The Canadian Press

The Ontario Teachers’ Pension Plan didn’t earn enough last year from its investments to overcome a funding shortfall that ballooned to $17.1 billion at the end of last year.

While 2009 was one of the fund’s best-ever investment years, with a 13% annual rate of return on investments, the plan’s deficit was almost seven times higher than the $2.5-billion shortfall booked at the end of fiscal 2008.

“We continue to face serious funding challenges,” said Teachers president and CEO Jim Leech.

“We’re working on looking at what are the possible changes that would need to be made as we go forward to ensure this plan is financially stable for the long-term.”

“I hasten to add that there’s no immediate problem here. We still have close to $100 billion in assets and we can pay pensions for a long time.”

In fact, the pension fund’s asset grew to $96.4 billion at the end of last year. In 2008, the OTPP saw the value of its investment portfolio fall by 18% during what was a dismal year for investing.

The deficit reflects the shortfall between the value of the fund’s assets and future liabilities. If the deficit persists, the Ontario government and teachers unions would have to either cut benefits levels or increase contributions from current teachers and-or employers.

Leech said there will not be any contribution increases at least until January 2012 when it is required to file a balanced report to regulators. The fund has set up a working group to determine how to address the funding gap.

The group consists of representatives from the fund, the Ontario government, the Ontario Teachers’ Federation and the four unions that contribute to the fund.

“They’re looking at minor course corrections we could make now that would have a large impact over the long-term,”he said.

“Any pension credit that have been earned to date are guaranteed…any teacher who has a number of years of credit, those years of credit toward benefits cannot be changed.”

But he added it would be imprudent to believe strong investment results alone can close the funding gap _ a warning that has been issued for several years by the fund’s senior management.

Leech said the strong investment returns in 2009 _ a year when the stock market dove in the early months and then made a remarkable recovery from early March onward _ were not enough to make up for the effects of record-low interest rates, demographic shifts and payments for stock market losses.

The fund is particularly sensitive to real interest rates, which continue to be historically low, because projections of liabilities over the next 70 years are calculated at present rates, he said.

The Bank of Canada’s real rate bonds dropped from 2.1% at the end of 2008 to 1.5% at end of last year, resulting in a cost to the fund equal to a $15 billion increase in liabilities.

While future interest rates could change the deficit projection, other factors will continue to have a major impact in the coming years.

One is a demographic shift, in which the population of teachers is aging and retiring. That means fewer teachers are paying into the fund, while more retirees are drawing money out.

The ratio of active teachers to retirees was 1.5-to-one last year, down from the 1.6-to-one ratio that has prevailed in recent years.

About $4.4 billion was paid out to pensioners in 2009, while only $2.7 billion was paid in. Pensioners received an average of $42,900 last year.

The fund booked $10.9 billion in investment earnings last year. Leech cautioned that much of the market rebound last year was the result of a return of confidence in the financial markets, adding he believed it will take some time until true economic growth takes hold. “We should not expect this kind of market growth going forward,”he said.

“In 2008 and continuing into the first quarter of 2009 we saw a crisis of confidence among investors. It caused market mayhem,”Leech said.

“After the markets bottomed out in March 2009, confidence edged back up and with that came a return to more reasonable valuations.”

The fund invests the pension fund’s assets and administers the pensions of 289,000 active and retired teachers in Ontario and is the largest single-profession pension plan in Canada.

Returns at pension funds were up across the board last year.