Teachers has $12.7B deficit. Good deal for taxpayers. Huh?
4 April 2008
Ontario Teachers Pension Plan (OTPP) announced their 2007 results this week. The fund returned 4.5% which is good news given the headwinds across almost any asset class and was over 200bps above its composite benchmark. That makes our household (being married to a teacher whose parents are both teachers) happy.
The headlines, though, focus on the asset/liability deficit of $12.7 billion. It’s more grabbing than Teachers beats by 200 beeps.
But wait. That deficit (at least part of it) is good news for Ontario taxpayers. And it’s not all actuarial voodoo.
First reason: Early retirement incentive.
In order to control costs in education the province introduced an early retirement incentive about a decade ago. It was called the 85 factor. Simplifying things a bit, it meant that when a teacher’s age + years of service added to 85 that he/she could retire and get the full pension. Before the 85 factor the deal was a 90 factor. The implication is that teachers could retire, on average, 2.5 years earlier under the new deal.
Replacing that retiring teacher saved the province about $35K per year because someone new was hired at a lower wage. So the province saved close to $90K (give or take) per teacher under this deal.
There was a cost to offering this kind of pension benefit, though, and the pension paid that cost. That cost is a whole lot less than the savings of hiring a younger teacher so taxpayers did well on the idea.
And because the province only funds half of the pension and teachers fund the other half out of their salaries (yes, they do pay for that great pension they get) taxpayers only paid for half of the pension cost but got all of the savings. Good trade, as they say.
Second reason: No more grade 13 (OAC)
Another savings here – get rid of a grade and you need 1/13th fewer teachers so salary costs go down again. But that puts strain on the pension because there are then fewer active teachers to support the retirees. This means that the actuarial projections of the pension assets will be lower and the deficit will be larger.
Again, the pension impact is paid for by the province (half) and teachers (half). So taxpayers are again better off than the salary savings alone would imply.
Scary headline. Good news. Enjoy your weekend.
CWN.
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