BC: The plan benefits are only 77% funded—down from 84% in 2005 and 94% in 2004. To what do you attribute the drastic change year-over-year?
CL: The large decrease in real interest rates over the last three years. And real rates, if you go back in the early ‘90s [were] close to 5%, and today they’re at 1.5%. So, the value of a pension really goes up a lot when rates go down.
BC: How critical is the plan’s underfunding situation?
CL: I think that in a pension plan, you always look at 30 and 40 years. I think that it’s a big number…but you have to keep it in perspective. In the ‘80s and ‘90s especially, it [was] easy to make money. Right now, with low interest rates…[it is] important that something be done. The government and the OTF(Ontario Teachers’ Federation)— they’re the ones deciding what has to be done. Do we bridge this gap by just increasing the contribution? I don’t think that’s necessarily the best way to go about it. Benefits have to be looked at. And, they certainly want us to look at assumptions which we’ve made. But, I think our board is comfortable with assumptions based on market rate.
BC: Do you think that the Ontario Teachers’ Federation and the Ontario government’s use of the $18.6 billion surplus created in the 1990s to eliminate special payments by the government and improve pension benefits for teachers and pensioners was a mistake?
CL: Well, at the time, some of us thought that some of that money should be kept in the surplus. In other words, you need a rainy day fund. And, eventually, that’s what the surplus management policy (introduced in 2003)did essentially—gave us a cushion of 7.5% before any improvements in benefits take place. I know OMERS…announced a 5% cushion. So, all of these plans really need a cushion before you improve benefits. Otherwise, it’s like running a financial institution with zero capital.
BC: Since you joined Teachers’ in the 1990s, what would you say your biggest challenge has been?
CL: Initially it was to create [broader] investment operations. I think we’ve done that. Initially we had a deficit—it got fixed in the early 1990s. It got fixed in a way that looked too easy and people thought that every dollar we make above the liabilities can be spent on an additional benefit. So, funding has always been a challenge.
BC: What do you think needs to be done to solve the defined benefit pension funding crisis in Canada?
CL: In general, our legislators have to recognize who owns the deficit and who owns the surplus. In my mind, every plan should have a funding management policy that requires [it] to have a surplus before benefits can be increased. The other thing is a realistic valuation policy. You see pension plans using assumptions and then if the assumptions are not met, we know what happens. I think there has to be room for defined benefit plans.
Chandra Price is associate editor of BenefitsCanada.com. Chandra.Price@bencan- cir.rogers.com