OPTrust Realizes Funding Surplus and Eliminates the Plan's Deficit

posting date Posted: August 1, 2008

This backgrounder contains important information about your pension plan including:

  • recent gains in the OPSEU Pension Plan, and
  • a survey OPSEU is using to gather your views on how the gains should be allocated.

Gains in the OPSEU Pension Plan

OPTrust’s Board of Trustees is pleased to announce that the OPSEU Pension Plan has recorded gains of $841 million, as of December 31, 2007 (see chart below). The Trustees also want you to know that your Plan is now in a surplus position of $470 million after eliminating the funding deficit of $428 million, determined by the 2004 valuation.

The current gains were identified in the Plan’s recent “actuarial funding valuation” for the years 2005–2007. This kind of valuation is carried out every three years by OPTrust’s independent, professional actuaries. The purpose is to determine whether investment assets are sufficient to meet the pension promise for all members and pensioners, today and in the future.

Gains in the OPSEU Pension Plan

The Plan’s available gains of $470 million are shared 50/50 between the Government of Ontario and members and pensioners. The members’ and pensioners’ share of gains is $235 million. The Government’s portion of the gains is $235 million. 

Shared risks and rewards

When the OPSEU Pension Plan was established, its sponsors – the Government of Ontario and the Ontario Public Service Employees Union (OPSEU) – agreed that any gains or losses would be shared between the Government and the Plan’s members and pensioners.

OPTrust’s primary goal is to ensure that money is available to pay current and future retirees’ pensions over their lifetimes, while maintaining stable contribution rates for plan members and employers.

To confirm our ability to meet our pension obligations, OPTrust engages independent actuaries to prepare regular funding valuations of the Plan. These valuations provide a snapshot of the Plan’s funded status and a tally of gains or losses experienced since the last valuation.

How gains can be used

As a Plan sponsor, OPSEU is responsible for deciding how to allocate the members’ and pensioners’ share of gains. These gains must be used to benefit members and pensioners by:

  • increasing the reserve to stabilize member contributions in the event of future losses in the Plan
  • paying for temporary or permanent benefit improvements, and/or
  • reducing members’ current contributions.

In 2002, for example, after consulting with members and pensioners, OPSEU decided to use the members’ share of gains from 1999-2001 to pay for various temporary and permanent improvements to the Plan and reduce contributions.

The Government can use its share of gains to improve benefits, reduce employer contributions or add to the contribution stabilization fund for employers.

Any changes to the Plan must be costed by OPTrust’s independent actuaries, and the total cost cannot exceed available gains. Plan changes must comply with federal and provincial laws.

Finally, as sponsors both OPSEU and the Government of Ontario must sign any amendments to the Plan text before any changes can take effect. Plan text changes are required to improve benefits or reduce contribution rates.

Rate stabilization fund and deferred gains

The Plan went from a deficit of $428 million in 2004 – due to poor investment returns between 2000 and 2002 – to a surplus of $470 at the end of 2007. This shortfall would have normally triggered an immediate increase in contribution rates rising above the Plan’s normal levels. As sponsors, both OPSEU and the Government of Ontario had prudently set aside a substantial portion of the past funding gains in separate rate stabilization funds. 

In fact, your Plan is one of the few public sector pension plans in Ontario that has been able to avoid increasing member and employer contributions from rising above normal rates. This has been done by using special stabilization reserves. At the end of 2007, the Plan had $408 million in a rate stabilization fund with the membership’s portion at $148 million.

Because OPTrust smoothes investment gains and losses over a five-year period, the Plan had $643 million in deferred gains at the end of 2007, to be recognized in the years 2007-2010 to provide a “safety cushion” for the Plan.

Rate stabilization fund and deferred gains

We hope this explanation and the information provided helps you understand the funding position of your pension plan and OPSEU’s responsibility for determining how the membership’s share of gains will be allocated.

For more information on gains in the Plan, please refer to:

OPSEU survey asks for your views

OPSEU is consulting with you – and approximately 81,000 other OPTrust members and pensioners. Your input will help OPSEU make final decisions on how to allocate the gains. This could make a difference to your pension in the future.

It’s important for you to know that OPSEU is the decision-maker in this process – not OPTrust. OPTrust is assisting by providing information and distributing the survey to members and pensioners so you can express your views.

The 2008 OPSEU survey provides more information on the options that are being considered in allocating the membership’s share of current gains. You will receive an e-mail or letter with instructions on how to complete the survey. The survey distribution will be staged over a couple days to ease system requirements.

To register your opinion, you are invited to complete an online survey by August 29, 2008.  For members and pensioners with a secure Online Services account, you’ll need your OPTrust ID or Social Insurance Number (SIN) and password. If you have not yet registered for Online Services, you’ll need to use your SIN and the temporary password “survey” that was included in the letter sent to your home address to access the survey. 

Divested and deferred members please return your survey to OPSEU before August 18, 2008. (Please do not mail your completed surveys to OPTrust.)

Questions and Answers

What are “gains” in the OPSEU Pension Plan?
A gain is money that exceeds the amount needed to cover the current and projected cost of OPTrust members’ and pensioners’ benefits. At OPTrust, an independent study was conducted by professional actuaries, taking a long-term view of the plan’s assets and liabilities. This “actuarial valuation” tests whether there is enough money for future pensions. The funding valuation is conducted at least every three years.

How did the current gains come about?
When the OPSEU Pension Plan was established, its sponsors – the Government of Ontario and the Ontario Public Service Employees Union (OPSEU) – agreed that any gains or losses would be shared between the Government and the Plan’s members and pensioners. Gains come from investments exceeding actuarial expectations and/or from the cost of benefits rising more slowly than assumed.  

How much are the gains?
The OPSEU Pension Plan has recorded gains of $841 million at December 31, 2007 – the end of the three-year valuation period. However, some of the money has already been used to eliminate past deficits. The “unallocated” or unused gains are $470 million.

How are gains shared?
The members’ and pensioners’ share of the gains from 2005–2007 is $235 million. The Government’s portion is also $235 million.       

What can members and pensioners’ gains be used for?
Member and pensioner gains can be used to improve benefits, reduce member contributions or increase the rate stabilization fund. A rate stabilization fund would be used to avoid member contributions rising above normal levels if future valuations show an overall loss in the OPSEU Pension Plan.

Who decides how to use these gains?
OPSEU decides how to allocate the member and pensioner share of gains. The Government of Ontario decides how to allocate its share of gains. If decisions require a change to the text of the OPSEU Pension Plan, both Sponsors must sign the amendment.

What happens if there are losses, instead of gains?
If there are losses in the future, the loss would be shared between members and employers through an increase in their respective contributions. Any loss must be paid off over time to ensure the money is there to pay for pensions in the future. However, both OPSEU and the Government have set aside a portion of prior gains in contribution stabilization funds. These funds would be used in the event of a funding loss to reduce any contribution increases.

You say the funding deficit was eliminated.  How does this work?
OPTrust uses a technique called “actuarial smoothing.” Smoothing involves recognizing – or spreading – each year’s investment returns over a five year period. This cushions the impact of short term fluctuations in investment earnings, providing a more stable base for the Plan’s long-term pension obligations.

OPTrust’s two previous funding valuations, completed at the end of 2003 and 2004, respectively identified actuarial losses due to poor investment returns between 2000 and 2002. As a result, the Plan had a net deficit of $428 million at December 31, 2004. Both sponsors’ respective reserve funds were drawn down to make payments on the deficit. The gains realized in 2007 were sufficient to pay off the deficit and still have a surplus of $470 million.

Why should I fill out the survey?
Your input will help OPSEU make final decisions on how to allocate the members’ and pensioners’ gains. This could make a difference to your pension in the future. Last time OPSEU chose permanent and temporary benefit improvements, contribution reductions and created a small stabilization fund.

Why do I need to use my OPTrust ID or SIN to access the online survey? Does it identify me personally?
Your response will not be identified individually to OPSEU. Your OPTrust ID or SIN ensures that you have your say in the survey. The OPTrust ID controls duplication and makes the tally of results more efficient and reliable. OPTrust does not share individual records or responses. OPTrust will only provide OPSEU with summary statistics for each question.

When do I need to complete the survey?
OPSEU has requested that all online surveys be completed by August 29th, 2008. In order to ensure full tabulation the paper survey for deferred and divested members must returned to OPSEU by August 18th, 2008.  

When will I know what OPSEU decides?
OPSEU has indicated that it will make decisions on gains allocations this fall. OPTrust will communicate their decisions to members and pensioners in the fall issues of both newsletters – OPTions and The Pension Connection and on OPTrust’s website. OPSEU will also release information on its decisions via their website.

When is the next valuation?
The next funding valuation, covering the years 2008, 2009 and 2010, will be completed in mid-2011.