The change under consideration means that the SC Board, based on its annual assessment of the Plan’s health and viability, may need to reduce future inflation increases on benefits earned after December 31, 2022.
This change is being considered by the OMERS Sponsors Corporation (SC) Board for the OMERS Primary Pension Plan and is still under review. The final decision will be made by the SC Board in June 2020.
Currently a retiree’s pension increases every year based on inflation.
I am retired:
I am retiring on or before December 31, 2022:
I am retiring after December 31, 2022:
I am a deferred member:
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 also become more vulnerable to market downturns.
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.
If an economic shock similar to 2008-2009 was to occur in 2045, the impact on active members would be double (~7% in 2010 vs. ~14% in 2045) what it was back then.
We expect that we will again face an economic shock that could impact the sustainability and affordability of the Plan.
If an economic shock similar to 2008-2009 were to occur in 2045, the impact on active members would be double what it was back then, due to plan maturity. This is because the growth in what we owe (our pension obligations) will significantly outpace the growth in our active membership.
Shared Risk Indexing allows OMERS to prepare for the unknown, without taking more in contributions from today’s active members and employers.
We have maintained and plan to keep contribution rates at current levels to build a reserve. This will be the first line of defence to protect the Plan and allow us to continue providing inflation increases in the future.
Only if there is a time that this reserve is not sufficient to protect the Plan’s health and viability would the SC Board consider reducing inflation increases.
Shared Risk Indexing would begin the slow process of expanding the number of members who could be impacted by changes to inflation increases. It only impacts benefits earned after December 31, 2022, so it takes many years before the risk-sharing benefits of the approach become significant.
Without Shared Risk Indexing, if the SC Board determined in its annual assessment of the Plan’s health that an inflation reduction was needed, the reduction would only impact active members. If an economic shock similar to 2008-2009 was to occur in 2045, the impact on active members would be double what it was back then.
This puts significantly more risk on future generations of Plan members. By considering this change and anticipating this reality, we can make the Plan more flexible to ensure that it is fair and equitable not just today, but into the future.
With Shared Risk Indexing, benefits earned by active members who retire after December 31, 2022 might not grow as fast as inflation.
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.
OMERS recognizes inflation increases are a valued benefit, which OMERS intends to provide.
The following guiding principles are to be used for shared risk indexing:
What happens if the SC Board cannot make a decision with a 2/3 majority on plan design issues?
In most instances, the motion to pass the plan design change is defeated. However, the OMERS Act authorized the SC Board to create an arbitration process for plan design disputes, where a dispute over a plan design decision can be submitted to an external mediator/arbitrator. In 2008, the SC approved the mediation/arbitration process, which is set in By-Law No. 12.
Plan design changes require a 2/3 majority vote of the SC Board. If the Board cannot reach a 2/3 majority, a simple majority (50% +1) of the SC Board can vote to refer the issue to mediation/arbitration. By-Law No. 12 describes how the meditator/arbitrator is chosen. The mediator/arbitrator will try to help the SC Board come to a decision, and if the SC Board cannot come to a decision, the mediator/arbitrator will make a decision. The mediator/arbitrator can pick from the positions taken by the different parties to the dispute, or, subject to the conditions as set out in section 26 of the OMERS Act, he or she can make his or her own decision, which is final and binding and not appealable.
The arbitration provision provides a safety valve. There may be circumstances where a plan change is necessary, but the Board is unable to come to a 2/3 majority, for one reason or another. Arbitration is a recognized process for resolving issues when parties become deadlocked.