OPTrust’s sponsors approve gradual contribution increase to address deficit

posting date Posted: December 3, 2009
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Toronto (December 3, 2009) – The OPSEU Pension Plan’s sponsors have approved a 3% increase in members’ and employers’ contribution rates, to be phased in gradually over the next three years.

The contribution rate increase was recommended by the OPSEU Pension Trust (OPTrust) as part of a proactive strategy to address the funding deficit resulting from the Plan’s 2008 investment losses.

The strategy is designed to help OPTrust and its sponsors meet the Plan’s long-term funding requirements without reducing pension benefits, while moderating the impact on contribution rates. The OPSEU Pension Plan is jointly sponsored by OPSEU and the Government of Ontario.

The increase means that members’ contributions will rise by 1% of salary starting in January 2010. Contributions will rise by another 1% in 2011, and again in 2012. The contributions paid by employers will rise by the same amount.

As a result, an average OPTrust member who earns $55,000 per year will see his or her annual pension contributions rise from approximately 6.7% of his or her salary in 2009 to approximately 7.7% in 2010, 8.7% in 2011, and 9.7% starting in 2012.

Funding valuation
As part of its deficit management strategy, OPTrust has filed the Plan’s most recent funding valuation with the provincial regulator.  

Without the increase in contribution rates, this valuation would have shown a deficit of $1.8 billion as of December 31, 2008. The additional future contributions resulting from the approved increase have reduced this shortfall to $606 million.

To cover the remaining deficit, the sponsors have approved a series of payments from the Plan’s member and employer rate stabilization funds. Payments of $64 million a year, including interest, will be amortized over 15 years.

The rate stabilization funds, which totalled $820 million at the end of 2008, were set aside as a reserve by the sponsors from the Plan’s past investment gains.

Proactive approach
“Like most major pension plans, OPTrust experienced a significant investment loss in the recent global market downturn,” said Tony Ross, Chair of OPTrust’s Board of Trustees.

“We are working with our sponsors to deal with the funding shortfall sooner rather than later. By taking a proactive approach now, we expect to avoid even larger contribution increases in the future, while maintaining the value of our 82,000 members’ and retirees’ pensions.”

No change to OPTrust pensions
This approach means that the Plan’s current deficit will be eliminated without reducing the pension active members will earn for their future service.

The changes will also have no impact on the pensions paid to OPTrust’s 24,000 current retirees, including the annual adjustment for inflation. These earned pension benefits cannot be reduced under Ontario’s pension legislation.

The same protection applies to the deferred pension entitlements of former and divested members and the pensions active OPTrust members have already earned for their past service.

“Smoothing” cap
As part of its strategy, OPTrust has modified its asset “smoothing” methodology to cap the amount of the Plan’s investment losses that can be deferred for recognition in future years. As a result, most of the Plan’s investment losses have been recognized in the 2008 funding valuation. The deferred portion of these losses, which will be recognized between 2009 and 2012, has been reduced to $927 million.

This financially conservative decision, together with the other elements of the OPTrust strategy, will help reduce the risk of larger deficits and further contribution rate increases in the future.

Funding outlook
Assuming a modest recovery in the financial markets over the next five years, the Plan’s rate stabilization funds should be large enough to offset any future shortfall. If investment returns recover more quickly than expected, the sponsors will have the option of paying down the deficit more quickly, increasing the stabilization reserves or reducing future contribution rates.

In the meantime, OPTrust is continuing to implement a multi-year diversification strategy to reduce the volatility of the Plan’s investment returns while meeting our funding target over the long term.

Since the Plan’s inception in 1995, OPTrust has achieved an average annual return of 8.1%. This exceeds both our 6.75% funding target and our 7.4% weighted benchmark return for the same period.

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