TORONTO - The Ontario Teachers' Pension Plan saw its funding shortfall balloon to $17.1 billion in 2009, despite strong investment returns.
While the fund posted a 13 per cent return on investments last year, the plan's deficit was almost seven times higher than the $2.5-billion shortfall at the end of 2008.
"We continue to face serious funding challenges," said Teachers' president and CEO Jim Leech, who attributed the deficit increase to low interest rates.
"It is confusing because we had a very good year of investment returns and yet our cost of pensions grew faster than our assets."
The fund is particularly sensitive to interest rates, which continue to be historically low, because liabilities over the next 70 years are calculated at present rates, he said.
Those rates dropped 0.6 percentage points last year, adding $15 billion in liabilities to the fund.
In fact, the pension fund's assets grew to $96.4 billion at the end of last year from $87.4 billion in 2008, when the fund saw the value of its portfolio fall by 18 per cent.
With close to $100 billion in assets, there's no immediate threat to teachers' pensions, but it could run in to pay-out problems 70 years from now.
Leech said any pensions that have been earned to date are guaranteed. He added that there will not be any contribution increases at least until January 2012 when the fund is required to file a balanced report to regulators and erase that deficit.
While rising interest rates could reduce the deficit, other factors will continue to have a major impact in the coming years.
One is a demographic shift, in which the population of teachers is aging and retiring. That means fewer teachers are paying into the fund, while more retirees are drawing money out.
Leech cautioned that much of the market rebound last year was the result of a return of confidence in the financial markets, adding he believed it will take some time until true economic growth takes hold.
"We should not expect this kind of market growth going forward," he said.
"In 2008 and continuing into the first quarter of 2009 we saw a crisis of confidence among investors. It caused market mayhem," Leech said.
"After the markets bottomed out in March 2009, confidence edged back up and with that came a return to more reasonable valuations."
The deficit is the shortfall between the value of the fund's assets and future liabilities. If the deficit persists, the Ontario government and teachers may have to increase contributions from current teachers and-or re-evaluate the level paid out to future retirees.
Leech said it would be imprudent to believe strong investment results alone can close the funding gap -- a warning that has been issued for several years by the fund's senior management.
The fund has set up a working group to determine how to address the funding gap, which consists of representatives from the fund, the Ontario government, the Ontario Teachers' Federation and the four unions that contribute to the plan.
"(They're) looking at minor course corrections we could make now that would have a large impact over the long-term," he said.
Reno Melatti, president of the Ontario Teachers Federation, said he is optimistic that the group will come up with a sustainable solution to the plan that will cover all members.
He said the working group is looking at possibilities including raising contribution rates from the current 11 per cent of annual salaries in order to make up the deficit by the 2012 deadline.
"We're in a better situation than we were last year... (but) we're not out of the woods yet," he said.
About $4.4 billion was paid out to pensioners in 2009, while only $2.7 billion was paid in. Pensioners received an average of $42,900 last year.
The fund invests the pension fund's assets and administers the pensions of 289,000 active and retired teachers in Ontario.
Alan White, a professor of investment strategy at the University of Toronto's Rotman School of Business, said Teachers' will continue to report deficits because the promises that pension plans make are difficult to fulfil.
"As long you don't retire and I don't have to pay you a pension I can promise you anything, but as soon as you get to the retirement stage and I have to deliver then we have trouble," he said.
"So you hope that you'll have enough money to cover the pensions but in order to get the high returns you have to take a lot of chances (in the stock market) and things might blow up in their face."
Returns at pension funds were up across the board last year.
The Caisse de depot et placement du Quebec saw a 10 per cent rate of return, while the Ontario public-sector pension manager known as OMERS saw a 10.6 per cent rate of return on its assets that marked their moves back into positive returns after a dismal performance a year earlier.
The Canada Pension Plan has not yet reported its full year results, but said it earned a return of 14 per cent for the nine months ended Dec. 31.
