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The OPSEU Pension Plan has recorded funding gains of $867
million for the three years ending December 31, 2001. The gains were identified in the
Plan’s recent actuarial funding valuation, which was adopted by OPTrust’s Board
of Trustees in June.
Shared risks and rewards
Under the terms of the Plan, any gains or losses are shared between OPTrust’s members
and pensioners and the Government of Ontario.
The members’ and pensioners’ share of the gains from
1999-2001 is $467 million. This includes a one-time addition of $78 million, under the
Plan’s original sponsorship agreement. It also reflects a $6 million reduction to
cover the members’ share of the cost of benefits negotiated between OPSEU and the
Government in May.
The Government’s portion of the gains totals $297 million,
after a reduction of $33 million to cover its share of negotiated benefit improvements.
The Government’s share was also reduced to eliminate the $63
million balance of the Plan’s initial unfunded liability - an amount owed to the Plan
when it was established. As a result, the OPSEU Pension Plan is now fully funded - 27
years ahead of schedule.
Allocating gains
The decision on how to allocate the members’ and pensioners’ share of gains is
up to OPSEU, as a plan sponsor. Gains may be used to:
- set aside a reserve to stabilize contributions in the event of a
future loss in the Plan
- pay for temporary or permanent benefit improvements, and/or
- reduce members’ contributions.
The Government can allocate its share of gains to improve benefits,
reduce employer contributions or establish a contribution stabilization fund for
employers.
Any changes to the Plan must be costed by OPTrust’s independent
actuaries and the total cost cannot exceed the amount of available gains. Plan changes
must comply with federal and provincial legislation.
Where changes to benefits or contributions require amendments to the
Plan text, both sponsors must sign the amendments before OPTrust can administer the
changes.
If the Plan experiences a funding loss, members’ and
employers’ contribution rates would have to increase to make up any funding
shortfall.
How gains are calculated
Every three years OPTrust’s actuaries prepare a funding valuation comparing the
Plan’s actual experience to the “actuarial assumptions” used to project the
Plan’s funding requirements.
Funding gains occur when the Plan’s assets grow faster than the
anticipated cost of members’ and pensioners’ benefits. If assets grow more
slowly than needed to fund the Plan, the result is an actuarial loss.
The two major sources of gains over 1999-2001 were strong investment
earnings before 2001 and slower than expected growth in the cost of pension benefits.
These gains were partly offset by increased costs for early retirements. The gains were
also reduced by changes to the Plan’s actuarial assumptions aimed at increasing the
long-term security of the Plan.
Funding outlook
While the current gains are substantial, they are lower than the $1.34 billion realized in
1996-1998. This reflects the Plan’s lower investment returns over the past two years
- including a 3.5% investment loss in 2001.
Another result of changing market conditions is a deferred
investment loss of $192 million, as of the end of 2001. This loss was not taken into
account when the Plan’s $867 million gains were calculated. As a result, the deferred
loss will reduce potential gains in the Plan’s next funding valuation, due in 2005.
If the investment climate remains challenging and returns for
2002-2004 are below the level needed to fund the Plan, the next funding valuation would
show a loss. Any losses would have to be made up either through increased contributions or
the use of any contribution stabilization fund.
For more information on the gains in the OPSEU Pension Plan and
OPSEU’s survey of Plan members and pensioners please see:
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