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Your Private Pension Plan Could Be In Jeopardy

Many individuals may be resting comfortably during this market turmoil knowing that they have a guaranteed pension for life and in most cases fully indexed to inflation. After all, most investors are looking at their month end statements wondering what lifestyle adjustments they may need to make if this market sustains these lower levels for a longer period of time.

With the daily volatility of global markets taking over the headlines, there was an adjustment announced by the Ontario Teachers Pension Plan that received very little coverage.  Ontario Teachers announced that they had a shortfall in their pension plan of $12.7 Billion. Their assets under management are rougly $108 Billion so the shortfall is very close to 12%.

Funds going to retirees are exceeding contributions coming in so contributions wont help decrease the shortfall. The pension plan announced two significant changes to the plan for all future retirees. One of the most valuable features of a plan is the indexing to inflation. As one gets older, inflation eats away at ones monthly income and protecting your income from inflation is very important.

The pension plan announced that they would have the option to decrease their indexing from 100% down to 50% to help decrease the shortfall. On January 1, 2009, contributions from employers and employees increase to 11.1% from the current 10.3%. This increase is to help cover past shortfalls, not the current one mentioned above. Had the plan decided to fund this shortfall with contributions alone, the rate would need to be increased to 16%.

More details can be found at their site http://www.otpp.com/web/website.nsf/web/funding07

Looking at the Alberta Teachers Retirement Fund, a shortfall in excess of $7 Billion existed at the end of August 2007. The plan assumes a long term rate of return of 4.5% in it’s calculation. The combined contributions however that are being made to cover the shortfall and all future commitments is closing in on 27% per year. This number is out of the stratosphere and the only reason it is doable is the strength of the Alberta government.

The agreement in place between the employees and the government however shows that employees will be responsible for future deficits since the Alberta government is covering past shortfalls. I would assume that the returns of the plan for the last year were not at the 4.5% assumed rate which will affect the shortfall even more.

These plans are stronger than most due to government backing. Employer plans where the company cannot afford to make these types of contributions will need to make changes as well to survive. You should make some adjustments as well


What are your thoughts on the future of private pension plans?


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