Decision Time for Teachers’ Plan Sponsors

According to Leech, the shortfall issue stems from a wider trend related to demographics as the boomer generation begins to retire and draw upon their pensions. “Our teachers are living for a long time,” he says. “So we’ve got many more retirees than what was actuarially projected, and teachers are retiring at a fairly young age and drawing a pension for 10 years longer than they used to.”

While $12.7 billion might seem to be a sizable number, the shortfall for 2006 was a whopping $31.9 billion, which was corrected by an increase in contributions of 3% over three years, the last of which will occur in 2009, according to Leech. In an effort to stave off member anger and confusion, Teachers’ and the plan sponsors (known as the partners) rolled out a communications plan to give members a choice in how the shortfall would be fixed. They asked active members how much they were prepared to pay for the currently available range of benefits, and were told that 12.5% was on average the upper limit.

Plan members were also given three possible choices in a change in benefits, consisting of changing the 85 rule (under which teachers may retire when their age and years of service equal 85), a 10% cut in benefits, or the introduction of conditional inflation protection. Members chose the third option.

The partners then sought outside help, commissioning an actuarial panel to study the assumptions used in their valuation process. “We wanted to know, ‘Are we being too conservative in some areas?’” says Leech. The panel reported that member longevity was becoming an issue. “Their study of our data indicated that we weren’t conservative enough in our mortality tables.”

The partners also had a research team seek lessons from other Canadian pension plans that have faced similar circumstances, but the findings are to remain confidential until the funding valuation has been tabled, according to Leech. In the meantime, as far as options are concerned, he admits there’s not much room to maneuver. “There are only four things you can do,” says Leech. “Increase contributions, alter benefits, make a whole bunch of money on the investment side, or you can assume it all away by changing your assumptions. But changing assumptions doesn’t change reality.”

Kevin Gaudet, Ontario director of the Canadian Taxpayers Federation, feels that the entire structure of the plan should be reviewed, as any unfunded liability ultimately rests with Ontario taxpayers. “I’d like to see the plan rolled over into a purely defined contribution plan,” he says. He’d like Teachers’ to take a page from the book of former Ontario Premier Mike Harris, where pension plans for members of provincial parliament were flipped from DB to defined contribution (DC).

“It’s one of the rare cases where politicians have set the example,” says Gaudet. “It wouldn’t be a simple process to roll it over, but if you change the plan into a DC plan it would reduce the future liability under the plan, which would reduce the $12.7 billion deficit.”

Leech is less than enthused about the suggestion. “That’s a pretty big move,” he says. “If contribution rates got way out of line, they might have to look at it, but I would think the plan sponsors would like to maintain the DB plan.”

Gaudet insists that something new needs to be done, as the current scheme is unreliable and exposes taxpayers to too much risk. “It’s a scary proposition when you see publicly announced a $12.7 billion unfunded liability for a pension plan,” he says. Gaudet hopes Teachers’ doesn’t follow in the footsteps of Alberta, where that province took over $2.1 billion of their teachers’ pension liability in exchange for a contract that would prevent strikes for five years.

He says that in the absence of a complete overhaul, the 85 factor must be reviewed in order to come to a sustainable funding solution. “When a plan issues a report that says it’s got as large an unfunded liability as this does, then I think it behooves contributors and managers of the plan to be looking at any number of ways to reduce that unfunded liability,” he says. “It’s not an easy problem, but the solution isn’t just to ask taxpayers for a great big cheque. I think it should be brought out during an election and discussed clearly and fairly in all candor.”

Leech is confident the shortfall will be resolved without the need for massive change. “Whatever decisions come out of this, I feel very comfortable that the people making the decisions are about as informed as they could ever be,” he says. “Everybody understands what the issues are.”

To comment on this story, email jody.white@rci.rogers.com.