Commission on the Reform of Ontario's Public Services

Chapter 19: Liability Management
Both HOOPP and CAAT are not directly sponsored by the province, but are consolidated
in the province’s financial statements. HOOPP, which had assets of about $35.7 billion,
was fully funded as at the last valuation date of Dec. 31, 2010, while CAAT had assets of
about $5.5 billion and a small surplus.
Many of these plans responded to the shortfalls created by the financial crisis by increasing
employer and employee contribution rates. For example, in the case of the TPP, teachers and
the province each contributed 8.9 per cent above the Year’s Maximum Pensionable Earnings
(YMPE) in 2006. That rate has increased since then to 12.4 per cent in 2012 and will rise to
13.1 per cent in 2014. The CAAT surplus is largely attributable to the fact that the contribution
rate for employers and plan members is set to increase from 12.9 per cent in 2012 to
13.7 per cent by 2014.
Three plans (HOOPP, CAAT and TPP) have taken steps to reduce or eliminate the level of
guaranteed inflation protection on a prospective basis. This action has mitigated the pressure
for further contribution rate increases.
Rates of Return
In accordance with PSAB rules, the province values the liabilities of the pension plans
consolidated in its financial statements using long-term nominal rates of return varying from
6.25 to 6.75 per cent. This reflects public-sector portfolios, which include equity investments.
Some argue that the actuarial positions should also be valued using more conservative (lower)
rates of return based on a portfolio of fixed income securities, as is the case in private-sector
accounting standards. This is neither the current accounting convention under the PSAB rules,
nor consistent with expected long-term rates of return on a diversified investment portfolio,
including both equities and bonds.
Nevertheless, it would be useful for the government to conduct a sensitivity analysis of the
health of these pension plans. This test could be as simple as assuming a static change in
the long-term rate of return, or could rely on a probability distribution of expected investment
returns. This type of analysis is consistent with current Canadian Institute of Actuaries’
standards of practice for individual pension plans.
In the case of more conservative estimates, the <strong>Commission</strong> believes this analysis could
reveal significant funding deficiencies across public-sector plans. While this result would not
suggest any immediate action needed to be taken, it would support the development of a
liability management plan to address the volatility of equity investments.
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