REPORT OF THE PENSION COMMITTEE April 23, 2009
The Pension Committee has written a report providing information and analysis on the recent TRAF announcement regarding COLA, for the information of the board, chapter presidents and members.
The Pension Committee will be studying the Pension Adjustment Account (PAA) Valuation Report.
1. JULY 1, 2009 COLA
The TRAF cost of living adjustment (COLA), effective July 1, 2009, as an adjustment to the base pension, is 0.37%. The consumer price index (CPI) for Canada for December 2008 over December 2009 is 1.2%. Therefore, inflation protection provided by the TRAF COLA is 30.8 % of CPI.
- Cost of living adjustment (COLA) - 0.37%
- Consumer Price Index (CPI) - 1.2%
- % of CPI - 30.8%
- No 2/3 COLA
- No surplus for a reserve in the PAA
Dollar Increases in COLA
Base Pension $ COLA % Annual Increase $ Monthly Increase $
$
10,000 x 0.37% $ 37.00 $ 3.08
15,000 55.50 4.63
20,000 74.00 6.17
25,000 92.50 7.71
30,000 111.00 9.25
35,000 129.50 10.79
40,000 148.00 12.33
Average base pension
(approximate)
$ 22,000
x 0.37%
$ 81.40
$ 6.78
2. Factors
Three factors important in analyzing this year’s COLA – the new COLA formula, the “greater of” method for calculating interest credited to the PAA and the new TRAF mortality tables - follow. Another factor – the valuation interest rate - is being reviewed by the Pension Committee.
a. New COLA Formula
With the passing of Bill 45,
changes to the COLA formula in The Teachers’ Pensions Act came into effect for ten years. The former formula
allowed for a full COLA in relation to CPI on an “affordability” basis. The new
formula caps COLA at 2/3rds of CPI to a maximum of 5.33% on an “affordability”
basis, i.e. unless doing so would result in an unfunded liability in the PAA.
The maximum COLA that could have been granted this year under the new formula is 0.8% - 2/3rds of 1.2% CPI = 0.8% CPI COLA.
The granting of a 0.8% COLA would have resulted in an unfunded liability in the PAA. Only a 0.37% COLA was “affordable”.
b. The “Greater of” Method
With the passing of Bill 45, changes to the method of interest crediting to the PAA came into effect for ten years. The new method credits interest to the PAA using the 3-year average of the annual “greater of” rates of return.* (* all returns net)
On the basis of the new formula, a ”greater of” return of 8.14% was credited to the PAA in 2008.
The calculation for the “greater of” method formula for the July 1, 2009 COLA is as follows:
For 2008, the fixed income return is 3.59%, and the total fund return is - 11.96%. So the “greater of” return for 2008 is the fixed income return of 3.59%.
The “greater of” 3-year average return, using each of the annual “greater of” returns credited to the PAA, is calculated as follows:
2006
2007 2008
2008
15.37% + 5.47% +
3.59% / 3 = 8.14%
The benefit of having the
“greater of” method is demonstrated this year.
Without the successful
RTAM initiative of proposing the “greater of” method in discussions at the
Pension Task Force, the COLA grant this year would have been zero.
According to TRAF, without
the “greater of” formula for crediting interest to the PAA, there would have
been insufficient funds to grant a COLA, thus resulting in a zero COLA.
For example, a retiree
whose base pension is $30,000.00 would not have received the adjustment of
$111.00 to his or her pension. This COLA of $111.00 is not just a benefit this
year, but a benefit of $111.00 each future year for a lifetime.
c. New TRAF Mortality Tables
TRAF has developed a new
mortality table, for future mortality assumptions, based on a study of TRAF’s
mortality experience. The use of
this table specific to TRAF, as opposed to the former universal mortality table
used, has had a negative effect on the financial position of the PAA and has
resulted in a lesser COLA being granted this year.
According to TRAF, had the
former mortality table been used, a 0.8% of CPI COLA could have been granted.
Therefore, the financial effect of implementing the new table was a loss of
0.43% COLA.
3. Sale Report
In a statement about its recommendations, the Sale Report prognosticated the following:
“Implementation of these recommendations in 2008 would allow COLAs to immediately reach the proposed ceiling of 2/3rds CPI in 2008, assuming that CPI remains below 3%.” (p.8) The COLA grant effective July 1, 2008 did not result in a 2/3rds COLA. It is important to note the following regarding the implementation of the Sale Report “package” of recommendations enacted with the passing of Bill 45:
Year one - No 2/3 COLA
- No surplus from excess interest for reserve in the PAA
Year two - No 2/3 COLA
- No surplus from excess interest
for reserve in the PAA
Noteworthy also is RTAM’s statement, in its Response Report to the Sale Report, about the report’s prognostication as follows:
“We are advised that prognostications of a 2/3rds COLA are speculative. Our professional advisors advise us that a 2/3rds COLA is dependent on low inflation and very dependent on consistently high investment returns. The average TRAF historical returns cannot be used asaccurate predictors of future returns.
As a result of such advice, we are skeptical of the report’s predictions of a 2/3rds COLA in 2008. Already in the proposed first year of the agreement, TRAF’s total fund investment returns fall short of the Fund’s historical average of 10%. They fall short of the verbal assertions of Mr. Sale to the RTAM Board regarding TRAF’s high returns the past 3 to 4 years of 12 to 15% and TRAF’s historical average, which implied the continuation of such high returns in order to convince us to ‘take the deal’.
RTAM believes that it would be imprudent to put reliance on expectations of rates of return equal to or higher than the TRAF historical returns in its assessment of the achievability of a 2/3rds COLA.” (pp.14-15) With the financial market downturn, RTAM has proven to have been right in the near term.
Anne Monk
Chairperson,
Pension Committee