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Ontario budget to limit cost of future pension deficits

posting date Posted: April 2, 2012

Toronto (April 2, 2012) - As part of the 2012 provincial budget introduced last week, Ontario Finance Minister Dwight Duncan announced a package of measures affecting the province’s public sector pension plans. This package includes a commitment to develop a new legislative framework that would limit the impact of future pension deficits on the government’s finances.

If the OPSEU Pension Plan experiences a funding deficit in the future, the proposed framework could affect the options available to OPTrust and the Plan’s sponsors to address the funding shortfall.

Based on the Plan’s most recent funding valuation, however, the framework is not expected to have an impact on the Plan’s current pension benefits or contribution rates. The framework will not affect the pensions that are paid to OPTrust’s 27,000 current retirees or the earned pension benefits of more than 56,000 current and former members of the Plan.

Pension “framework” parameters
The government’s stated objective for the new framework is to ensure that jointly-
sponsored public sector pension plans remain sustainable and affordable over the long-term, both for plan members and for the province.

The government plans to develop the framework after consulting with its key partners. As a result, the details of the final framework are not known. However, the budget sets out a number of key parameters, or principles, for the way future pension deficits will be managed.

These principles include the following:

  • In case of a deficit, public sector pension plans would be required to reduce future benefits or ancillary benefits before further increasing employer contributions.
  • In exceptional circumstances, a limit would be set on the amount or value of benefit reductions before additional contribution increases could be considered.
  • Any benefit reductions would involve future benefits only, not those that have already been accrued. Current retirees would not be affected.
  • Where employee contributions are currently less than employer contributions, increased employee contributions would also be available as a tool to reduce pension deficits.
  • Where plan sponsors cannot agree on benefit reductions through negotiation, a new third-party dispute resolution process would be invoked.
  • The framework would be reviewed after the budget is balanced.

OPTrust ‘s deficit and “rate stabilization funds”
The proposed funding framework is not expected to affect the OPSEU Pension Plan’s benefits or contribution rates, unless the Plan experiences a funding deficit in the future.

Like most other major pension plans, OPTrust was affected by the market downturn of 2008. Since then, however, OPTrust and the Plan’s sponsors - OPSEU and the Government of Ontario - have implemented a series of measures to address the Plan’s funding deficit without reducing members’ and retirees’ pension benefits. These measures included:

  • a gradual increase in member and employer contribution rates equal to 3% of members’ salary, which was phased in between 2010 and 2012
  • the use of the Plan’s “rate stabilization funds” to pay down the balance of the deficit over the next 15 years.

According to OPTrust’s most recent funding valuation, the Plan had a deficit of $586 million at the end of 2010. At the same time, the Plan’s rate stabilization funds totalled $843 million. These funds were set aside from past surpluses and are available to the sponsors to offset contribution increases that would otherwise be required to address a funding shortfall. The stabilization funds are enough to allow the sponsors to pay down balance of the current deficit without either reducing members’ future pension benefits or increasing contribution rates above current levels.

Members and pensioners current pensions protected
Based on the parameters set out in the provincial budget, the new framework is not expected to affect the current protections that apply to members’ and retirees’ OPTrust pensions.

Under Ontario’s current Pension Benefits Act (PBA), the value of retirees’ OPTrust pensions cannot be reduced, even if the Plan experiences a deficit in the future. For current retirees, this means there will be no change in your monthly pension amount, and your pension will continue to be adjusted annually to keep pace with inflation.

For OPTrust members, the pension you have already earned for your past service is also protected under the current PBA, and cannot be reduced. The same protection applies to divested members and the deferred pension entitlements of former members of the Plan.

If the Plan experiences a future deficit, the proposed framework may limit the sponsors’ options for addressing the funding shortfall. In this case, if the Plan’s rate stabilization funds are not large enough to cover a future deficit, the framework may require the sponsors to modify the pension benefits earned by active members, rather than increasing members’ and employers’ contribution rates.

However, under the framework parameters outlined in the budget, any change to the Plan’s benefits would apply only to the pension benefits that members will earn for their future service. The value of members’ pension benefits for their past service would continue to be protected.

More information
OPTrust closely monitors a range of factors that affect the Plan’s funding outlook. Our most recent investment and financial results, and the results of our next funding valuation, will be released in our 2011 annual report later this spring.

In the meantime, OPTrust looks forward to providing information and assistance to the Plan’s sponsors regarding the government’s consultation on the new legislative framework, and will provide updates as the process unfolds.

More information on the 2012 provincial budget is available at www.ontario.ca.

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