It is clear that many teachers will not be receiving pension benefits that they long expected.
The Ontario Teachers Pension Fund has a $9.6 billion dollar shortfall.
The shortfall is largely due to record low interest rates. It is difficult for the OTP to generate 7% returns when interest rates are only 1%. Perhaps most disturbing is the fact that the OTP has a significant shortfall at a time when the Canadian economy has been relatively strong. The last decade of Canadian economic growth and stock market gains of the TSX have been inadequate to counter balance the weak U.S. economy.
“We are saying benefits have to be cut,” Finance Minister Dwight Duncan said in an interview on Tuesday after the new shortfall was announced. “We are not agreeing to contribution increases.”
The good news for new teachers is that their contribution requirements will not increase as fast as in previous years. The bad news is that the Ontario government is balking at pension support.
Ontario Teachers’ Pension Plan CEO Jim Leech emphasized to reporters in a press conference on Tuesday morning that the plan is still 94 per cent funded.
“This is not a crisis,” he said. “This is our 10th year that we have faced a preliminary deficit.”
Of course other major pension funds including CALPERS in California are facing similar pension shortfalls. In addition, many corporate pension funds are wildly underfunded.
Mr. Leech said he thinks both the government and the teachers’ federation would like to deal with demographic challenges to prevent shortfalls in future years. The plan has been paying out more in benefits than it has received in contributions since the end of the 1990s. Teachers work on average 26 years and collect a pension for 32 years.
The rules of the plan currently allow the sponsors to increase contributions to 15 per cent of salaries (contributions are already scheduled to rise to 13.1 per cent), with those contributions matched by government, or to decrease some of the guaranteed inflation protection.
But doing both of those things “would not quite cure this deficit,” Mr. Leech said.
Leech is quite right in that all the tinkering does not actually cure the shortfall. Unless interest rates rise to normalized levels of 6-7%, all pension funds and insurance companies will struggle with defined benefits.