The quarterly newsletter for members of the OPSEU Pension Trust
Winter 2009, Number 46
In this issue...
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Your "defined benefit" advantage
The global financial crisis has put a spotlight on retirement security and retirement planning. As a result many investors are worried about how the crisis will impact their portfolios and long-term plans.
Whether you have personal savings, contribute to RRSPs or have a managed investment fund, one thing is clear; like many Canadians you’re waiting for the economy to bounce back.
In the meantime, you have the security of knowing the value of your OPTrust pension is not affected by the financial meltdown. That’s because your pension plan is a “defined benefit” plan. This means your pension at retirement is based on a formula that uses your salary history and credit in the OPSEU Pension Plan - not changing investment returns.
As an OPTrust member you can count on your pension to provide you with a predictable income in retirement, payable for your lifetime. With the Plan’s pension formula, you know what to expect when you retire.
Key advantages to a defined benefit plan
Defined benefit plans offer members peace of mind with a safe, easy and secure way to save for the future, providing a monthly income in retirement. There are several advantages to belonging to a defined benefit plan.
According to a report A Better Bang for the Buck: The Economic Efficiencies of Defined Benefits Pension Plans published by the National Institute on Retirement Security (NIRS), defined benefit plans deliver retirement benefits at a low cost¹.
What’s more, like many defined benefit plans, OPTrust is professionally managed with a pool of contributions to achieve greater investment returns through a diversified portfolio of funds. Contributing to your OPTrust pension, means you do not have to make investment decisions or track your investments throughout your career.
OPTrust has an inflation protection feature which means your pension in retirement will grow annually to keep pace with the cost of living.
So, while the world continues to weather the current financial storm, you do not have to worry about the value of your OPTrust pension. Although OPTrust, like many institutional investors, experienced losses in 2008, you can count on your earned pension at retirement.
OPTrust’s pension formula
Your OPTrust pension is designed to provide a steady retirement income for your lifetime, in combination with Canada Pension Plan (CPP) benefits payable at age 65.
Your OPTrust pension is calculated using the following formula:
2%
times your best five-year average annual salary
times your credit in the Plan
minus CPP integration at age 65
Want to see an estimate of your pension at retirement? Check out OPTrust’s online pension estimator. When you plug in your personal information, including date of birth, salary, and years of credit you’ll get an estimate of your pension along with different retirement dates.
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¹A Better Bang for the Buck: The Economic Efficiencies of Defined Benefit Pension Plans, August 2008 – National Institute on Retirement Security (Washington, DC)
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Short-term market volatility does not affect the security of your OPTrust pension
Between September and December 2008, Canadian and international investment markets experienced sharp declines in response to the deepening global financial crisis.
As a long-term investor, OPTrust anticipates that market returns may experience significant short-term volatility from time to time. That is why our investment program has been designed to consider market risk and return in the asset classes in which we invest over a five-to-10 year time horizon. The goal is to achieve the long-term returns needed to pay for our members’ and retirees’ pensions.
Financial results
Like all major institutional investors, OPTrust is affected by trends in the markets that we invest in. Our investment returns for 2008 and their impact on the Plan’s financial position will be released in April as part of our 2008 annual report.
A secure pension
In the meantime, OPTrust’s members and retirees enjoy the security and peace of mind of a defined benefit pension (see above [link to first article]). Your OPTrust pension is backed by the Plan’s assets and the future contributions of more than 48,000 active members and the Government of Ontario.
Plan surplus
According to our recent actuarial valuation, the OPSEU Pension Plan had a $470 million funding surplus as of December 31, 2007. This reflects OPTrust’s strong investment returns from 2003-2006. In 2008, the Plan’s sponsors, OPSEU and the Government of Ontario, chose to add this surplus to their existing contribution rate stabilization funds, bringing the total stabilization reserves to $878 million, as of the start of 2008.
The sponsors can use these funds to offset the impact of any future funding loss that may result from the current market downturn.
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Change to commuted value calculations
The Canadian Institute of Actuaries is changing its rules on commuted value (CV) calculations for defined benefit plans. With longer life expectancies and increasing interest rates, the new guidelines will better reflect pension values for members of all ages.
A "commuted value" is the amount of an immediate lump-sum payment in today's dollars, estimated to be equal to your future lifetime pension.
The change will generally lead to lower CVs for members who leave the Plan before retirement and transfer their pension to a locked-in retirement arrangement. For younger OPTrust members, this may mean an estimated 15 to 20% decrease to their commuted value. Commuted values for older members will go down by approximately 5 to 10%.
The change has no impact on the value of your OPTrust pension when you retire. Is also does not affect members who end their membership with OPTrust and leave their deferred pension in the Plan.
The change is set to take effect April 1, 2009. The Pension Benefits Act (PBA) will be amended to adopt the new standards. OPTrust along with all public sector pension plans must follow the new rules.
For more information visit the Canadian Institute of Actuaries website at www.actuaries.ca.
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2009 Inflation Adjustment: 2.5%
OPTrust pensions increased by 2.5% effective January 1, 2009. The 2.5% inflation increase was also applied to future pensions of deferred and divested members for 2009. Last year’s increase was 1.8%.
How OPTrust calculates the annual increase
OPTrust calculates the annual increase by dividing the Consumer Price Index (CPI) average for the two 12-month periods ending the previous September. For example, the 2009 escalation factor and resulting 2.5% increase were calculated as follows:
The maximum increase in any year is 8%. An increase above that level is carried forward and applied in the next year when the adjustment is below 8%.
For more information
More information about inflation protection and the OPSEU Pension Plan is available in the OPTrust Fact Sheet on Inflation Adjustments.
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Buy back credit today; increase your pension in the future
Wondering if buying back credit will make a difference to your overall pension at retirement? For members planning to take a leave of absence or having just returned from one, this may be a critical question.
But considering your OPTrust pension may likely be the most valuable component to your retirement income, it’s a good idea to weigh your options with facts and figures that apply to your individual situation.
Your OPTrust pension at retirement is calculated using a formula that takes into account your years of credit and salary. So, the more credit you have, the higher your pension will be in retirement. That’s why buying back credit is a smart investment in your financial future.
The following examples show how buying back credit can increase your future retirement income.
Get a cost quote
Want to know how a buyback will increase your pension in retirement? When you submit an online or written application to purchase past credit, OPTrust will provide you with:
- a cost quotation
- an outline of the increase in your monthly lifetime pension at age 65 based on completing the buyback
- how much time a buyback will pay for itself (for online quotes only).
OPTrust has a flexible 10-year payment timeframe to complete payments, making buying back credit easier.
Strict timelines apply
To be eligible to buy back past service, you must submit your online or written application to OPTrust within 24 months of:
- the start of your most recent period of membership in the Plan, or
- the last day of the leave of absence you are applying to buy back.
For more information, refer to OPTrust’s publication Your Pension and Buying Back Credit.
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Your Annual Pension Statement is coming soon
Why wait for the mail, when you can view your Annual Pension Statement online in advance of the print version. With a secure Online Services account, members have access to their APS statements in mid-April. So, now is a good time to update your personal information and make sure OPTrust has your correct e-mail or home mailing address.
You can make address changes directly through our secure Online Services. As a registered user, you can update your:
- home mailing address
- e-mail address
- beneficiary information
- communications preferences – whether you want to receive material from OPTrust via e-mail or print.
It’s always a good idea to keep your mailing and e-mail addresses up-to-date, that way we can keep you informed about your pension.
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OPTrust named one of Canada’s Top 100 Employers for second year running
OPTrust was named one of Canada’s Top 100 Employers for 2009. This marks the second year in a row that OPTrust has been selected for the award, which is sponsored by Maclean’s magazine.
“It is an honour to be recognized again as one of Canada’s leading employers,” said Heather Gavin, OPTrust’s Chief Administrative Officer and Plan Manager.
“At OPTrust, our staff is critical to our success in delivering the finest service to our members and retirees, and managing the Plan’s investments to ensure the long-term security of our pension promise,” Gavin said.
This award recognizes OPTrust’s commitment to deliver on its pension promise to provide service and security to over 81,000 members and retirees.
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Pension report reflects OPTrust’s recommendations
In October 2007, OPTrust offered a set of recommendations to strengthen defined benefit pension plans in Ontario in its submission to the Ontario Expert Commission on Pensions (OECP).
The OECP report, which was released on November 20, 2008, echoes several of OPTrust’s proposed recommendations to strengthen the pension sector.
Many of OPTrust’s recommendations reflect its own success in administering the OPSEU Pension Plan, which is jointly sponsored by the Government of Ontario and OPSEU.
The Expert Commission was appointed in late 2006. Its mandate includes reviewing the province’s Pension Benefits Act, the rules governing the funding, deficits and surpluses of defined benefit pension plans, and other issues relating to the security, viability and sustainability of the pension system in Ontario.
OPTrust will monitor the progress of the OECP’s findings and provide additional information in a future issue of OPTions.
For more information and to read the full report A Fine Balance visit www.pensionreview.on.ca.
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Member Profiles: Share your story
Are you getting ready to retire? Did a buyback help increase your OPTrust pension? Do you have retirement planning advice for other active members? We want to learn more about how your OPTrust pension fits in to your overall retirement goals.
Send an e-mail to communications@optrust.com, and your story may be featured in a future issue of OPTions.
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Question: Will the current financial crisis affect the security of my OPTrust pension when I retire?
Answer: No. Your earned OPTrust pension is a defined benefit pension (see article above). That means when you retire, your pension is calculated based on the Plan’s formula. So, your OPTrust pension is based on your years of credit in the Plan and your best five-year average annual salary.
Unlike a defined contribution pension plan, RRSPs or other personal investments, the value of your OPTrust pension is not affected by changes in investment market returns. Once you retire, your OPTrust pension is payable for your lifetime, and increases each year to reflect changes in the cost-of-living.
Question: Are my pension contributions tax deductible?
Answer: Yes. Your employer will keep track of your contributions and report them on your T4 slip as contributions to a registered pension plan.
Your T4 will also show a “pension adjustment” amount. The Canada Revenue Agency (CRA) uses the pension adjustment to calculate the amount of RRSP contribution room you will have in the following year. The CRA will notify you of your RRSP room for the following year on your annual Notice of Assessment.
If you made a buyback payment in 2008, OPTrust will send you a T4A income tax receipt by the end of February. You should report your buyback contributions on your 2008 income tax return in addition to your pension contributions.
Question: I joined the Plan in October 2008. Before I was hired for my permanent position in the Ontario Public Service, I worked as a co-op student at the Ministry of Culture for two summers. Do I have the option to buyback credit for these periods?
Answer: Yes, you can buy back the service for the period you worked as a co-op student. You must submit an application within 24 months of the date you first become a member of the Plan. To apply to buy back this service, you will need to complete OPTrust’s Application for Past Service Credit form (OPTrust 1036). The form is available on our website at or from your Human Resources representative.
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Posted on Februrary 5, 2009
