Funding Considerations
Managing Benefits and Contributions
It is the responsibility of the OMERS Sponsors Corporation (SC) to decide when it’s appropriate to change benefits and contribution rates to manage the financial health of the Plan. For example, a decision to increase contributions or to decrease benefits could be made to improve Plan financial health. Conversely, a decrease in contributions or increase in benefits may be possible if the financial health of the plan is assessed as very robust.
On an annual basis, the SC reviews the current funded position, financial projections, risk metrics and other relevant information to assess the health and long-term viability of the Plan. The SC Board may decide to consider changes to benefits and/or contributions based on their consideration of this analysis. Any changes to benefits and/or contributions can only be made by a two-thirds (2/3) vote of the SC Board. The chart below, while not prescriptive, summarizes the types of action the SC would consider when reviewing the benefit and contribution levels of the Plan.
Objectives | |
|---|---|
Deficit | Build reserves |
Surplus | Maintain Reserves |
Reserve | Maintain and build reserves |
Measures/Actions | |
|---|---|
Deficit | • Contribution rates increased |
Surplus | • Pensions adjusted prospectively to reflect any inflation increases not provided in the past |
Reserve | • Generally no changes to contribution rates or benefits |
Zone | Objectives | Measures/Actions |
|---|---|---|
Deficit | Build reserves | • Contribution rates increased |
Surplus | Maintain Reserves | • Pensions adjusted prospectively to reflect any inflation increases not provided in the past |
Reserve | Maintain and build reserves | • Generally no changes to contribution rates or benefits |
There are three management zones defined by different ranges of potential funded status, and which lead to different actions:
When the plan’s funded status is in the Deficit Zone, the SC would consider actions to improve the funded status of the Plan. These actions include a combination of increasing contributions and reducing benefits;
When the plan is in the Surplus Zone, opposite actions will be possible – reductions in contributions and increases in benefits;
When the plan is in the Reserve zone, the objective is to build sufficient reserves. Consequently, there would likely be no changes to contributions or benefits.
Key Considerations that impact Plan decisions
As we look to protect the Plan, now and into the future we are mindful of several considerations, as outlined below. These dynamics mean that we continue to assess and mitigate the risks facing the Plan and build the reserves we need to ensure that the Plan is resilient and available to members today, and for generations to come .
Plan Maturity & Longevity
There is a growing number of retired members for each active member, and people are living longer, so pensions are paid over a longer period. The benefits we pay exceed the contributions we receive, and the gap is expected to grow. This increases our reliance on investment returns.
Today, we have fewer than two active members for every retiree. We expect that by late 2030s, we will have less than one active member for every retiree. In short, we are a maturing pension plan.
OMERS members are also living longer. This is great news for our community, while placing additional financial pressure on the Plan, which pays pensions for life. At the same time, fewer members are contributing to the Plan relative to retired members that are receiving benefits, which places a higher emphasis on investment returns to fund the pension liabilities of the Plan.
Plan maturity could be accelerated if member life expectancy increases, if we experience a slowing growth rate of active contributing membership due to shifting workforce trends and the changing nature of work; if active members seek to retire earlier than expected from historical norms, or if member longevity continues to increase.
Our valuation assumes that longevity will continue to improve, however, to the extent that longevity improves faster than our current assumption, our pension liabilities will increase.
Investment Markets
Shifts in global markets and the economic environment can make it challenging to generate consistently high returns.
As our Plan continues to mature and the ratio of retirees receiving benefit payments exceed contributions being made by active members, our risk tolerance will decrease as the Plan becomes increasingly dependent on investment returns to pay pensions. OMERS regularly monitors the suitability of our investment strategy against pension liabilities and periodically conducts studies to inform the selection of our asset mix.
Discount Rates
The discount rate is a key actuarial assumption used to calculate the present value of members’ future pension benefits and is based on a variety of factors including long-term investment return expectations.
OMERS objective is to progressively lower the discount rate used to measure the value of OMERS pension liabilities. This is being done incrementally to balance our long-term financial health with benefits and contribution rate stability. A lower discount rate makes the Plan more resilient through less dependence on annual investment returns.
Learn more about discount rates here.
Inflation
Benefits earned prior to December 31, 2022 are fully protected against increases in inflation. A persistent and heightened level of inflation could have a range of consequences for the Plan’s financial health. In addition, as inflation rises, members' contributory earnings may grow, expected benefit payments increase, with the impact of increasing the Plan’s future pension liabilities.
A Changing Workforce
As the generational profile of our membership continues to evolve, a changing workforce could impact evolving retirement needs.
In response to the changing nature of the workforce, in 2020, Sponsors Corporation Board approved the introduction of “non-full-time” expansion effective January 1, 2023. This change enables non-full-time employees to join the Plan at any time expanding pension coverage to Ontario workers who previously were not eligible to participate, based on the nature of their work.
Through informed decision-making and leading governance practices, our overriding objective is to ensure the Plan remains sustainable, affordable and meaningful in our complex and changing world.
Please see the most recent Annual Report for a discussion of the factors we are currently monitoring.
