We must prepare for the future
Defined benefit pension plans like OMERS are meant to last for generations. That means we need to think not just about where we are today, but where we are going to be 20, 30 and even 50 years in the future. One of things we know will happen over that time horizon is that our Plan will become more mature.
The number of retirees is increasing faster than the number of active members joining the Plan. This is called “plan maturity” and it is significantly changing the ratio of active to retired members.
Where we used to have 7 active members for each retiree, we now have 2-to-1. Soon the ratio will be 1-to-1. This reduces the Plan’s financial resiliency, and increases the risk faced by future generations of Plan members. As our Plan matures, we become more vulnerable to market downturns. For example, should an event similar to the 2008-09 recession hit (where we experienced -15% net return), additional contributions would be required from each member and their respective employer to cover the shortfall.
The illustration shows the impact in 2045 would be double what it was back then (~7% in 2010 vs. ~14% in 2045). This puts significantly more risk on future generations of Plan Members.
To prepare for this future, we recently adopted Shared Risk Indexing which means that we will be able to reduce future inflation increases on benefits earned after December 31, 2022. We have made the Plan more flexible to ensure that it is fair and equitable not just today, but into the future.
Shared Risk Indexing would ensure the weight of supporting the Plan in an economic shock can be shared across employers and a larger number of members — active members and members who retire after December 31, 2022 — reducing the overall impact for any one individual, or generation of plan member.
Shared Risk Indexing begins the slow process of expanding the number of members who could be impacted by changes to inflation increases. It takes many years before the risk-sharing benefits of the approach become significant – hence the need to think 20, 30 or even 50 years into the future.
OMERS recognizes inflation increases are a valued benefit, which we want to provide. But we also want to be sure our Plan can continue to be sustainable, meaningful and affordable for generations to come. You can learn more about how we intend to use Shared Risk Indexing to manage the health of the pension plan for all its generations of members .