# Confidence in Ontario Teachers' Pension Plan, 30 years hence?



## joncnca (Jul 12, 2009)

My wife has been on maternity leave and we're thinking about buying back her pension contributions for this past year. We are only in our early 30s. Because of the way we're set up, the Ontario Teachers' Pension Plan website calculator indicates that this years contribution will translate into about $800 worth of pension payments per year after retirement. Not a whole lot.

On the other hand, we could take that same lump sum and I could contribute to her spousal RRSP because I have quite a bit of unused contribution room. I'd also get a better tax refund than she would. Obviously the benefit at retirement would not be defined, but based on some reasonable assumptions for return, it'd probably be roughly the same amount of payout assuming 20 years of retirement.

My question is, how confident do you guys feel about the Ontario Teachers' Pension Plan if one is expecting to retire more than 30 years from now?

If we contribute to the pension plan, yes it's defined benefit now, but who know what will happen in 30 years. All sorts of DB pensions are being decimated these days, so it might not stay that way. I also know some friends who're having their DB pensions altered now, so you don't get the kind of predictability that a DB pension is supposed to offer. At least in a spousal RRSP, the money feels more like "ours" in that it's not held by the pension, it's held in our own accounts.

Pensions probably have access to interesting investment opportunities, but does that really matter? I'd do something pretty boring with it like ETFs or index funds, and fold it into our existing portfolio.

Pension contribution or RRSP?

Thanks for your thoughts!


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## OptsyEagle (Nov 29, 2009)

You really cannot plan your retirement on a bunch of "maybes", "what ifs", etc. You have to assume the pension will be there and at the least, whatever you have accumulated as defined benefit, will stay that way and only future benefits will go defined contribution, if that change happens...and it probably will.

You need to take the cost of the buyback and mathematically compare it to the potential benefit, using "guaranteed" rates of return, not projected stock market returns. In that situation, I know the pension plan will win, especially if the employer is contributing some to the buyout (employers always contribute to pension plans but do not always contribute to buybacks).

The happiest people I seem to come across are the ones who have enough "guaranteed" income in retirement to cover their basic fixed expenses and then have some more money in RRSPs, TFSAs, and cash accounts to provide the little extras that make life worth living. If all your money is "variable", during the turbulent times, that will come at least 4 or 5 times during your retirement, your enjoyment of those little extras can be sucked away for many years, not to mention the sleepless nights.

My advice...buy back the pension.


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## Davis (Nov 11, 2014)

I am generally not a risk-averse investor. Until I realized earlier this year that I can retire in 2016 at 50, I was 100% invested in equities (dividend stocks and REITs). But knowing that at 60 or 65 I'll be able to start collecting an indexed DB pension is very reassuring. That has always been the conservative part of my portfolio. I would buy back the pension - it will never run out. Check out the OTPP website. It says that the plan is fully funded (based on an evaluation ovrr the next 70 years). They are using $5 billion surplus this year to increase the inflation protection from 50% to 60% of the nflation rate.


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## Guban (Jul 5, 2011)

From today's perspective the Teachers' Pension Plan looks like it will survive, but you are right, 30 years is a long time, and things could change.

As to whether it is worth the $800, you have not indicated how much that will cost, so it is hard to say. $800/year does sound low for a year, however. What is also hard to say, is how long your wife (and you, if you survive her) will live. Are her genes and lifestyle good?

Is she still off on mat leave now and returning to work soon? Or did she just start back this September? If so, don't consider buying back now! Wait until she is in a year with a good income, so that she can use the tax deduction. It will cost a bit more because they add interest, but in the long run, it is worth waiting.

Does she currently have a spousal RRSP open? If not, that is another consideration. Do you really want to open another plan to manage? I assume that there is a reason that you don't want to just contribute to your RRSP instead, like you already have a prediction of a greater income stream in retirement.

All things being equal, the pension buy back is just easy to do, so that would be my vote, but there certainly are a few things to consider.


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## nortel'd (Mar 20, 2012)

joncnca said:


> Pension contribution or RRSP?


*Pension contribution*

I am a member of the CAAT Defined Benefit Pension Plan. Thanks to my supervisor telling me it was a good thing to do, in 1994 (19 years before I retired) I purchased 26 months of pensionable service.
Why? 
Because it would let me retire with an unreduced pension 26 months sooner. 

To add more fuel to the fire ... I was able to claim all of my pension buyback for a taxable deduction. 

From the PDF file ... Absences from Employment - Ontario Teachers' Pension Plan



> There are two ways absences can affect members’ pensions.
> 
> • It may reduce the amount of their pensions. Pensions are based on the actual number of years members teach. Missing a year’s credit now means a lower pension when they retire, unless they teach an extra year later on.
> 
> • It may postpone the date members can retire with an unreduced pension. Not earning credit during an absence may mean losing qualifying years toward their qualifying factor. Members are eligible for an unreduced pension with an 85 factor (age plus qualifying years equal 85) or when they reach age 65.





> Buying credit for absences from employment builds up members’ service credit and may increase their qualifying years. This will result in a member receiving a higher pension and possibly being able to retire earlier.


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## sags (May 15, 2010)

OptsyEagle said:


> The happiest people I seem to come across are the ones who have enough "guaranteed" income in retirement to cover their basic fixed expenses and then have some more money in RRSPs, TFSAs, and cash accounts to provide the little extras that make life worth living.


I have a full DB pension that is more than adequate for our monthly expenses, and my wife has a much smaller DB pension.

What would be nice is the option of commuting the value of the smaller pension. The cash would open up investment opportunities and the possibility of reducing monthly expenses.

Alas, the world of pensions is fairly inflexible about such things..........and the government considers every pension to everyone as a sacred trust that can't be spent lest the person become destitute.

In the US there are companies that will buy pensions........but I would imagine the cost is far too high to consider.

In the circumstance of the OP...........I would suggest buying back the service time and I would do it as soon as possible. My wife had the opportunity, but too much time had passed and it was far too expensive to purchase at $12,000 per year of service. The cost outweighed the benefit.

The sooner the cheaper..............


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## nortel'd (Mar 20, 2012)

sags said:


> In the circumstance of the OP...........I would suggest buying back the service time and I would do it as soon as possible. My wife had the opportunity, but too much time had passed and it was far too expensive to purchase at $12,000 per year of service. The cost outweighed the benefit.
> 
> The sooner the cheaper..............


*+1*


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## joncnca (Jul 12, 2009)

Thanks everyone for the helpful comments!

I'm going to make arrangements to buy back the pension for this year's absence due to maternity leave. 


If I go it alone with 'guaranteed' rates of return and not projected market returns, it will be (very likely) less than the DB pension. This year's buy back is about $5100, and according to the Pension Plan calculator will amount to the $800 annual benefit, as described above. 

The defined amount of income for basic fixed expenses at retirement is reassuring. We will have other investments as well, but defined basic amount (not just the $800 per year, but the total of our pensions) is nice to have.

I think I read that the pension is funded, but there's an anticipated shortfall with teachers retiring.

We're hoping to live for a while, we have fairly good habits but you can't predict these things. This is her first year on leave, and we may extend her leave for a few years if we can afford to have her stay at home with the kid. The plan is to extend her leave for at least a second year. In future years, I can't remember if we can buyback any more of her pension, and it may not be as worthwhile to do so. I'm trying to buy back this year because since she's taking a second year off, her income will be even lower the second year without EI. Even if she buys back on returning to work, that could be years away, and she reduced her contract a couple years ago. It could be even longer before she returns to a full contract, so I think better to buy back now if at all, for the tax refund (even if not totally maximized) and building up service credit earlier. You get 5 years to buy back pension.

I already have a spousal RRSP set up for her and have our whole portfolio managed over the different accounts, so it wouldn't be hard to re-allocate the money and fold it into our existing portfolio. So it's not that much work to go with spousal RRSP, but I think the pension buyback is still easier.

I didn't realize that when a DB pension is converted to DC, the DB portion remains DB. I guess it would piss people off royally (even more) if the existing DB portion was no longer defined.


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## My Own Advisor (Sep 24, 2012)

Most retirees I know, who are financially secure, have some sort of guaranteed income/pension. This is used for basic expenses (food, shelter) and the investment income/portfolio is used for the extras in life (major trips).

I would suggest obtaining as much guaranteed income/pension as you can in your 30s and 40s so that your 50s and 60s + is a breeze.

With no debt:
Guaranteed income/pension + Gov't benefits in your 60s (CPP + OAS) + investment income, you'll be doing very well.


Buy it back!


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## My Own Advisor (Sep 24, 2012)

joncnca said:


> I guess it would piss people off royally (even more) if the existing DB portion was no longer defined.


It might start a civil war


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## cougar (Oct 15, 2014)

Speaking from experience, I took 2 years off when I had my children and bought back my DB pension-now that I am an early retiree I am very glad I did. My pension covers the basic monthly expenses and our savings/PT income cover the extras-not old enough for CPP/OAS yet. I agree with the others who say buy it back-you still have many years to also save in an RRSP/TFSA too but as others have said if you try to buy back this year later the cost would likely be too high.


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## Jorob199r (Sep 4, 2014)

Always buy back your pension.

My spouse and I are both in our 30s in govt jobs. I don't believe our pensions will be anything close to as good as what the plan is guaranteeing now. 

I'm saving with that in mind. If it's going to be there, it's just going to be a shell of what it used to be.


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## lonewolf (Jun 12, 2012)

Perhaps its because teachers can live a good life style with not much stress that they average to living into their 90s. Collecting 800 dollars a year for 40 years is really going to ad up. All these benefits like being paid for maternity leave is killing the country. Being paid by tax payers for not working makes no sense & is an example of entitlement that is destroying the country. If you work you should get paid if you don't work you shouldn't get paid.


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## Davis (Nov 11, 2014)

The question is about one person's pension situation in a forum about retirement planning. Let's not drag this down into a debate about what is " killing the country".


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## Guban (Jul 5, 2011)

lonewolf said:


> Perhaps its because teachers can live a good life style with not much stress that they average to living into their 90s. Collecting 800 dollars a year for 40 years is really going to ad up. All these benefits like being paid for maternity leave is killing the country. Being paid by tax payers for not working makes no sense & is an example of entitlement that is destroying the country. If you work you should get paid if you don't work you shouldn't get paid.


Can you provide a reference to the average life span of teachers? I wonder how it compares to other professions?


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## hboy43 (May 10, 2009)

Guban said:


> Can you provide a reference to the average life span of teachers? I wonder how it compares to other professions?


Doubt it. And even if he can, 90s is pretty vague so lets say it is 90 exactly. Given from birth is something like 87. Then given high income folks, including hard working non public employees like himself would account for most of the 3 year supposed gain.

Like I often tell people if teaching is such a great gig he is welcome to go into it. I mean the stress is really low when you are trying to foil an abduction. True story and it was successful, foiling it that is. In fact it was so low stress that the main teacher involved soiled herself.

hboy43


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## lonewolf (Jun 12, 2012)

Guban said:


> Can you provide a reference to the average life span of teachers? I wonder how it compares to other professions?


 Was @ my moms birthday party on Saturday. My sister is a teacher & she got talking about retiring in a year or 2. She then started talking about how teachers live long & mentioned that the average teacher on pension lived to be 90 something (forget exact number). Talking about Ontario teachers, here say does not hold up in court. My sister is not one to exaggerate so I believe she is telling the truth unless she received wrong information.


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## HaroldCrump (Jun 10, 2009)

^ As Jane Austen wrote : _if you observe, people always live for ever when there is an annuity to be paid them_


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## sags (May 15, 2010)

The head of the Ontario Teachers Pension Fund has stated that teachers have additional longevity, and they will introduce solutions to deal with it.

He believes it could be attributable to a non-smoking environment long before it was legislated for all work areas, and that some teachers are more health aware.

Nevertheless...........the pension plan had already taken action to eliminate the deficit, and the fund is in good shape. 

They have changed their investment strategy...........as have many large pension funds, into long term cash generating investments......that are less volatile than stocks.

The size of the fund allows them to make cash purchases of large commercial properties for example...........with steady income flow and no mortgage expense.

I would worry more about personal portfolios in stocks than pension funds.

The potential for collapse in pension funds is largely a myth. 

There have only been a couple of pension failures when companies went bankrupt..........but even in the worse case scenarios, benefits were still paid out at a reduced benefit.

In the case of public service pensions, the odds of a bankruptcy or pension collapse are exactly 0%.

There is an article in the media today regarding another "study"..........this time from Manulife, that many retirees are planning to sell their homes or get a reverse mortgage or credit line...........to generate the needed monthly income.

Generating monthly income is a problem for retirees..............even those who have a high net worth in assets.

Anyone who has a DB pension................should hang onto it for dear life. It is an important part of retirement spending.


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## Guban (Jul 5, 2011)

lonewolf said:


> Was @ my moms birthday party on Saturday. My sister is a teacher & she got talking about retiring in a year or 2. She then started talking about how teachers live long & mentioned that the average teacher on pension lived to be 90 something (forget exact number). Talking about Ontario teachers, here say does not hold up in court. My sister is not one to exaggerate so I believe she is telling the truth unless she received wrong information.


Did a quick google search, and found that the Alberta Teachers' Association says that female teachers live to 87 on average. Sounds not too far from the Canadian average. Also, not a definitive source for the country, but I suspect the Association knows what is happening in Alberta.

http://www.teachers.ab.ca/Publicati...eachers begin taking Canada Pension Plan.aspx


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## atrp2biz (Sep 22, 2010)

Is that statistic for teachers who retire live to an average of x? I wouldn't be surprise if that number is significantly higher than the life expectancy of the general population as that would contain a significant survival bias.

Another statistical bias comes from eliminating those that die in their youth (before becoming a teacher or any profession for that matter) whereas a statistic on the life expectancy of the general population would obviously include those numbers. This bias has an even higher statistical impact if using averages as opposed to median.


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## HaroldCrump (Jun 10, 2009)

sags said:


> #1 - The potential for collapse in pension funds is largely a myth.
> ...
> #2 - In the case of public service pensions, the odds of a bankruptcy or pension collapse are exactly 0%.


Agree completely with #2, but disagree with #1.

Regarding #1, It is entirely possible for a pension plan to collapse, just like a bank or an insurance company.
It depends on how the plan is managed, what the funding levels are, what the assumptions are, etc.
Any combinations of factors ranging from a poorly managed pension plan, belonging to an employer is a highly volatile sector, employer voting for contribution holidays for itself, poor investment strategy etc. can lead to a pension collapse.

Regarding #2, that is mainly due to the absolute government guarantees.
The respective level of govt. will bring the entire weight of the tax-payers behind the public sector pension plan long before it can collapse.

Pension plans like Ontario Teachers (OTPP), Health Care (HOOPP) are almost guaranteed not to have a current deficit ever because of guaranteed increases in staffing levels and guaranteed raises for the members.

There is nothing inherently safe in public sector pension plans vs. private sector.
You have read the book _The Third Rail_, right?
That describes 3 govt. pension plans that came pretty close to collapse or at least not being able to meet its promised benefits.


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## RBull (Jan 20, 2013)

joncnca said:


> Thanks everyone for the helpful comments!
> 
> I'm going to make arrangements to buy back the pension for this year's absence due to maternity leave.
> 
> ...



Great decision. 



OptsyEagle said:


> You really cannot plan your retirement on a bunch of "maybes", "what ifs", etc. You have to assume the pension will be there and at the least, whatever you have accumulated as defined benefit, will stay that way and only future benefits will go defined contribution, if that change happens...and it probably will.
> 
> You need to take the cost of the buyback and mathematically compare it to the potential benefit, using "guaranteed" rates of return, not projected stock market returns. In that situation, I know the pension plan will win, especially if the employer is contributing some to the buyout (employers always contribute to pension plans but do not always contribute to buybacks).
> 
> ...


Agree 100%.



My Own Advisor said:


> Most retirees I know, who are financially secure, have some sort of guaranteed income/pension. This is used for basic expenses (food, shelter) and the investment income/portfolio is used for the extras in life (major trips).
> 
> I would suggest obtaining as much guaranteed income/pension as you can in your 30s and 40s so that your 50s and 60s + is a breeze.
> 
> ...


*
Bingo.*


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## realist (Apr 8, 2011)

Jorob199r said:


> Always buy back your pension.
> 
> My spouse and I are both in our 30s in govt jobs. I don't believe our pensions will be anything close to as good as what the plan is guaranteeing now. I'm saving with that in mind. If it's going to be there, it's just going to be a shell of what it used to be.


Agreed. I just don't think the odds of government pensions surviving in their current form for thirty years in an environment where cutting them will win votes is likely.


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## HaroldCrump (Jun 10, 2009)

realist said:


> I just don't think the odds of government pensions surviving in their current form for thirty years in an environment where cutting them will win votes is likely.


Cutting govt. pensions wins no votes, quite the opposite in fact.
Just ask Tim Hudak.


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## Beaver101 (Nov 14, 2011)

HaroldCrump said:


> Cutting govt. pensions wins no votes, quite the opposite in fact.
> Just ask Tim Hudak.


 ...+1


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## lonewolf (Jun 12, 2012)

I wonder if some of the pension funds are in bed with Goldman & Goldman will take the other side of the trade when the time is right.


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## timetofly (Dec 11, 2014)

*payback time*



lonewolf said:


> I wonder if some of the pension funds are in bed with Goldman & Goldman will take the other side of the trade when the time is right.


It's time for the public service pensions to be revisited. Time to get out of the pockets of taxpayers that generate wealth and reduce the number of government workers who just consume. Your overall contributions to the growth of GDP are crippling and only handicap those in private business. You can flame me but facts are facts. I do not care for teachers sense of entitlement.


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## HaroldCrump (Jun 10, 2009)

Payback time indeed...well said:

It begins again:
_*ETFO today announced that its members had voted 95 per cent in favour of strike*_

and:
_*Labour peace with teachers cost $468M*_


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