If you want a good preview of what longevity is going to do to all our established models – especially financial ones – here’s a lesson from the Ontario Teachers’ Pension Plan.
First, some background. It’s a massive – and very well-run – pension plan. It has over $107 billion in assets, and posted an impressive 14.3% return in 2010. It owns or has owned some very big and high profile assets, too. For example, a 25% stake in Maple Leaf Foods (now sold), and 66% stake in Maple Leaf Sports and Entertainment, which owns the Toronto Maple Leafs, Toronto Raptors and Toronto FC soccer team (although this asset is apparently on the selling block). In 2010, it increased its commodities assets to $5.2 billion, up from $1.9 billion in 2009.
So we’re not talking about the little leagues here. In fact, it’s the largest single-profession pension plan in Canada, administering the pensions of 295,000 active and retired teachers in Ontario.
And yet it’s facing – in the words of Jim Leech, chief executive of the plan – “systemic funding problems.”
The plan pays out $1.8 billion more each year than it receives from contributions – a gap it projects will increase to $5.3 billion by 2030.
Why the shortfall?
“Our demographics have changed dramatically,” Leech said in an interview that was widely reported in Canadian newspapers.
No kidding. Have a look at these statistics:
- 20 years ago, there were four active teachers per retiree. Today, the ratio is 1.5:1.
- 20 years ago, the average teacher worked 29 years and collected pension benefits for 25 years. Today, the average career is 26 years and retirement benefits are paid out for 30 years.
- Among the retirees are more than 90 people over the age of 10
Yikes. Teachers are collecting retirement benefits for more years than they were working. And as life spans continue to lengthen, that 100+ cohort will only get bigger.
“This is a dynamic that’s hitting every pension plan in the world,” Leech said. Fortunately for Ontario’s teachers, their fund is very strong and Leech and his team have plenty of time to take action. (“We can pay pensions for many, many years even if we didn’t have any other investment returns,” Leech noted, “but we have to think about the 70, 80 year horizon and that’s when you start to say maybe we should do some course corrections today.” )
But what about pension plans that aren’t as strong? (Hint: the entire US Social Security system)
What about benefits that already can’t be paid – right this minute? (Hint: Europe)
And now people are going to live — shudder — even longer?