OMERS Reviewing its Indexing Policy?

Ryan Murphy of Benefits Canada reports, OMERS looking at indexing as part of plan review:

As part of a comprehensive plan review, the Ontario Municipal Employees Retirement System is looking at a number of changes, including to indexing provisions.

While a plan executive is offering a more nuanced version of the issue, the Canadian Union of Public Employees union is sounding the alarm about possible changes.

According to CUPE Ontario president Fred Hahn, OMERS has been doing well, with returns exceeding expectations. He says that after the 2008 recession, plan sponsors and staff worked hard on a strategy to improve the plan’s health. OMERS covers almost 120,000 CUPE members in Ontario, according to Hahn.

“It included some adjustments to some benefits for some plan members, and it included increased contributions for all plan members, so that means employers and plan members,” he says of previous efforts to boost the plan.

“Our folks from there were more than happy to make those additional contributions, because they understood it was important to protect their plan. . . . OMERS, in terms of its plan to come back to balance, is so far ahead of schedule [that] not only has it increased its funded status, it’s now at 94 per cent. But this year, [it] was in such a strong position that it was also able to address its discount rate. It was able to bring down the discount rate by 20 basis points, again well ahead of schedule.”

Given those improvements, the union isn’t happy about possible changes to indexing.

“Our position in relation to these kinds of changes has been one where we said we don’t buy, we do not believe that when the plan is doing well, when it is in a strong position, when it is quickly coming back to balance, when it has enacted a plan that is working ahead of schedule, now is not the time to actually remove a benefit that is so incredibly important to plan members like indexing against inflation,” says Hahn.

Paul Harrietha, chief executive officer of OMERS’ sponsors corporation, takes issue with the idea that the plan is de-indexing benefits. The plan, he says, is talking about conditional indexing and not completely removing the inflationary provision.

“It’s a nuance, but it’s an important one. De-indexing says we’re going to eliminate indexing, you’re not going to get it. Conditional indexing is predicated on the assumption that we’re going to maximize the indexing that we provide at any given time,” says Harrietha.

“Basically when you manage a plan like ours, you have two levers currently. One is you either cut benefits or increase cost if the plan suffers financially,” he adds.

“All conditional indexing does on a forward-looking basis is just give you one more lever that serves as a bit of a safety valve if the plan gets into financial trouble. It just allows you to manage the funding and contributions of the plan while the plan gets healthy again. We’ve only looked at it as a risk mitigation strategy that’s in the best interests of all of the members, both current and retired, so that we ensure that the plan remains financially healthy. But then we’re able to manage the contribution and funding rates at the same time so that we don’t have to keep going back to people and asking to pony up in the short term to cover losses potentially.”

Harrietha says the plan’s modelling indicates that if it were to adopt a conditional approach, it could anticipate providing indexing of about 85 per cent of what members would have gotten had it made no changes.

“In terms of other options, and I don’t mean to be flippant about this . . . everything was on the table. On the table was in direct consultation with all of the sponsors, including CUPE — who has two members on our board — to say: Is there a better way to deliver the pension promise? We looked at everything from flat accrual rates given the new CPP that’s coming in that would actually have enhanced benefits for lower-paid members’ lifetime pensions. We’ve looked at the conditional indexing component, we’re looking at service caps, we’re looking at revised early retirement benefits that can be perceived as a positive, we’re looking at expanding coverage potentially for all part-time employees in the sector,” he says.

This month, the board will consider options that would go to a vote in November.

“If the board accepts options in June, that’s all they’re doing,” says Harrietha.

“They’re suggesting these are the options that are meaningful at this time and that they would then socialize those options with our key stakeholders, sponsors, employers, unions and members over a four-month engagement plan. And then we will take that data back and in November, assuming there are any options approved in June, the board would at that time determine if they would vote for permanent changes under the plan.”

Harrietha, who notes a two-thirds vote would be necessary in November to pass any changes, says there would be a transition period. Any changes would be unlikely to take effect before January 2021, he adds, noting they would be prospective and therefore not affect benefits earned to date.

“Again, there’s no desire to disadvantage the members. It’s really just a matter of ensuring that the plan remains sustainable and meaningful and affordable over the time frames,” he says.

So who is right, the Canadian Union of Public Employees union or the CEO of OMERS's Sponsors Corporation when it comes to conditional inflation protection?

Let me unequivocally, emphatically state that Paul Harrietha is spot on and it's about time CUPE stop demanding guaranteed inflation protection and allow OMERS to adopt conditional inflation protection.

The two best pension plans in the country, Ontario Teachers' and HOOPP, both adopted conditional inflation protection.

Go read my comment on making OTPP young again where I stated:

What's crucially important to understand is that not only does conditional inflation protection (CIP) address intergenerational risk sharing, it also allows the plan to breathe a little easier if they do experience a severe loss and run into problems in the future.

In effect, as more teachers retire, if the plan runs into trouble and experiences a deficit, CIP allows them to slightly adjust benefits (remove full indexation for a period) until the plan's funded status is fully restored again.

Because there will be more retired relative to active teachers, they will be able to easily shoulder small adjustments to their benefits for a period to restore the plan back to fully funded status.

This isn't rocket science. The Healthcare of Ontario Pension Plan does the same thing and so do other Ontario pension plans like the Ontario Pension Board and CAAT Pension Plan which recently hit 118% funded status, putting it right behind HOOPP in terms of the best funded Canadian plan.

Importantly, while all these plans have different maturities and demographics, they've all adopted a sensible shared-risk model which is fair to all members of their plan, active and retired members, and it ensures the sustainability of their plan for many more years.

As of now, only two large Canadian pension plans offer guaranteed as opposed to conditional inflation protection, OMERS and OPTrust.

OPTrust is fully funded but to address the challenges it has ahead to maintain guaranteed inflation protection without burdening current workers, it's looking at an innovative new pension initiative which will launch a new defined benefit plan for employers in the broader public sector, charitable and not-for-profit industries.

In other words, it's looking to increase assets under management to maintain guaranteed inflation protection for retired members of the plan.

The problem with this approach is they have to sell it to new members, which isn't easy, and even if they're successful, it might not be the most efficient way to address the problem of intergenerational equity.

A much simpler approach is just to adopt conditional inflation protection and explain to plan members because the ratio of active to retired members has shifted to almost one for one, it only makes sense that when the plan runs into problems, retired members bear some of the risk too and accept their cost-of-living adjustments (indexing) will be adjusted lower in periods where the plan runs into deficits.

This cut in benefits won't be material, it won't be felt, and it will only last until the plan's funded status is restored to fully funded status.

Unions hate conditional inflation protection but I really don't understand why. Yes, OMERS is doing well, had an exceptional year last year and posted solid gains over the last four years but so what?

You cannot expect a plan's funded status to rely solely on its investment gains. You absolutely need to adopt a shared-risk model to ensure the plan's long-term sustainability.

I've said it before and I will say it again, the key to a successful pension plan is great governance and adopting a shared-risk model which spreads the risk across active and retired members.

Hiking the contribution rate puts pressure on active members but as more and more people retire, shouldn't they too bear some of the risk if the plan runs into trouble?

In another recent comment of mine on Canada's public pension service problem,  I wrote this:

In my opinion, the most important point that Fred Vettese addresses is the demographic shift going on in Canada (and elsewhere) where in a few years, we will have more retirees than active workers.

You know where I'm getting at with this? That's right, I want to see the federal Public Service Pension Plan (PSPP) adopt a shared-risk model which forces intergenerational equity.

In particular, I want to see conditional inflation protection adopted so if the plan experiences a deficit, retired members will experience a cut in inflation protection for some time until the plan is fully funded again.

In fact, conditional inflation protection is a critical factor behind HOOPP and OTPP's success and that of other fully funded plans in Canada.

It's mind-boggling that in 2018 we still have public sector unions demanding guaranteed inflation protection as if the rest of society owes it to them no matter what.

I'm sorry, I'm an ardent defender of defined-benefit plans but I absolutely need to see two key elements: 1) world-class governance and 2) a shared-risk model where if needed, contributions are raised, benefits cut (typically for a short time using conditional inflation protection) and/ or both.

We need to defend DB pensions but we also need to make them fairer and more sustainable over the long run.

Unions can huff and puff all they want, we're in 2018, demographic shifts are placing extraordinary pressure on these pensions, it's time to drop the guaranteed inflation protection charade.

I urge CUPE Ontario to listen carefully to Paul Harrietha and the folks at OMERS, they know what they're talking about, it's high time OMERS adopts conditional inflation protection.

Below, once again, a clip on how small adjustments to inflation protection ensures the Ontario Teachers' Pension Plan will be sutainable over the long run, effectively making the plan young again.

And Paul Harrietha, CEO of OMERS's Sponsors Corporation, talks about whether they can balance "the appropriate range of benefits with the appropriate range of costs without favouring one generation over another." Listen carefully to his comments.

Update: OPSEU President Warren (Smokey) Thomas says the executive of the OMERS Pension Plan can expect a fight if they try to rush through unnecessary pension plan changes that will leave members paying more for less:

"The OMERS pension plan is in good shape financially and will ensure a dignified retirement for the hundreds of thousands of Ontarians who've paid into it throughout their working careers," said Thomas. "We don't see any good reason to scale back the size of peoples' pensions or to increase the amount that people pay in. We'll fight any proposal to do either."

I suggest Smokey reads my comment carefully, he's dead wrong in this fight. Dead wrong.