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Benefits and Pensions MonitorSignificant Developments At Teachers’By: Claude Lamoureux One of the most notable changes to the Defined Benefit pension landscape that weʼve noted over the past 15 years is the swing of the interest rate pendulum. Many people say it has swung to an unsustainably low level. Being the contrarians that we are at Teachers ʼ, we believe that these low rates are the normal levels. The high levels seen in the ʼ80s and early ʼ90s were the real anomaly, not the current lower rates. If you look at Canada bonds over the past 80 years or so, the average real rate, that is the rate after inflation, is 2.8 per cent. Right now weʼre at 1.6 per cent, so really, interest rates are roughly in line with the average and are right about where they should be, within approximately one per cent of the average. The danger is that people will think that the ʼ80s and ʼ90s were normal. Back then, the Bank of Canada was much looser with its money. It has since returned to a disciplined approach and has kept inflation at a published target of two per cent to three per cent. So to summarize, yes, there has been a major swing of the interest rate pendulum, but it is a swing back to where interest rates should be, and away from unrealistically high rates. Of course, this pendulum swing has affected our fund in a number of ways. As a result of this interest rate shift, for example, we have had to adjust our asset mix away from equities. In 1994, we had an asset mix of 61 per cent equities, 37 per cent fixed income, and two per cent interest sensitive investments. At the end of 2005, we had only 49 per cent of our fund invested in equities and 19 per cent in fixed income. We moved the difference to inflation sensitive investments, increasing our investments in that class to 32 per cent of our portfolio. The Changing Ratio Of Working Members: Pensioners The second major change weʼve seen in recent years is the decline in the ratio of working members to retired members. At Teachersʼ, weʼve seen that ratio move from four to one in 1990 to 1.6 to one in 2006, and, within the next 10 to 15 years, we expect it will be relatively even at one to one. Finally, at Teachersʼ we began using dynamic mortality rate tables in the early 2000s, following the lead of the insurance industry. I believe that the majority of pension plans still use static tables. That means that many plans are calculating their assumed costs on a different set of mortality rate assumptions – assumptions that donʼt take into account how remarkably life expectancy rates are increasing. For example, using a dynamic mortality rate table, a 58-year-old female teacher in Canada today can be expected to live to an average age of 87 years, whereas a 68-yearold female teacher in Canada is expected to live to 88 years. Using a static table, the same womanʼs life expectancies are 86.1 and 87.5. In other words, more pension dollars will be owed than will have been accounted for. The dynamic mortality table gives us a more realistic view of our projected costs over the long term.
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Claude Lamoureux is president and chief executive officer of the Ontario Teachersʼ Pension Plan.