Despite earning a 4.5% annual rate of return last year and beating the benchmark, the Ontario Teachers’ Pension Plan says it has a $12.7 billion shortfall between the plan’s assets and liabilities.

“This highlights the continuing challenge of managing a mature plan,” says president and CEO Jim Leech. “Put simply, a declining portion of the plan’s members must now bear increasing responsibility for keeping it fully funded.”

The plan’s co-sponsors, the Ontario Teachers’ Federation and the Government of Ontario, must file a balanced funding valuation with the regulators by the end of September.

Teachers’ staff and board members have been working with the co-sponsors to help them identify the best solution for eliminating the shortfall.

Currently, benefits paid out ($4 billion) to contributions received ($2.1 billion) is now double, future contributions to total assets has declined to 26% last year from 42% in 1990, and the decline in the number of active members to pensioners has dropped to 1.6:1.

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“The result,” explains Leech, “is that our fund cannot afford the investment risk that it once did.”

At the end of 2007, the plan’s asset mix was 47% equities, 36% inflation sensitive and 17% fixed-income investments. In 1995, equities comprised 65% of the fund.

Teachers’ earned $4.7 billion in investment income last year and grew net assets to $108.5 billion.

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