The Ontario Teachers’ Pension Plan has eliminated its $12.7-billion funding deficit by reducing inflation protection for some of its members, allowing the fund to better deal with market volatility.

Depending on the financial health of the plan, inflation increases for pension credit earned after 2009 will be between 50% and 100% instead of the current 100% adjustment for the cost of living.

According to Teachers’ communications director Deborah Allen, the move gives the pension plan some breathing room in terms of its asset mix to equity, which currently sits well below the average of 60% for comparable Canadian pension funds.

“This allows Teachers’ to build a portfolio with an asset mix that can earn the kind of long-term returns that we need,” she says. “We currently have a 45% asset mix to equity, and now we are able to alter that.”

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Allen says the decision was a slow process and was not affected by the credit crisis, but that it will allow the plan to be more nimble in its investments. “What this does is equip us to better deal with the volatility.”

The decision to reduce inflation protection was made by Teachers’ plan sponsors, the Ontario Teachers Federation and the Government of Ontario. An actuarial study and an expert panel were conducted earlier this year, and plan members were polled on the acceptability of the three most likely solutions. Members voted in favour of inflation protection reduction.

The fund has become increasingly risk-averse recently due to a shrinking ratio of working to retired teachers. While there were 10 working teachers for each retiree in 1970, today the ratio is 1.6 to one. This has caused the fund to reduce its exposure to public and private equities to 45% of its asset mix from 65% in 1995.

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