April 3, 2012 – The Ontario Teachers’ Pension Plan is projecting a $9.6 billion funding shortfall. The shortfall exists despite an 11.2% return on investments in 2011 and plan changes that eliminated a shortfall reported last year.

A shortfall occurs when plan liabilities (the estimated cost of future pensions) exceed projected plan assets. The $9.6 billion shortfall means the plan expects to have 94% of the assets required to meet its long-term pension obligations.

The Ontario Teachers’ Federation (OTF) and the Ontario government, which sponsor the Teachers’ plan, are studying options to keep the pension plan viable and affordable.

If a shortfall persists, as expected, OTF and the government must eliminate it by 2014, but they could decide to resolve it earlier. To eliminate a shortfall, OTF and the government can:

• increase contribution rates;
• further reduce inflation protection for pension credit earned after 2009;
• reduce other pension benefits members will earn in the future; or,
• adopt a combination of these options.

Current Ontario legislation protects the value of pension benefits already earned by working and retired members. Only future contribution rates and pension benefits to be earned in future years can be adjusted during a teacher’s career.

Recurring shortfalls

The pension plan has projected several shortfalls during the past 10 years because plan liabilities (the cost of future pensions) are growing faster than plan assets. Increased life expectancy, longer retirements and historically low interest rates are largely responsible for growing pension costs.

Interest rates are used to estimate the cost of providing pensions because they predict future economic growth. When interest rates fall, pension costs rise because more money must be set aside to pay future pensions. After inflation, long-term interest rates fell to an all-time low of 0.45% at the end of 2011 from 1.1% at the start of the year.

To eliminate a projected $17.2 billion shortfall last year, OTF and the government introduced a 1.1% contribution rate increase (to be phased in during 2012-2014) and slightly smaller inflation increases for teachers who retired after 2009.

Net assets have grown significantly, but pension liabilities (the projected cost of future pensions) are growing faster, causing funding shortfalls.