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Pension contribution rates going down

January 26, 2016 Sandra Johnston, ATA Teacher Welfare

Teachers’ pension contribution rates will decrease by .78 percentage points starting in September 2016.

As of that date, teachers will pay 12.68 per cent of their salaries into their pension plan, a reduction from 13.46 per cent. The change will amount to a saving of approximately $550 a year or $46 a month for a teacher earning $70,000 annually.

Teachers’ contributions to the Alberta Teachers’ Pension Plan are commonly made up of two different payments. The first payment is to fund the service that plan members are currently earning. The second payment is made to deal with any deficiency in the funding of the plan.

It is fundamental to pension plan design that, as much as possible, members make contributions to fund service earned during their careers and that no debt is transferred to future generations. This is why, in law, pension plans must eliminate any deficiencies within 15 years and why they must conduct actuarial valuations at least every three years.

These contributions to both current service costs and deficiencies are shared by teachers and government.

As of the last valuation on Aug. 31, 2012, the plan had a deficiency of $2.88 billion with a funded ratio of 72 per cent. That deficiency is actually the cumulated total of several smaller deficiencies dating back to 2002. Over the last four years, the plan has experienced very solid investment returns, earning an average of 12 per cent annually.

The deficiency identified in 2002 was due to be completely eliminated by 2017. The strong investment returns allowed the Alberta Teachers’ Retirement Fund Board (ATRF) to retire this deficiency earlier than planned. In addition, a significant portion of the deficiency identified in 2004 has also been eliminated. The remainder of this deficiency amounts to 0.4 per cent of salary shared by teachers and government and will be completely eliminated by Sept. 1, 2019.

As of Aug. 31, 2015, the plan has a deficiency of $2.364 billion and is 82 per cent funded.

The remaining deficiencies will continue to be paid down and are expected to be eliminated by Sept. 1, 2027.

However, teachers cannot assume that these strong investment returns will continue each year. The previous valuation assumed that, on average over the long term, the fund will earn 6.25 per cent annually. ATRF has, given the continued market instability and low long-term interest rates, moved to “de-risk” the fund again in this valuation by adjusting this assumption to 6 per cent. If the plan assumes a lower average long-term rate of return, then contributions must increase while the risk of future deficiencies is decreased. ❚

Sandra Johnston is the co-ordinator of the ATA’s Teacher Welfare program area and is also a member of the Alberta Teachers’ Retirement Fund Board.

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