rate.
For members, the current temporary contribution reduction will be phased out
in two stages:
- Until the end of November, your contributions will be reduced by 2% of
your earnings.
- Starting with the pay period that includes December 1, your contributions
will be reduced by 1%.
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OPTrust Approves More than $400 Million in Real Estate Investments
OPTrust’s Board of Trustees approved a series of real estate investments
over the first eight months of 2004 totalling more than $400 million. These
commitments are part of a long-term strategy to increase the size of the
OPSEU Pension Plan’s real estate portfolio. At the end of 2003, OPTrust’s
real estate investments stood at $40 million.
These new investments represent a major step in implementing changes to the
Plan’s asset mix that were approved by the Trustees last year. When they are
fully implemented over the next several years, real estate will account for
approximately 9.5% of OPTrust’s portfolio, or almost $1 billion.
A Major Step
The investments approved so far in 2004 include commitments to a number of
real estate funds, each with a specific focus. For example, OPTrust has
committed $140 million to three “closed-end” funds, where the investment is
locked-in for a pre-set period of time. Two of these funds focus on office,
retail and industrial properties in Canada. A third provides financing for
residential developments in Canada and the United States.
Another $200 million has been committed to two well-established “open-end”
funds. The first, managed by GWL Realty Advisors, invests in large office,
multi-family residential and industrial properties in major markets across
Canada. A second fund, managed by Morgan Stanley, focuses on major office,
retail, industrial and multi-family residential properties in the U.S.
Unlike closed-end investments, OPTrust’s stake in these two open-end funds
can be sold at any time.
OPTrust has also hired its first Canadian real estate investment manager,
Tonko Realty Advisors, to build a portfolio of industrial properties in
Western Canada. These properties will be directly owned by the Plan. Over
the balance of 2004 and 2005, OPTrust will select additional investment
managers to construct portfolios focusing on specific property types across
Canada.
Why Real Estate?
Real estate offers a number of advantages to a pension plan like OPTrust, as
part of a diversified investment portfolio.
First, with 10 years of solid performance and steady income returns, real
estate has earned its place alongside stocks and bonds in a pension fund
portfolio.
Second, real estate tends to respond differently to changes in inflation,
interest rates and other economic factors compared to stocks and bonds,
which make up approximately 60% of OPTrust’s portfolio. As a result, real
estate is an important source of diversification – particularly in periods
of market volatility.
Finally, real estate offers a good match to OPTrust’s pension commitments.
Real estate values are generally more stable than stocks, which can help
reduce the risk of a funding shortfall. Real estate also tends to perform
well in periods of rising inflation, which can help match increases in the
cost of retirees’ indexed pensions.
Over the next three to five years, OPTrust will continue building a
well-diversified real estate portfolio. This gradual approach will allow us
to evaluate each opportunity, select investments that match the Plan’s
long-range strategy, and balance risk and return to maximize value over the
long-term.
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Building the Portfolio:
Rob Douglas, Managing Director for Real Estate Investments, is leading
OPTrust’s strategy to build a $1 billion real estate portfolio, along
with Investment Analyst Shane Miyama and Administrative Assistant Luiza Fernandes.
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Diversification is Key to OPTrust’s Asset Mix
Diversification is central to OPTrust’s overall investment strategy. Simply
put, diversification means not keeping all the Plan’s “eggs” in one
“basket.” By investing in a range of asset types, and in different markets,
sectors and regions, our Investment Division can manage the Plan’s exposure
to various investment risks while enhancing the prospects for long-term
growth.OPTrust's Target Asset Mix
 OPTrust’s
target asset mix includes Canadian and foreign stocks – or “equities” –
fixed income investments (bonds), real estate and real return bonds. In
2003, OPTrust’s Board approved an increase in the Plan’s real estate
allocation to 9.5% of the total fund, to be implemented over several years.
Fixed income investments will be reduced over the same period, from 32% of
the fund in 2003 to 23%.
Want to find out more? Visit the Investment Section
of our Web site for more
information on OPTrust’s asset mix policy and investment strategy.
|
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Corporate Governance: Voting OPTrust’s Shares
Buying shares in Canadian and foreign corporations is a key part of
OPTrust’s strategy for generating the investment growth needed to pay for
members’ and retirees’ pensions.
Owning shares also gives OPTrust a say on issues that can affect the way a
company is governed, its corporate direction and its profitability. As a
major investor – with almost $6 billion invested in Canadian and
international stocks – OPTrust has an important stake in actively voting the
Plan’s shares to promote sound corporate governance and enhance shareholder
value.
OPTrust’s Approach
To ensure that OPTrust’s voting rights are exercised consistently, the Board
of Trustees has adopted a detailed set of
Proxy Voting Guidelines. We have also hired an independent proxy voting organization,
Institutional Shareholder Services (ISS), to track shareholder motions and
consistently vote our shares according to the guidelines. This approach also
allows us to benefit from ISS’s detailed research on voting issues that
emerge with new developments in corporate governance.
The Proxy Voting Guidelines set out OPTrust’s position on a range of key
governance issues, such as the appointment of independent auditors and
directors, compensation and stock option plans, and mergers and
acquisitions. The guidelines also address a variety of social, ethical and
environmental concerns. Where voting issues arise that fall outside the
scope of the guidelines, ISS is directed to refer the issues back to OPTrust
for guidance. In these cases, the issues are reviewed by a Proxy Voting
Subcommittee of OPTrust’s Board of Trustees.
The Board of Trustees also reviews our voting record on an annual basis and
considers whether changes to the guidelines may be needed.
Our Voting Record
In 2003, OPTrust registered votes on a total of 32,737 ballot items that
came before the shareholders of more than 1,555 Canadian and foreign
companies.
The Voting Highlights table shows our voting record on some key issues
during 2003. In each case, the issue was voted according to the Proxy Voting
Guidelines and our policies on corporate governance. As a result, a vote for
or against a particular issue simply reflected how each proposal measured up
to our guidelines, and not whether or not we voted for or against a general
concept.
For example, OPTrust generally supports proposals that the majority of a
company’s directors are independent of management. A vote against a
particular proposal on director independence would therefore indicate it did
not meet OPTrust’s standards. In a number of cases we did not support a
proposal due to inadequate information.
OPTrust’s Proxy Voting Guidelines in Action
Appointment of auditors: In most instances OPTrust voted “for” motions on
the appointment of auditors. Addressing an emerging issue, the Proxy Voting
Subcommittee directed that we vote “against” the appointment of auditors who
derived more than 50% of fees from non-audit services. This position is
consistent with OPTrust’s general guideline on auditor independence.
Board diversity: OPTrust voted “for” all board diversity proposals, as set
out in our guidelines.
Election of directors: OPTrust “withheld” our vote or voted
“against” the
election of directors for a number of reasons such as poor attendance or
when the nominees served on too many boards.
Stock option plans: OPTrust voted “against” stock option plans that were
excessive or did not meet our established criteria for such plans. For
example, we oppose plans that excessively dilute stock ownership and reduce
current stock values, or reward management tenure rather than performance.
Clean, renewable energy: OPTrust also voted “for” shareholder proposals
requesting a report on renewable energy practices. |
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OPTrust Continues Original Nortel Class Action
OPTrust’s role in a major class action lawsuit against Nortel Networks Corp.
is not affected by a recent U.S. court ruling on a more recent complaint
against Nortel.
On July 13, 2004, a New York court appointed two other pension plans as
co-lead plaintiffs in a lawsuit against Nortel covering its 2003 and 2004
fiscal years. The two plaintiffs were selected from among more than 15
complainants – including OPTrust – based on the court’s determination that
the two plans had the largest losses during the affected period.
In December 2001, the courts in New York named OPTrust as lead plaintiff in
an earlier class action suit against Nortel – covering the period between
October 24, 2000 and February 15, 2001. This suit alleges serious
irregularities in Nortel’s accounting and financial disclosure and seeks to
recover damages for investors who bought Nortel shares during this “class
period.”
The court certified the OPTrust-led class action in March 2004, after
unsuccessful attempts by Nortel to have the complaint dismissed. In April,
notice of the certification was issued to all potential class members in
Canada and the U.S. Pre-trial proceedings are now underway.
The original class action is not affected by the court decision in the more
recent case.
OPTrust is pursuing the original lawsuit as part of its fiduciary
responsibility to the members and pensioners of the OPSEU Pension Plan and
to recover for losses in its investments. As a major institutional investor,
OPTrust continues to support efforts to ensure full, timely and accurate
financial disclosure and high standards of corporate governance.
In addition to our role as lead plaintiff in the 2000-2001 case, OPTrust
remains a member of the proposed class in the 2003-2004 action and retains a
stake in any settlement or damages that are awarded.
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Service Improvements on Track for 2004
Members and pensioners regularly give OPTrust good marks on our overall
service. Still, one area where you’ve told us we can do better is the time
it takes to complete your pension transactions. So, at the start of 2004 we
set some ambitious targets for improving our performance. Now, nine months
into the year, we’re glad to report we are ahead of schedule.
In 2003, we made an important start by reducing the number of current
transactions from almost 8,000 at the start of the year to about 5,500 at
year-end. By August 2004, this number was down to 3,400. Given the size of
the Plan, we expect to have between 3,000 and 4,000 cases open at any given
time.
Measuring Our Progress
With this as our starting point, we set a new goal for 2004 – reducing
overdue cases to no more than 20% of current transactions by year-end. The
20% target reflects the fact that about one in five cases is delayed for
reasons outside our control – usually while we wait for information from
other parties.
How are we doing so far? Pretty well, judging by our most recent statistics.
On January 1, about 72%% of our open cases were overdue. By August 31, we
reduced that number to 41%, putting us slightly ahead of our 42% target for
this time of year. Over the coming months, we’ll continue working towards
the 20% goal – and reporting to you on how we’re doing.
In the meantime, if you have any questions about your pension transaction,
please give us a call at 416-681-6100 or 1-800-637-0024. You can also
contact us online, by logging on to the secure
Online Services section of our
Web site.
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Focusing on Service: Leigh Brain (left) Sorayah Kassim-Lakha, Darnell
Luciano and OPTrust’s other Member and Pensioner Services staff are working
to deliver prompt, friendly, personal service. |
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Relationship Breakdown and Pre-Retirement Death Benefits
The Ontario Court of Appeal recently confirmed that ex-spouses can receive
death benefits when a plan member dies before retirement, provided this
arrangement is set out in a legal separation agreement or court order. The
court ruling, which concerned a case involving the Ontario Teachers’ Pension
Plan, largely confirms OPTrust’s current policy.
As a result, if you and your spouse separate, you have the option of
assigning a death benefit to your ex-spouse as part of the division of
family property. OPTrust can only pay this benefit if we have a valid
separation agreement or court order on file that specifies this arrangement.
Your ex-spouse must also meet OPTrust’s definition of an “eligible spouse”
at the time your relationship ends.
The type and amount of any death benefit payable to your ex-spouse would
depend on whether you have a new spouse when you die. In this case, your new
spouse’s survivor pension will be reduced to reflect the benefit paid to
your ex-spouse.
Ontario’s pension legislation limits the death benefit payable to an
ex-spouse as part of the division of family property to no more than 50% of
the death benefit for the member’s service during the spousal relationship.
Because the issues can be complex, OPTrust recommends that both spouses seek
independent legal advice regarding separation agreements or court orders,
and how the recent Court ruling may affect them.
For more information, see OPTrust’s fact sheet on
spousal relationship
breakdown and your pension.
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Actuarial Change Affects CV Calculation
One option available to members who leave OPTrust before age 55 is to
transfer the “commuted value” (CV) of their pensions to a locked-in
retirement account, or LIRA. The CV is the amount you would have to invest
today to generate a retirement income equal to your deferred OPTrust
pension.
By law, OPTrust is required to calculate CVs using a set of standard
actuarial assumptions established by the Canadian Institute of Actuaries.
These standards have recently been revised to:
- use current statistics to project members’ life expectancy
- use variable interest rates, based on Government of Canada bonds.
These changes will affect members who leave the Plan on or after February 1,
2005.
The impact will depend on each member’s circumstances. On average, the
result should be slightly lower CVs for younger members who leave the Plan,
and slightly higher payments for older members. However, the move to
variable interest rates means that the CV amount could change significantly
from month to month.
Note: You should get advice from an independent financial professional
before deciding what to do with your pension when you leave the Plan.
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Attention: New Members
Calculator Lets You Estimate Cost to Buy Back Non-OPS Service
Buying back credit for past service is an important way to increase the
value of your OPTrust pension. If you are a new OPTrust member, you may be
able to buy back periods when you worked outside the Ontario Public Service
(OPS).
In deciding whether to buy back non-OPS service, a key question is how much
will it cost? Now, you can use OPTrust’s new online
Buyback Calculator for
non-OPS Service
to estimate the cost.
Eligibility
There are two main criteria for buying back past service with a non-OPS
employer:
- Your former employer must have had a registered pension plan.
- You must submit your buyback application to OPTrust, within 24 months of
joining the OPSEU Pension Plan.
Using the Calculator
To use the Buyback Calculator, just fill in your birth date, current salary
and credit in the OPSEU Pension Plan, and the amount of service you want to
buy back. The calculator will show you a range for the estimated cost of
your buyback, and how much it will increase your monthly pension.
You can also use OPTrust’s separate
Pension Estimate Calculator to test how
your buyback could help you to qualify for early retirement – or qualify
sooner.
Submitting Your Application
Your estimate may help you decide whether to proceed with your buyback
application. Once OPTrust receives your application, we will confirm whether
you are eligible, verify the actual cost of your buyback, and send
you a
purchase agreement.
Important: OPTrust must receive your application within 24 months of the
date you join the Plan. Once you apply, you have up to 10 years and three
months to complete your payment.
For more information, see OPTrust’s Booklet
Your Pension and
Buying Back Credit.
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Posted on September 16, 2004
