The huge Ontario Teachers’ Pension Plan (OTPP) is the latest defined benefit pension plan in Canada to report a much-improved financial position, thanks to healthy stock markets and higher long-term interest rates.
The OTPP today reported a surplus of $5.1 billion – its first surplus in 10 years – with the plan 103% funded.
In recent years, for instance, the plan’s sponsors made inflation protection dependent on the financial health of the plan.
The OTPP isn’t the only defined benefit pension plan to see its fortunes improve.
A survey released this week by Aon Hewitt of more than 275 such plans from the public and private sectors in Canada found that the median solvency ratio – the market value to plan assets over plan liabilities – stood at 95.4% on March 27. That’s a 21-percentage-point increase over the same quarter a year ago.
The main driver of the improvement was strong equity markets. Canadian equities returned almost five per cent in the first quarter of this year, while U.S equities returned 4.6%. That added to the double-digit gains that North American markets scored in 2013. The declining value of the Canadian dollar also helped as it boosted the domestic market value of U.S. assets.
More than a third of the plans Aon Hewitt surveyed — 36% — were more than fully funded. Just 3% could say the same thing a year ago.
With a defined benefit pension, the plan is obliged to pay a promised amount to retirees, regardless of how well its investments have performed.
These plans, which are common in the public sector but much less so in the private, guarantee a preset lifetime pension. The better plans include partial or full inflation indexing. Both the employee and the employer contribute. But it’s the employer’s responsibility to make sure that the plan is properly funded to pay the promised benefits. Any shortfalls in the plan’s funding must be made up entirely by the employer.
In the case of public sector employers, that means the taxpayer is responsible for solving the pension deficit problem.
In the private sector, many employers have dealt with the pension deficit problem by closing their defined benefit plans to new enrollment and require new hires to enroll in the other kind of plan – the defined contribution, or DC, pension plan. Under a defined contribution plan, a member receives a set amount that they then invest to pay for their retirement.
In past years, the health of defined benefit pension plans has been a major issue for many of Canada's largest corporate names as record low interest rates and poor market returns drove up the liabilities of those plans and forced the companies to make large contributions to return the plans to solvency.
The drive is on now to "de-risk" defined benefit pension plans. Having some benefits, like indexing, depend on investment returns is a solution that is being adopted by more plan sponsors, including several public and private sector plans in New Brunswick.
