Legislative Assembly of Ontario

TEACHERS' PENSIONS

CONTENTS

Wednesday 8 December 1993

Teachers' pensions

STANDING COMMITTEE ON ADMINISTRATION OF JUSTICE

*Chair / Président: Marchese, Rosario (Fort York ND)

Vice-Chair / Vice-Président: Harrington, Margaret H. (Niagara Falls ND)

Akande, Zanana L. (St Andrew-St Patrick ND)

Chiarelli, Robert (Ottawa West/-Ouest L)

*Curling, Alvin (Scarborough North/-Nord L)

*Duignan, Noel (Halton North/-Nord ND)

Harnick, Charles (Willowdale PC)

*Malkowski, Gary (York East/-Est ND)

*Mills, Gordon (Durham East/-Est ND)

Murphy, Tim (St George-St David L)

Tilson, David (Dufferin-Peel PC)

*Winninger, David (London South/-Sud ND)

*In attendance / présents

Substitutions present/ Membres remplaçants présents:

Cunningham, Dianne (London North/-Nord PC) for Mr Harnick

Martin, Tony (Sault Ste Marie ND) for Ms Harrington

Phillips, Gerry (Scarborough-Agincourt L) for Mr Chiarelli

Also taking part / Autres participants et participantes:

Ministry of Education and Training:

Nielson, Margot, senior manager, teachers' pension plan unit

Robinson, Ron, senior legal counsel, legislative branch

Pitcher, Clare, chief actuary, Management Board of Cabinet

Clerk / Greffière: Bryce, Donna

The committee met at 1607 in room 228.

TEACHERS' PENSIONS

The Chair (Mr Rosario Marchese): I'd like to call this meeting to order. We're here today to consider the matter of issues related to teachers' pensions. We will begin with the presentation from the staff of the Ministry of Education and Training. We have Ms Margot Nielson, senior manager; Ms Joan MacCallum, policy adviser to the teachers' pension plan unit; Mr Ron Robinson, senior legal counsel, legislative branch; and Mr Clare Pitcher, chief actuary, Management Board of Cabinet staff.

Welcome here today. We have half an hour for your presentation. I'm assuming you won't need more time, but more or less a half an hour. Please begin.

Ms Margot Nielson: Thank you. We have handed out the presentation and also some handouts that I'll be referring to during the course of the presentation.

First of all, I thought some of you might appreciate an overview of the teachers' pension plan. Many of you are familiar with it. It's one of the oldest and largest pension plans in Canada. It was established in 1917 and it has been under sole government sponsorship from 1917 until 1992.

One other happening that I'm sure most of you remember was in 1989, when we were in the midst of negotiations which resulted in the merger of the two funds at that time, which were the teachers' superannuation fund and superannuation adjustment fund, into one fund, which was then allowed to be invested in the market. The government at the time created the Ontario Teachers' Pension Plan Board to oversee the investment of the assets and the administration of the benefits.

Another issue is the move to partnership in 1992, which I will deal with in a minute.

Currently, there are 160,000 active members and 41,000 pensioners. There are also 88,000 inactive members. These are teachers who have at one time been members of the plan who have credit or money still left in the plan. So you can see the size of the plans. Almost everyone in the province I think has been a teacher at some point or had known a teacher or had some interest in the plan.

Members pay 8.9% of salary. This is now matched by the government. The board is a 50-50 board with responsibility for the benefits, the assets -- by the way, in 1990, when the assets were given to the pension board and allowed to invest in the market, it was worth about $18 billion. So it's grown substantially in the past three, almost four, years. The board also has responsibility for the actuarial evaluations of the plan and for communications with its members.

We reached partnership on January 1, 1992. That was with the Ontario Teachers' Federation. What joint sponsorship means is that all future gains and losses would be shared on an equal basis and the OTF would have equal say in all aspects of the plan.

The board, which had been a government majority board, then became a 50-50 board and Gerry Bouey, former governor of the Bank of Canada, who was the original chair appointed by the government, was asked to stay on by the OTF and the government to oversee the new joint board.

When we were doing the partnership agreement, we came to the discovery that the Pension Benefits Act does not contemplate partnerships. I know there was some discussion in the House the other day of, I guess, the Conrad Black amendment and some of the issues surrounding that. This is what we found when we were looking at how to set up this plan so that the teachers and the government would be equal partners and would be able to share gains in the future and also to share the liabilities.

This is very unique in that plan members, if there are ever losses in the plan, will not only have to absorb losses through increases in contribution rates but also may be responsible for paying unfunded liabilities. As I say, I must repeat, it is unique. There aren't many plans around that put this type of responsibility on to the actual plan members.

When we were doing the amendments to the act to allow for partnership, we did do a PBA exemption to allow for sharing of gains. One other aspect of the partnership that came into effect in 1992 was that we had a transition phase. This would allow us to move into equal sharing of gains and losses or risk and reward. Certainly the teachers at that point were quite hesitant about accepting this responsibility because it could be very onerous.

I've set out here that what the transition phase did. It said that 100% of the gains, if there were gains, would go to government at a certain date, and then there was a splitting of the gains so that government got a certain share, and then we had what we called the bargainable share. This bargainable share was the residual which was shared equally by the teachers and the government. It could be used to increase benefits, reduce contribution rates, providing there were gains, or to establish reserves; in effect, any other use that the partners could agree on. After 1997 we would move to full 50-50. While we're talking about the sharing of gains, it would also be to pay off losses. Government, during the transition phase, said that it would take a disproportionate share of losses.

Also in the partnership agreement, we did put in a provision that would allow government to use its gains to offset special payments. You cannot have a surplus while you still have a deficit but you can have gains which arise from valuation to valuation, but the Pension Benefits Act says that all gains must be used to pay off any liability that's outstanding.

We have another unique situation here in that we have a very sizeable liability which government has undertaken to pay off itself. The teachers do not share in the initial unfunded liability; it's solely government's responsibility, set out in schedule 2 to the Teachers' Pension Act. During the partnership discussions we agreed to treat that, in effect, as almost an asset of the plan and to stream payments and to treat it separately.

So after we reached the partnership in 1992 it was almost like starting at zero and starting over again, with any gains or losses shared on the basis set out in the old transition phase. That's another sort of important point that I'd like to bring to your attention now because it does have an impact on the next agreement we reached in August.

Then in August this year, turning to the next page, we reached a memorandum of understanding with the teachers. I've given as one of the handouts a copy of the memorandum of understand that we did sign. The key points in the memorandum of understanding were that the partners agreed to ask the pension board to do a valuation as of January 1, 1993. The social contract was in progress and we'd had some other actuarial studies done, and we were pretty certain and the plan's actuary had confirmed that there were gains in the plan.

We did request that the pension board prepare a valuation as of that date and that we set aside $1.2 billion in gains to offset special payments and another $325 million which would be used to reduce the teachers' social contract obligations. This valuation was approved by the pension board because it has the authority for it and filed with the Pension Commission of Ontario on November 1.

We also have a handout from that valuation which was mentioned, I think, in the Legislature on Monday with a request to see the actual schedule of payments. The handout, which is appendix 1, is straight from the actuarial valuation prepared by the board's actuary and does show how the schedule is prepared and does give you the schedule of payments, which you will notice on the last page. The schedule before using the $1.2 billion has the figures, and after using the gains to offset the special payments they're zeroed out.

Another part of the memorandum of understanding was that we eliminated the transition schedule to move to the full 50-50 sharing of gains after the January 1, 1993, valuation. The other issue was that we agreed to amend schedule 2 to change the way the special payments were calculated.

This is a really technical issue. I'm sure Clare can clarify any questions you may have on it, but the original schedule of payments that was set out in 1990 was based on a fixed schedule. You could calculate the payment due in 40 years today, in effect. The pension board originally brought this issue up and thought that it was not a very good way to pay off the unfunded liability; it preferred something that had a bit more flexibility and moved with inflation since the liabilities are all indexed. It was really at their request that we initially looked into changing the way of doing the special payments, and together with Clare and the board actuary we came up with this semivariable method, which is a very technical part of the bill that we've introduced.

The bill itself is, we feel, quite simple. We had a problem of retroactivity -- we've been paying payments. Because we have the schedule of payments in the Teachers' Pension Act and the valuation was done as of January 1, 1993, we didn't have the valuation done and filed until November but we had to continue to make the special payments. Because the actuary, when he did the valuation, followed the partners' wishes and said that we wanted to use the $1.2 billion to offset the special payments, he then zeroed them out, making them not in error but not necessary.

We looked at the Pension Benefits Act and we talked to the pension board and the pension board said, "We would very much like clear authority to repay this money," and we thought that was a reasonable request. We again looked at the Pension Benefits Act and saw again that it's not really appropriate for partnership plans. It's very complex and the timing I think was a big issue too. As the clock ticked and as we went through the whole process to get the repayment, it would almost sort of build on. That's why put in a PBA exemption to section 78.

I also have handed out a photocopy of what's called the Exchange. Exchange is published by the teachers' pension plan board. Exchange goes to all the active members; they also do one for pensioners, but it's their responsibility to inform the plan members and I think they do a very good job of it, whether we like what they say or not sometimes. This particular issue does deal with how the social contract affects the pension.

If you look at the middle pages, it does show what the MOU does, the amount of money that we've requested we put aside for the special payments and for the teachers' social contract obligation, and it does have a chart that shows how the unfunded liability would be offset and how it grows and how it decreases.

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I think there was some concern in the Legislature that perhaps we were trying to put one over on the members. I want to assure you that the members, through the pension board, are always fully informed of what the partners do. The OTF itself also put out Interaction and explained the arrangements that we came to in the memorandum of understanding.

There are a number of issues, turning to page 5. One is the issue that was brought up, a contribution holiday. I think really what we're doing is funding the special payments out of the gains rather than borrowing in the public market or increasing taxes. It's as if we have a credit note at the pension board and we're using up that credit note right now.

With the use of the gains, yes, there are other ways that we could have done it. We could have reduced the amortization or each payment on a pro rata basis. We chose to offset the current special payments as being the best for all concerned, including the taxpayer.

I think there's a question about the size of the unfunded liability. Since we're just offsetting the amounts, there really is no change. The amounts are paid off. As I say, if we'd applied it to reduce the full amount, it would be lower, but the amount does not grow. It's as if we did make the payments.

That's all I have in the presentation. If you have any questions or if you'd like further explanations, Clare and I will be pleased to try our best to answer them.

The Chair: Thank you very much. What we will do now is ask the members to ask questions of you. What I'm going to propose is that we give each caucus up to 15 minutes if they want to ask questions, and we'll rotate in that way. If they don't wish to use the 15 minutes, we'll continue rotating. Mr Phillips, we'll begin with you.

Mr Gerry Phillips (Scarborough-Agincourt): I'm quite interested in this matter. This section 78 that's exempting the government from that provision, if you were to go to the Pension Commission of Ontario and ask it for approval to take -- how much are you taking out of the fund, by the way?

Ms Nielson: It's about $300 million; the payments from January 1 to December 1. It's just a little bit over $300 million.

Mr Phillips: If you were to go and ask them for permission to take the $300 million out, would they be allowed to permit you to do that?

Ms Nielson: We spoke to them about it, because we have the consent of the OTF. We said, "What will we have to do?" and they gave us how many pages?

Mr Ron Robinson: Five or six.

Ms Nielson: Five or six pages of procedures we had to go through. One of the procedures was to notify all members, which is why on the front of the presentation I put the number. About 260,000 people would have to be informed. That wasn't that much of an issue, except we do have the pension board that does inform people. We took the notice provisions.

Mr Phillips: But are they legally allowed to permit you to take money out of a fund that has a $7.5-billion unfunded liability?

Ms Nielson: Yes. We have an exemption to the PBA which says that we can share gains. This is the one that went through on January 1, 1992, and it allows us to share gains. This is not like we're taking surplus out, because you can't have a surplus like you have a deficit. We're not really taking the funds. They've gone in, but they're being offset, so there is no hole in the funding of the plan. There is no deficit in the funding of the plan.

Mr Phillips: There is an unfunded liability of $7.5 billion. There's no surplus in there. My understanding was that you cannot take money out of a fund that has that kind of an unfunded liability. But you're saying the pension commission -- is that the right term? -- has told you you can.

Ms Nielson: The Pension Commission of Ontario.

Mr Phillips: I guess that would be interesting information for us.

Ms Nielson: We have a stream of payments that's set up to fund the unfunded liability, and we have that stream of payments in legislation in schedule 2. We are not not paying those payments, we are just using the gains to offset them. If we use the gains to offset, we would have paid double for the January 1 to December 1 period.

The Chair: Mr Pitcher, do you want to add something?

Mr Clare Pitcher: Yes. I'm just going to say that these gains were established effective January 1, 1993, the effective date of the valuation. The valuation was completed of course in November. So really we're just recovering those payments from January 1 to November 1, because of the practicalities of evaluation. We continued making those payments for that period of time, not before January 1, which was the effective date of the establishment of the gains.

Mr Phillips: I understand all of this, but the pension commission has said that it believes it is permissible, without this amendment, to withdraw the funds.

Mr Robinson: The previous amendment allowed the situation at the time, and that was fine. The necessity for the amendment at this time was based on -- we had the consent of the OTF, we had the consent of the members, and it would be totally impractical for us to have done it any other way.

Mr Phillips: What I think I heard earlier was that the commission told you that legally you could take money out of the fund.

Mr Robinson: They advised us of the procedure for doing that. There were also procedures for reducing the notice procedure and so on and so forth.

Mr Phillips: I would like to see that, if I could. Clare, my worry is that when I look at the communications that have gone out from the teachers, it was their understanding money wouldn't be taken out of the fund.

Mr Robinson: I think Mr Pitcher and Ms Nielson have accurately characterized the type of money that's coming out. Perhaps they could go over that again.

Mr Phillips: Pardon me?

Mr Robinson: Perhaps they could go over the points again as to the types of funds that are coming out. I think that's crucial to the understanding here.

Mr Phillips: I understand you're taking $300 million back out of the fund, but the communications that have gone out, the teachers' understanding was that money will not be removed from the fund.

Mr Pitcher: This was part of the agreement that was made back in the summer with the teachers. I believe you have a copy of that memorandum of understanding.

The Chair: Could you point to that, Mr Pitcher, for Mr Phillips's sake?

Mr Phillips: I have the memorandum of understanding. I'm just saying that's the latest communication I've seen, which indicates the teachers feel that money wasn't going to be withdrawn.

The size of the unfunded liability -- let me just make sure I understand that. My understanding is that on December 31, 1992, the unfunded liability was $8.8 billion, $8.9 billion.

Mr Pitcher: Yes. I really think what you're saying is --

Mr Phillips: That was the unfunded liability that was estimated. In a recalculation done January 1, 1993, it came down by $1.2 billion. So it's $7.6 billion, I assume.

Mr Pitcher: I'm going straight from the actuarial report, which I believe you have, as at January 1, 1993. The liability, which my friends and I prefer to call the present value of the future government obligations -- in any event, this is the term that we seem to be using -- was $8.4 billion, and that's prior to the application of the gains. So compared to your $8.8 billion, I'm saying, as per the actuarial report, it's $8.4 billion. I'm not sure where you got the $8.8 billion.

Mr Phillips: I got it from the public accounts, which I assume comes from you people.

Mr Pitcher: That would probably have been done prior to the actuarial report and was based on an estimate. This is now the actual number as per the independent actuary.

Mr Phillips: Okay.

Mr Pitcher: It's $8.4 billion as at January 1, 1993. With the application of the actuarial gain of $1.2 billion, that drops it down to $7.2 billion. If you want to just look at the handout that Margot gave, which was the bulletin provided by the pension board, and turn to page 5, you'll see towards the bottom of the page there's a graph, just to relate the numbers that I just talked about, because with the graph and the photocopying, sometimes it doesn't come out as clear. The yellow line --

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Mr Phillips: We have it all photocopied, I think.

Mr Pitcher: Do you all have that?

The Chair: Yes, except there's no yellow on it.

Ms Nielson: There was on some of them. I'm sorry, I didn't bring enough copies. Some have a yellow line and some don't.

Mr Pitcher: Okay, let's just talk about the black line for a second.

Mr Phillips: It's all black to me.

Mr Pitcher: Everyone has a black line.

Mr Alvin Curling (Scarborough North): It's all black and white to me.

Mr Pitcher: The left part of the black line, in 1993, where it says "with actuarial gain," that's the $7.2 billion I'm talking about, the one I just quoted, $7.2 billion. Just to talk about that for a second -- actually I think I'll talk about the yellow line. How many people have the yellow line? Do we all have it?

Mr Phillips: I think we have it, but I can't see it.

The Chair: It's more or less the same, the yellow and the black.

Mr Pitcher: Yes. It's actually $1.2 billion. It starts in the left-hand margin at $8.4 billion. That's where the yellow line starts. Sorry about that. You don't have the yellow line, but about three quarters of an inch along, it actually intersects with the black line, and that's at about $9.5 billion of unfunded liability, corresponding to mid-1996. So August 1996. At that point, the yellow line and the black line become identical. They're exactly the same.

First of all, what I want to talk about is the yellow line. That is basically the trajectory of the liability if none of this ever happened. It's a natural consequence of the funding method that was chosen back in 1989 by the current government, using a level percentage of payroll methodology, that this unfunded liability or present value of future remaining payments would increase over time and then eventually decrease.

It's somewhat different than a mortgage, where in a mortgage you're paying off based on a level dollar amount. We all know in mortgages what happens is, at the beginning of the mortgage, you're paying very, very little principal and a lot of interest. This takes that one step further, and instead of as a level dollar amount, you're paying it as a level percentage of payroll.

As I'm saying, a natural consequence of that is that this liability will increase for a period of years. In fact, you can see by the diagram it increases until about 2014, and then starts to decline very, very rapidly until at the end of the amortization period, 2030, it becomes zero. That's what happens if none of this $1.2-billion stuff was going on.

Now we've got a $1.2-billion gain. What we've essentially done then is lowered this liability from $8.4 billion down to $7.2 billion, and then at the end of the three-and-a-half-year period, the value of the unfunded liability is at $9.5 billion, which is identical to what it would have otherwise been. Then it follows the exact same trajectory as was originally contemplated back in 1989 when this method was decided upon.

Mr Phillips: I understand that perfectly. I'm just saying over time, I'm not sure it'll stand up to public scrutiny. This is where the public, I think, go crazy. We have found that the unfunded liability is $1.2 billion less than we thought. So rather than saying: "Great. Let's continue our payments. It's now not $8.4 billion, it's $7.2 billion. Let's keep our payments going," we say: "Great. We are going to take a three-year holiday from this and we're just going to let it run up to $14 billion or $13 billion," and kid ourselves about the expense of running this thing.

It's like borrowing money against the unfunded liability. There's no doubt about that. I will be very interested in the proof that this saves taxpayers' money, because I think the interest on this will be higher than the interest we could borrow money for on the market.

I understand why OTF is in agreement with this, because it's helpful on the social contract side. They are doing their best to try and minimize the impact in the clash from the social contract. I understand that completely. But for me at least, the thought of letting this thing run up -- it's sort of like, we have a little bit of good news, but we'll get ourselves back to as bad as it was before by taking a 42-month holiday.

Mr Pitcher: But it's not running up to any more than it otherwise would have been. As you can see by the lines, they intersect at 1996 and it's exactly identical.

Mr Phillips: It's not right. If we had made payments, if we'd said, "Listen, now instead of $8.4 billion, we have $7.2 billion. Let's reschedule the payments and let's continue to make payments against that unfunded liability," it wouldn't be that. It would be, if nothing had changed and we still had an unfunded liability of $8.4 billion.

Mr Lamoureux, the president of the fund, says he'd prefer a different method. He doesn't think this is the best method. He has the fiduciary responsibility for managing the fund and what not. Why would we not listen to his advice?

Mr Pitcher: We do listen to his advice, but we also have the fiduciary responsibility to the taxpayers of the province, and I think this is where our responsibility to both the taxpayers and to the members of the plan comes in. We have to balance those responsibilities.

Mr Phillips: But I challenge you. I think you'll find that this will cost the taxpayers more money.

Mr Pitcher: I don't believe so. In fact, quite frankly, our belief is that it would be fiscally irresponsible to the taxpayers if we did not do this.

I just wanted to comment also on the gains --

Mr Phillips: Could you show me the evidence of that?

Mr Pitcher: Yes, I will in a second. You were talking about the fact that the gains should be applied right to the unfunded liability, as if these gains were only generated from the unfunded liability. The reality is those gains were generated because we're dealing here with a period of low salaries and low inflation. So just from a commonsense perspective, it seems to make sense to apply those gains to offset expenditures for the exact same period they were generated in.

From a provincial point of view, the same things that cause the province's economy to be less than expected, in the sense of lower salaries and lower inflation mean lower taxes, mean lower revenues, those same factors have a positive impact on a pension plan and are exactly what are creating the gains in the pension plan. All we're doing is relating those gains for that period of time to expenditures for that period of time.

The Chair: Mr Phillips, can we come back? We'll move on and come back if we have time. Ms Cunningham, we have up to 15 minutes now.

Mrs Dianne Cunningham (London North): Just to perhaps follow along with that line of questioning, when you talk about the gains, the $1.2 billion, are those real gains? Are those real dollars or are those dollars that were anticipated to be spent that weren't spent and that's why we now have them? Is this a paper number?

Mr Pitcher: I think what we all have to understand is that in an evaluation of a pension plan, the numbers are all based on estimates. They're based on estimates of the future. What we try to do as actuaries is come up with estimates which are reasonable estimates of what the future may hold. The reality, as of 1993, as compared to 1990 or any year in the recent past, is that the view of the future is much different from what the view was back then, so we reflect that by saying we expect lower salaries, we expect lower inflation; therefore, this is a result. This is just basically an ongoing part of evaluation of a pension plan to be more in line with reality.

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Mrs Cunningham: But I go back to my question. Is this a gain because we didn't pay out as much money in pensions because people chose to stay on for a longer period of time? I don't understand why it would be a gain because of what people paid into the pensions, because they wouldn't have paid in any more; in fact, they probably would have paid in less than what was expected because they didn't make as much money.

Mr Pitcher: It's a gain from several sources.

Mrs Cunningham: Yes.

Mr Pitcher: It's not an easy matter to talk about all these sources, but if I can just briefly.

Mrs Cunningham: Give me four or five of them.

Mr Pitcher: Investment income is a good example, and I think you've seen the report right above the graph, where it shows the rate-of-return performance: 12 1/2% versus an actuarial assumption of 8 1/2%. That will cause a gain to the pension plan.

Mrs Cunningham: Fine.

Mr Pitcher: So excess in investment returns causes a gain. Salaries lower than expected will cause a gain. Inflation lower than expected will cause a gain. Of course, the reverse of that is also true, that investment income less than expected will cause a loss, and salaries and inflation higher than expected will cause a loss. But the reality that we have here and for the foreseeable future is that the investment returns are good and the salaries and the inflation are low.

Mrs Cunningham: But these are real dollars that the fund has realized because of these gains in investment income and not as big payouts because of, for want of a better word, inflation and lower salaries and things like that, right? This is really money for the fund.

I don't understand your answer to Mr Phillips's question. You maybe didn't say this but you inferred that this money isn't all money that would normally be used with regard to just the fund alone.

Ms Nielson: Can I just say something to that? The experienced gains arise from valuation to valuation, and when we negotiated the partnership with the teachers, we anticipated there would be gains, there would be losses, and that the partners could use this. It's real dollars.

Mrs Cunningham: That's right. That's what I wanted to know.

Ms Nielson: Yes, it's real dollars.

Mrs Cunningham: It's real dollars and it relates to this fund.

Ms Nielson: Yes, it does.

Mrs Cunningham: Because of projections or whatever.

Ms Nielson: It's because when we sat down and we did the last valuation in 1990, they thought that, as Clare said, inflation was going to be higher and investment returns weren't going to be as good. So you measure the gains from valuation to valuation. There's no sleight of hand in this; they're real dollars.

Mrs Cunningham: I've got that straight now. So if we had made no changes at all and we didn't have to talk during the social contract, and everything had been according to the last amendment, which showed the time period for payback with the responsibility of the government, and then the other part shared equally between the government and teachers, and we had our valuation as of January 1, 1992, all of that, how much money would we have paid into the fund in the 1992-93 budget year, where the government was responsible for 100%?

Ms Nielson: We have the special payments that are set out in the Teachers' Pension Act.

Mrs Cunningham: That's right.

Ms Nielson: We have to pay those, unless we have the gains to offset them, which we're doing here. We pay the matching contributions. I think our contributions in total are around $1 billion with the matching contributions.

Mrs Cunningham: A billion each.

Ms Nielson: Together. Remember, only government makes the special payments. The teachers don't make those payments.

Mrs Cunningham: That's right.

Ms Nielson: So government's commitment to the pension plan is the special payments and the matching contributions.

Mrs Cunningham: So, the special payment, what would it have been?

Ms Nielson: It's as set out in the schedule. It's about --

Mr Pitcher: Three hundred and fifty annually.

Mrs Cunningham: It's $350 billion annually?

Mr Pitcher: Sorry, million.

Mrs Cunningham: It could have been. Can I go back to this? Now, we do this annually, right?

Ms Nielson: The valuations?

Mrs Cunningham: No, the valuations are only 1992, 1994 and 1997, according to the section that we've just removed, the amendment. Right?

Ms Nielson: Yes, we've changed that now. The partners have altered that.

Mrs Cunningham: That's right, but I'm asking you if they hadn't altered it.

Ms Nielson: Yes.

Mrs Cunningham: We all voted on this, because we thought it was a good thing at the time. It wasn't very long ago either; I remember it well. I was persuaded to vote for it. That's why I'm asking these questions.

Ms Nielson: To be very frank with you, on a working basis with the teachers, the partnership is working really very well.

Mrs Cunningham: But that's not my question.

Ms Nielson: I know.

Mrs Cunningham: I have another job and I'm glad it's working, but it's my responsibility to find out what's different. Obviously, things are better actuarially because you've got more money than what you expected.

Ms Nielson: That doesn't change whether we have the partnership or not.

Mrs Cunningham: Okay. I actually believe that too. You don't have to convince me. You're asking us to change a section of the act. For want of a better word, what do you call it, section 5? How do you refer to the old section 5?

Ms Nielson: Section 5 was the one that we had --

Mrs Cunningham: It's the one that talks about 100%, 60%, 40% government, and then the equal share is zero and then 40%, 60%, 100%.

Ms Nielson: It's a transition formula.

Mrs Cunningham: How do you refer to that?

Ms Nielson: It's part of the transition phase. We had to put that in because the Pension Benefits Act is only set up for employers. It doesn't contemplate that employees are paying back anything. We had to have a section in the act which allowed us to pay more than we would normally do as an employer and for the teachers to pay us back. Actually, that particular section in the act --

Mrs Cunningham: Because that was part of what you negotiated at the time.

Ms Nielson: That's right, and that was the disproportionate sharing of losses. Since we've negotiated and agreed to remove the transition schedule, we are removing that part because we no longer have to take a disproportionate share of the losses.

Mrs Cunningham: You didn't like this? Is it because we don't have losses or we don't anticipate them, or because it was part of the social contract or what?

Ms Nielson: No. This particular section only had to do with the transition phase that we originally negotiated, and without the transition phase, it was just redundant.

Mrs Cunningham: You don't think we need a transition phase, is that right?

Ms Nielson: No. The teachers and the pension board and the government found that the transition didn't work as well as we thought it did when we originally negotiated it.

Mrs Cunningham: That's what I need to know. Why didn't it work?

Ms Nielson: Maybe Clare can answer this too, but any time you did a valuation, when you had one party who got 60% and another party gained 40%, then any change to the actuarial assumptions would impact on it in an unequal way, and it became very problematic to deal with. I'm a little out of my depth in actuarial matters.

Mr Pitcher: Just to add to what Margot said, we didn't just decide because it was administratively difficult to deal with the transition. Of course it was, as Margot said, in terms of different complications, but that was only part of the reasoning.

The $1.2 billion essentially was the value of the transitional formula. If we had waited for the transitional formula to unfold as it would have, then based on our new outlook for the future which I just talked about, lower salaries, lower inflation, it would have created that level of gains for the government.

There's a two-sided coin here. The transitional formula was eliminated, but the other side of the coin was that $1.2 billion in gains for the government.

Mrs Cunningham: I'm obviously out of my depth too, but I'm going to get the answers anyway because I have to explain them when I go home. So what you're saying is that this was a very rich formula for the government, given the times?

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Mr Pitcher: This formula, depending on what the future would hold, for example, if instead of low inflation and low salaries we were now in a period of high inflation and high salaries --

Mrs Cunningham: Yes, but that's not my question. I understand all that. This was a good formula for the government. Am I right? Am I correct?

Mr Pitcher: If there were gains that were greater than losses, yes. If there were losses greater than gains, no. What this reflected is that we are going from 100% sole sponsorship to 50-50.

Mrs Cunningham: That's right.

Mr Pitcher: The transitional formula was to recognize that we don't go there from today to tomorrow; we do it over a period of time.

Now, what I'm saying is, that we then actuarially valued those expected gains. Now that we are in 1993, almost 1994, we have a better idea of what the next three, four, five years are going to hold. There were actuaries from all three parties involved in these discussions, from the OTF, the government and the independent board, determining what is the most realistic outlook for the future and what is the value of those transitional gains that belong exclusively to the government, and that's the $1.2 billion.

Mrs Cunningham: That's right and that's pretty good. So, given that, I have to ask you, why did we, during any negotiations, decide to terminate this transitional phase?

Mr Pitcher: Because if we didn't terminate the transitional phase then we wouldn't have $1.2 billion.

Ms Nielson: It was an agreement between the teachers and the government.

Mrs Cunningham: The second stage which we're getting into now with the 40% -- and you saw my question the other day in the House and perhaps you can answer that with regard to the 40%, where I stated that the government could have used its 40% sole share to pay down the $7.8 billion unfunded liability. This is the question that my colleague was pursuing. I'm just maybe either really thick or I don't understand, during the social contract, why we would have changed this phase-in period and why it would have been an advantage to the government, given what you've just said.

Mr Pitcher: I think what's really important to understand here is that really all we're doing is affecting the timing of the release of these gains. Actuarial methods and assumptions and all this gobbledegook --

Mrs Cunningham: I'm glad you said it, by the way. It looks good coming from you.

Mr Pitcher: -- do not affect the long-term, ultimate cost of a pension, but they certainly can affect the incidence of how an employer and employees contribute to a pension plan.

All we've done here with the transitional form and everything else is: There is $1.2 billion of gains in the plan that three parties basically agreed on, and that came after a somewhat lengthy discussion and no-debate negotiations that it was the right number --

Mrs Cunningham: Was that based on a specific valuation date?

Mr Pitcher: Yes. That's based as at 1/1/93.

Mrs Cunningham: Okay.

Mr Pitcher: That was the best estimate of those numbers and there were different ways of that $1.2 billion flowing out. It could flow out at 1/1/93, it could flow out at 1/1/94, 95, 96, 97 or any combination thereof for a number of reasons. We've talked about some of the reasons from a province's perspective, in terms of not wanting to increase taxes, not wanting to borrow on the open market, not wanting to reduce social programs. These are reasons why it made sense to access those gains today.

Mrs Cunningham: What about the valuation on 1/1/92? What was it then?

Ms Nielson: The 1/1/92 valuation was never officially filed.

Mrs Cunningham: Why?

Ms Nielson: Because we wanted to change the way that the special payments -- it was filed provisionally, going with a variable form of payments, and it showed --

Ms Nielson: It was a $10-million gain.

Mr Pitcher: It was a $10-million gain at 1/1/92.

Mrs Cunningham: I voted for the legislation where the valuation dates were specific, and that's why I'm asking. So your answer then to why the government has decided to terminate the transitional phase-in is because we were then able to access the $1.2 billion and do other things with it?

Mr Pitcher: That's right, if we were to access that more quickly than we otherwise would have been able to.

Mrs Cunningham: Yes, because you would have had to wait while you would have had to break this agreement, period. You would have had to break the phase-in agreement to get the money or you would have had to wait till January 1, 1994.

Mr Pitcher: Yes, part of it in 1994 and then another part of the rest of it in 1997. That's right.

The Chair: Mrs Cunningham, we'll get back to you and rotate to the other members.

Mrs Cunningham: I appreciate these answers to my questions. I actually think I know what's happening.

The Chair: We'll have time to come back again.

Mrs Cunningham: Thank you.

Mr David Winninger (London South): I too really appreciate your appearing before the committee today. We have many teachers in our ridings who had questions about these issues and they're very complex, but you've done a good job of clarifying and simplifying some of the issues. I want to make sure and confirm that I'm correct in some of my assumptions, so I'm just going to run through a couple of scenarios with you.

It's my understanding that under previous governments the unfunded liability continued to increase and pension funds of teachers and municipal employees were used as a source for government borrowing and that the borrowing was frequently at less than market rate. Is that correct?

Mr Pitcher: I think it's fair to say that prior to 1989 the unfunded liability or this liability was increasingly not under control; it was totally out of control in the sense that it was not on a fully funded basis. In 1989 it was established on a so-called fully funded basis where all the liabilities were recognized, and the government decided to fund the current initial unfunded liability of, I believe, $7.8 billion at that time over a 40-year period.

Now, as you'll see in the graph, that was expected to increase but it was increasing on a controlled basis, it was just a natural consequence of the funding method, the level of percentage of payroll rather than level dollar amount, that it would do that for a period of time. That was different than what was happening prior to that time where there was no recognition or at least there was less recognition, shall we say.

Mr Winninger: The graph is quite helpful and demonstrates the plan to pay down the initial unfunded liability. I understand that in 1990 the unfunded liability was estimated, as you said, to be $7.8 billion?

Mr Pitcher: Yes.

Mr Winninger: But the plan performed better than expected over the last three years?

Mr Pitcher: Yes.

Mr Winninger: And instead of a return of 8.5%, according to this communication from the pension board, the return averaged about 12.5% over the last three and a half years. So I gather that out of these good returns was taken $1.5 billion to mitigate the effect of the social contract. Is that correct?

Ms Nielson: Yes. Some of it is being used to mitigate the social contract.

Mr Winninger: So $325 million from the partners' bargainable share --

Ms Nielson: -- yes, is going to reduce the teachers' social contract obligations.

Mr Winninger: The number of days of unpaid leave, for example.

Ms Nielson: Yes, over two years.

Mr Winninger: And the remainder of that $1.5 billion, what does it go towards?

Ms Nielson: It goes to offsetting the special payments, which gives government relief.

Mr Winninger: That the provincial government makes.

Ms Nielson: Yes.

Mr Winninger: To the tune of about $1 billion a year, as you said.

Ms Nielson: Well, no, the special payments themselves are about $350 million a year.

Mr Winninger: And the rest of it is the regular share.

Ms Nielson: The 1.2 will be used over a number of years.

Mr Winninger: I see.

Ms Nielson: It's like having a credit note at the pension board, so it'll be used up, I think, in mid-1996.

Mr Winninger: Earlier you mentioned that the government's contribution each year is about $1 billion total to the teachers' pension fund?

Ms Nielson: Yes.

Mr Winninger: One of the important things for teachers to know is that the money used to reduce the teachers' days of unpaid leave and to offset the government's payments will not affect pensionable benefits.

Ms Nielson: No, not at all.

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Mr Winninger: Okay. This was reached as an agreement between the teachers' federation and the government?

Ms Nielson: Yes, it was.

Mr Winninger: I see. If this is a kind of win-win situation both for the teachers and the government, what is there really to complain about here? It looks like the fund is performing well and that the plan to reduce the deficit will be met on target in the year 2030, according to your graph. It seems like a win-win situation. Is there anything that teachers or the government should have to complain about here? I don't see it.

Ms Nielson: The teachers signed off on it and the government did.

Mr Pitcher: We agreed.

Ms Nielson: We agreed.

Mr Winninger: So the debt gets paid down, the teachers' benefits remain the same, the social contract unpaid days leave is mitigated and the government's able to offset its contributions --

Mr Curling: Let's celebrate.

Mr Winninger: -- and teachers' contributions to the pension plan are based on a full year. In other words, their contributions and our contributions aren't reduced for the unpaid days. They're based on a full year's contribution.

Ms Nielson: You mean in the -- yes.

Mr Pitcher: Both the benefits and the contributions are unchanged.

Mr Winninger: That sounds quite reassuring. Thank you.

The Chair: You asked the right questions.

Mr Tony Martin (Sault Ste Marie): This has been a good session for me as well. I'm not a person who is well versed in these kinds of intricate financial matters or economic planning. I'm not an economist, but I'm trying to put it into words that I can also take back to the people I represent to explain if it should be asked of me.

I did own a small business before I came here and I had an accountant who acted as a financial planner. He set out sort of a business plan three, four five years down the road and we tried to perform to that. It seems to me what we have here is a plan that is performing well, that has some extra money in it at this point and we have some choices to make.

We can either pay down the debt or we can take that money and spend it on some things that we need at the moment to expand the business or take care of some other needs within the business, particularly if you run into a rainy day. It seems to me that given the economy we're in at the moment -- it's pouring -- we would take that money and do some things with it that would try and make things a little bit less difficult as we work through the challenges that we confront. Would that be a fair characterization of what we're doing here?

Mr Pitcher: I think it is. I just want to add one thing to what Mr Martin has just said. I think, as I said earlier, exactly the same factors which have a devastating impact on the province's economy, ie, lower salaries, lower inflation, lower taxes, have a positive impact on a pension plan.

So it would seem, from a commonsense point of view, that you want to line up those expenditure offsets at the same time where you've got your expenditure increases because of the same factors, and that's exactly what we're doing here. Because our revenues are lower for certain reasons, we're reducing our expenditures for those exact same reasons; there is exact matching of those revenues and expenditures.

Mr Martin: Are the people who put together the original plan in 1989 basically the same people who are working on the plan now as we rejig it a bit to meet some of the needs that we have in front of us?

Mr Pitcher: I would say so, to a good extent. I wasn't here in 1989 personally, but --

Ms Nielson: I should say that when we deal with the pension plan and the pension plan board we rely a lot on the staff there. They're an arm's-length board. They were established in 1990 and the actuary was then hired, but the government staff is the same.

Mr Martin: So it would be fair to say then that if they've done the kind of job they did in 1989, which has gotten us to a point now where we have actually more money than we anticipated, the decisions that are made now are probably pretty sound as well.

Mr Pitcher: Without a doubt; I think that's a very fair statement.

Mr Martin: I guess the last question I would ask, in terms of these kinds of plans, is that they tend to be fairly cast in stone, particularly if you have agreements between people and there are probably at least two ways of getting out of them or changing them. One is if a certain period in time clicks where there's a formula put in place that says, "At this point we will revisit then and open," and I guess I'm thinking of a mortgage I have. I wish I could change it now, but I can't, so that I could take advantage of some of the savings that could be made and probably not pay down the mortgage any quicker, but spend it on some other things that I need for my kids and for ourselves as a family.

I guess the only other way you could break into this arrangement or agreement is by bringing all the partners again to the table and saying: "We have a common challenge here. Can we find a way to resolve it, using some of these dollars that are beginning to accrue?" It seems to me at this point that's what we've done. I think it's been said two or three times today that the teachers, the government and the board itself have sat down and agreed that this was a good thing to do.

Mr Pitcher: That's exactly what we've done.

Mr Phillips: This is extremely interesting to me because another view on it can be that much of the actuarial savings are a result of assumptions on teachers' remuneration for the next two years. I think that was one of the big savings. You took 2% savings on teachers' remuneration in 1993-94. You could argue -- being in the opposition you argue this more -- that the government reduced the unfunded liability by creating the savings by taking salaries down, then borrowed $1.5 billion from the fund, rather than borrowing it on the market, to pay for its various programs, and at the end of three years, the teachers' unfunded liability I think will be $1.5 billion higher than it would have been if the government had followed one of the other three options.

You've chosen one option, but the other two options are to reduce each payment on a pro rata basis, or reduce the amortization period. You've chosen the one that runs the unfunded liability up the most.

The risk for the teachers, it seems to me, is that they are essentially loaning the government $1.5 billion, and if the government's having trouble borrowing money on the market, it may be easier to run it up on the unfunded liability. My teacher friends will say to me: "Wait a minute. We created the reduction in the unfunded liability by the social contract, and then we loaned the money to the government."

Maybe I'm wrong and maybe somebody can prove me wrong on that, but that's what I think is happening. One way you can dissuade me of that is to show me the unfunded liability assumptions on the other two things you looked at: Reduce the amortization period and reduce each payment on some form of a pro rata basis.

Mr Pitcher: The unfunded liability at 1993 will be identical, $7.2 billion, regardless of which of the three methods have been used.

Mr Phillips: Yes, of course it is. At the end of the 42-month period, what will the unfunded liability be on those three bases? That's a question I asked in the House yesterday and I thought I might get the answer here today.

Mr Pitcher: In response to your concern about the OTF and about teachers, I can assure you that the OTF was ably represented.

Mr Phillips: Of course.

Mr Pitcher: In the negotiations, they had their own independent actuary, and of course we've got the board actuary, which is operating from an independent point of view. So you've got three actuaries plus three parties working together and working with somewhat different interests in different areas, to come up to a common number. Believe me, that was no easy challenge. However, at the end of the day, I think all parties would agree that it's a fair number to both parties and properly represents the situation as at January 1, 1993.

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Mr Phillips: I have never questioned January 1, 1993. I'm talking about the unfunded liability at the end of the 42-month holiday period, using your three different scenarios.

Mr Pitcher: This diagram we've just shown you is something that has gone out to the teachers before. The teachers are all well aware of what the trajectory is, and as we've talked about --

Mr Phillips: That's not the question I'm asking.

Mr Pitcher: -- does not alter the end date, does not alter the series of liabilities beyond the three and a half years.

Mr Phillips: No, that's not the question I'm asking. The question I'm asking is, you have on your issues: "Use of the gains: There are three ways in which gains can be applied...(1) reduce the amortization period; (2) reduce each payment on a pro rata basis; (3) offset current special payments. We have chosen option 3," presumably after all the analysis. I just want to know, what would be the unfunded liability on the other two, the unfunded liability showing that little bell curve there?

Mr Pitcher: At what point in time?

Mr Phillips: I'd like to see the same bell curve, but if we can't, then certainly at the end of the 42-month period.

Mr Pitcher: At the end of the three and a half years, if we had chosen to reduce the amortization period and continued to make the $350 million or $400 million in special payments either through increased taxes or borrowing, whatever, then the unfunded liability, as far as the teachers' fund would be concerned, would be about $1.2 billion lower; $9.5 billion.

Under the method of reducing each payment on a pro rata basis, I don't know exactly, but it would be between the two, between $9.5 billion and $8.3 billion.

Mr Phillips: Presumably the pro rata basis wouldn't reduce each payment too much, so maybe it's $1 billion. Would you think that would be fair? I assume you've got that somewhere.

Mr Pitcher: Sure.

Mr Phillips: That would be useful to have, that number.

The Chair: Can you provide that, Mr Pitcher? That's what he's asking you.

Mr Pitcher: Yes.

Mr Phillips: That's helpful. That's my point. I understand why the government does this, but for the taxpayers it's borrowing money against the unfunded liability.

You mentioned that the taxpayer benefits from this. The taxpayer benefits in this presumably because you're able to pay a lower interest rate on this money than the province is borrowing money for. Is that how the taxpayer benefits?

Mr Pitcher: That's true, what you just said.

Mr Phillips: What's the comparison?

Mr Pitcher: I think the comparison is that in today's market to borrow on the open market for 30 years is about 8.25% versus the interest rate if the unfunded liability were accruing at 8%. So there's a 0.25% differential. There's 0.25% margin, which is essentially the gain on not borrowing from the market, rather doing what we've done.

Mr Phillips: Excuse me. I didn't hear that answer.

Mr Pitcher: At the end of the period, of course, you still owe the $1.2 billion as well. You've got the differential of the 0.25% on $1.2 billion, which I think is about $3 million a year savings, but then of course at the end of the period you still owe the $1.2 billion.

Mr Phillips: I understand. But in the one case we all see the provincial debt there; in the other case it's kind of nicely hidden, temporarily, but I think less so now.

You mentioned earlier that the teachers would assume part of the responsibility of the unfunded liability. Did you say that?

Ms Nielson: What I said was that in future, other unfunded liabilities, the teachers would assume part of it. The initial unfunded liability is the government's commitment to pay off, but because of the partnership with any future liabilities or solvency deficiencies, the plan members themselves share a responsibility.

Mr Phillips: So the government has 100% responsibility for this.

Ms Nielson: Yes.

Mr Phillips: It wouldn't be surprising, if I were OTF, that I could agree to this too because the province clearly has the financial obligation --

Mr Pitcher: Let's be clear on one thing. This was agreed back in 1989 when the valuation, when this initial setup was made. That's when that decision was made. This is not a recent decision. The government was 100% plan sponsor and owned the unfunded liability at the time. That is not a new development.

Mr Phillips: No, I'm just saying that you said OTF has agreed to this proposal, and I'm saying this proposal deals mainly, I gather, with the treatment of the unfunded liability.

Mrs Cunningham: Could I jump in here, Gerry --

Mr Phillips: Sure.

Mrs Cunningham: -- and you have it back and you can have my time if you want it?

The Chair: Can you allow him to answer that question before you jump in? Did you want to answer that?

Mr Pitcher: You're going to have to refresh me what the question --

The Chair: Well, then, Ms Cunningham, go ahead.

Mrs Cunningham: Your response was that it was the original agreement, 100%, and that's not new. That 100% initial agreement for the government was the 1992, I think, to -- how long was that? Because then it jumped down to 60%.

Ms Nielson: No, our responsibility for the unfunded liability: It's always been 100% government. That's why it's set out in the schedule to be --

Mrs Cunningham: I guess I'm talking about the sharing part.

Ms Nielson: The sharing of the gains?

Mrs Cunningham: That wasn't the question here? The sharing part wasn't the question?

Mr Phillips: No.

Ms Nielson: I don't believe so.

Mr Pitcher: We have to differentiate between the initial unfunded liability, which is $7.8 billion, versus actuarial gains or losses that developed after 1990. It's those gains and losses and how those experienced gains and losses will be shared which is covered in the transitional formula. The $7.8-billion, 100% owned by the government, was a decision made back in 1989-90, and it's separate and apart from any further gains or losses that may develop.

Mr Phillips: Right. The 8% interest payments on the unfunded liability: That's just part of the agreement, is it?

Mr Pitcher: This agreement here?

Mr Phillips: The 8%, that's in a written agreement that that's the annual interest payments on the unfunded liability?

Mr Pitcher: That's the valuation rate at which these liabilities are valued.

Mr Phillips: We can assume you will be paying 8% a year interest on this.

Mr Pitcher: Right. That's what it is calculated at. This is just another actuarial assumption.

Mr Phillips: How is it actually calculated? Is it actually calculated at 8% or is there some formula that kicks in?

Mr Pitcher: It's an estimate of what future interest rates will be in the pension plan over a long period of time.

Mr Phillips: If I could just stay with this for a moment, when you said 8%, I said, "That must be the written agreement at 8%." Is there some formula that's used to calculate the interest payments the government has to make on the unfunded liability?

Mr Pitcher: Certainly, the schedule of payments that I think Margot handed out initially. It's very clear what the schedule of payments is.

Ms Nielson: If I could just interject, the calculation is in schedule 2 of the Teachers' Pension Act. It's how the actual special payments are calculated by the actuary, and that's what we are doing, the amendment to schedule 2.

Mr Phillips: And that's 8% interest.

Mr Pitcher: Right. It's based on 8% interest.

Mr Phillips: The additional $325 million: I understand the gain of the $1.2 billion in the actuarial assumptions. Where does the $325 million come from and how is that actually funded?

Ms Nielson: The actuary, in the valuation, has actually identified gains of I think $1.525 billion, $1.2 billion for the government and $325 million to be used for the teachers. I think there was an understanding certainly that the $325 million -- it's $200 million this fiscal year, $125 million next fiscal year -- would be used to offset or to actually increase the general legislative grants so that the number of days would be reduced.

Mr Phillips: I'm getting confused, I guess. The actuarial assumption differences were not $1.2 billion, they were $1.5 billion?

Ms Nielson: It's $1.525 billion. The valuation that you have reveals gains of, I believe, $1.525 billion.

Mr Phillips: The determination on the split of that between the government's share and I guess the teachers' share, that was part of an --

Ms Nielson: That was part of what we negotiated in the memorandum of understanding in connection with the social contract. You cannot put a 60-40, any split like that, on it. We really started, in some ways, from scratch on that again.

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Mr Phillips: So on the unfunded liability, the numbers you gave me were that the old valuation had it at $8.4 billion and then you said now $7.2 billion?

Mr Pitcher: Right.

Mr Phillips: That's a $1.2-billion difference. Where does the $1.5 billion come from?

Ms Nielson: The $325 million is not reducing the unfunded liability.

Mr Phillips: Where is the $325 million --

Mr Pitcher: It's offsetting the social contract targets, the unpaid days.

Ms Nielson: Instead of taking seven days, we only have to take three.

Mr Phillips: Yes, but isn't going to be $325 million less going to the pension fund?

Ms Nielson: No. In a perfect world, what would have happened is that all this would be on a perspective basis, and what we would do is give an offset of the $200 million that the teachers are going to use that we are going to take to increase the GLG this year. We are in effect going to offset it against other payments that we would make into the plan. So teachers get the credit. We get the credit at the plan; the teachers get the credit on the GLG.

Mr Phillips: Is the credit separate from the unfunded liability?

Ms Nielson: Yes, that $325 million is like a separate credit note at the pension board. It will not be used to reduce the unfunded liability.

Mr Phillips: But the government will make $325 million less payment into the fund than it had planned?

Ms Nielson: In a sense, yes, because it will be offset. It's part of our agreement with the teachers set out in the memorandum of understanding.

Mr Phillips: So there is $325 million less going to the pension fund than you had planned.

Ms Nielson: No. The $325 million -- government owes matching contributions of, say, X dollars.

Mr Phillips: It's $705 million.

Ms Nielson: And there are gains in the plan. We have to give the teachers, under the social contract, credit for this money. Instead of the pension board giving us the money so that we can put it out in the GLG, we're not going to deduct it from amounts we pay in, but the pension fund will get the same amount that it had planned on getting last year or in its estimates.

The Chair: Mr Phillips, we'll continue the rotation and come back to you.

Mr Phillips: Good. This one's interesting.

Ms Nielson: The teachers have wanted some money to reduce their social contract days.

Mr Phillips: Yes, I know.

Mrs Cunningham: If we hadn't changed the plan from the other phase-in, the one we had agreed to before, what would have happened this year, according to the old plan, if we hadn't had the social contract?

Ms Nielson: Nothing.

Mrs Cunningham: Then what would have happened last year?

Ms Nielson: Last year, under the formula we had, we would have filed a 1992 valuation and the government would have had 100% of gains or losses.

Mrs Cunningham: In this case, 100% of gains?

Ms Nielson: Yes.

Mr Pitcher: Which at January 1, 1992, was $10 million.

Mrs Cunningham: So we would have had $10 million and that would have been all of our responsibility. This year, that's 60%. How would we then have applied the $10 million according to the --

Ms Nielson: We would have applied to offset special payments. That's what we have set out in our partners' agreement as the use of any gains arising from the plan.

Mrs Cunningham: How would that $10 million have been applied, though? Wasn't there a formula the second time around in 1992-93, based on 1992, of 60% the government's responsibility and 40% shared equally between the government and teachers? Wasn't that the way it was supposed to work?

Ms Nielson: But that's not until 1994. In 1992, if that valuation had been filed, if we had changed the way the payments were calculated, then as to that $10 million, the actuary automatically would have reduced the amount required for the payment by $10 million. That's the way the money goes back and forth, in effect. It would have just been offset.

Mrs Cunningham: So you're saying that even though there was a gain of $1.5 billion, only $10 million of that would have been used for the transition period?

Ms Nielson: No. Back in January 1, 1992, we didn't have gains of $1.5 billion.

Mrs Cunningham: You had gains, though.

Ms Nielson: Yes, $10 million.

Mrs Cunningham: Let's go forward then; let's not worry about the past. What do you think the valuation would have been in 1994 if we already had a pot of money of $1.2?

Ms Nielson: That would have depended on circumstances. It could be that --

Mrs Cunningham: Well, actuarially, you're telling us that circumstances are pretty good.

Ms Nielson: The actuary was saying that circumstances are pretty good on the salaries, the wages and inflation.

Mrs Cunningham: It could have been, maybe, that the $1.2 billion could have been $2.8 billion.

Ms Nielson: It could have been zero.

Mrs Cunningham: I don't think so, not if you want me to believe what you've got on the chart.

Ms Nielson: No?

Mrs Cunningham: If you're telling me that in fact we've got better than expected interest payments --

Ms Nielson: That's right, and we've had very good returns in the market, but those are things that may not have been so.

Mrs Cunningham: That's right. But we're supposed to believe you about this chart, based on good projections with regard to that fund. You're not going to tell me today that actuarially I'm supposed to think that the $1.2 billion won't be more money.

Ms Nielson: No, I'm not trying to. I'm just trying to point out that I don't think we really have the best estimate of 1994.

Mrs Cunningham: I guess what I'm getting at is if the $10 million could have gone towards the plan a year ago, then $1.2 could have gone this year and maybe another $1.2 next year --

Mr Pitcher: No. The $1.2 represents the value of gains which will be expected over the transitional period. Essentially, what we were doing is speeding up those gains to be able to access them sooner. While we as actuaries don't profess to be God, we do our best to estimate what we think the future will be, and of course we're better at estimating what the future will be over the next five years than the next 50 years.

Given the circumstances we have right now and the projections of various bodies in terms of what inflation is going to look like and what salaries we're going to look at, we've had three actuaries from three different parties represented in this triangle agree that this is the fairest, the most appropriate number to represent the value of those gains.

Mrs Cunningham: If we stop now, if we make this agreement now, those are the best numbers. Did you look at numbers with regard to dates of payments -- is that a vote?

The Chair: Sorry, Mrs Cunningham. Would you like to --

Mrs Cunningham: No problem. We're called to the House for a vote.

Mr Winninger: The Speaker said five minutes.

The Chair: What we'll do is recess. We should recess for 15 minutes, more or less. We'll come back as soon as the vote is over to finish off the questions we have.

The committee recessed from 1730 to 1747.

The Chair: I call this meeting to order again. We'll distribute the time equally. If all three parties are here, we'll have five minutes each. If not, we'll distribute that time as equally as we can. Mr Martin, you were on the list. We'll begin with you.

Mr Martin: I'm at Mr Mills's microphone here, so --

Interjection: Make it brief, Tony.

Mr Gordon Mills (Durham East): I thought we'd asked all the questions there were possible to be asked. I could never think of anything else to ask.

Mr Martin: Gerry's stimulating some thought here with his line of questioning. I guess the one thing I'd like to know is, could the government, given the circumstances, have made a better deal?

Mr Pitcher: No, I don't believe so.

Mr Martin: Is there anything clandestine in any way in what has happened here?

Mr Pitcher: I believe it's totally appropriate, what we did, and with the agreement of three different parties who were involved.

Mr Martin: How long did this whole process take? How much time and energy and effort went into actually making this happen?

Mr Pitcher: This whole thing dates back 12 or 18 months to when we originally started talking about these kinds of things; certainly prior to the social contract.

Mr Martin: So it wasn't something that Floyd Laughren or somebody dreamt up in the bathroom one morning.

Mr Pitcher: Certainly not.

Mr Martin: Okay, thank you. Those are all my questions.

Mr Mills: Can we have the vote before Mrs Cunningham comes back?

Mr Noel Duignan (Halton North): How do we get in on this pension scheme?

Mr Gary Malkowski (York East): The presentation was very helpful. It was very clear. Could you tell me, though, a little bit what would be the worst-possible-case scenario and what would be the best-case scenario coming from this deal?

Mr Pitcher: I'm not sure I understand that question in the sense of --

Mr Malkowski: I'm curious. You thought this was perhaps the best package that you could arrive at, that the government could come up with with you, right? You were just asked that question. So I guess what I'm trying to get at is, what would have been the worst-case scenario, and is this the best-case scenario for you, sort of in your predictions in the next 10 years or so?

Mr Pitcher: I think this is the fairest as far as the two parties are concerned. As I indicated before, actuaries for both parties were involved in the decision, as well as the actuary for the independent board, which essentially operated to moderate, shall we say, the potentially differing views of the two parties.

The $1.2 billion we've talked about is the best estimate of what we feel the gains will be over the transitional period. It may in fact turn out to be more than that, less than that. Of course, we don't know the future until it happens, but this is the best-assumption estimates at this time, as concurred by three parties.

Mr Phillips: I want to continue to pursue this, and maybe longer than we'll have time. The reason is that this is not the only way of doing it. I think there's a better way of doing it that would have been better for the teachers. I understand why the teachers agreed to it, because it was part of the social contract. I don't mean to be overly provocative, but I don't think they had much choice.

I saw where the government delayed a payment to the teachers' pension of $500 million last year, from January 1 to April 1. The auditor is on to that, and I don't personally think that was in the best interests of the teachers, because now you're going to have to delay payments again this year. The auditor's going to say you can't do that. It's going to create a big hassle, an ongoing hassle that's going to be a hassle for the teachers' pension fund.

I believe a more sensible thing to do would have been to prorate lower payments over the schedule. That way, the unfunded liability would not have been $1 billion higher than it is. I understand why the teachers agreed to it, the $325 million, but I don't personally think it's in the best interests of the teachers this way. It's in the best interests of the government.

The manager -- the president, the CEO -- of the pension board supports that. That's the one that has, as I say, the fiduciary responsibility. What we've heard today is that the government doesn't think that was the best idea. Lamoureux believes one thing; the government believes another thing.

What we hear is the government thinks this is in the best interests because it allows them to, in my opinion, put another $1 billion of provincial debt in the unfunded liability. I guarantee -- I shouldn't say guarantee. I would bet a lot of money that the unfunded liability in the teachers' pension will become part of the provincial debt pretty soon, because the province has 100% of the obligation to pay that. You read the Provincial Auditor's report yesterday. He's beginning to increasingly look at that sort of thing. That's why I'm pursuing all of this. Frankly, the bill will pass on Monday, this will become law, but it won't go away.

Whatever time I've got left, I'd like to pursue the $325 million one just so I understand that one a little bit better. I gather from what I've heard it's $200 million less payments this year and $125 million less payments next year.

I understood there was an obligation for the province to pay a percentage of salaries into the fund. Will we still be paying the same percentage of salary or is this percentage of salary minus the $200 million?

Ms Nielson: We still pay the same percentage of salary. What we're doing is that the teachers wanted to have money to reduce their days or to increase the GLG from what it would have been, and somehow we have to get that money. So the way we are going to do it is that we will more or less offset that against the other payments that are going into the plan from the government.

Mr Phillips: But aren't there only two payments? There are special payments and then there's the percentage --

Ms Nielson: The pension contributions.

Mr Phillips: Yes. Isn't that a percentage of salary?

Ms Nielson: Yes, of course -- yes, if you're saying we owe $600 million, and that will be offset.

Mr Phillips: There's a legal obligation to pay that in, but how do you get the agreement to reduce the payment in by $200 million?

Ms Nielson: We have the teachers' agreement. We can do that in the partnership agreement.

Mr Phillips: So the pension fund will get $325 million.

Ms Nielson: The pension fund will not be shortchanged in any way, if that's your question.

Mr Phillips: Why would that be, if you should be paying in a percentage of the salary and you're paying $325 million less?

Ms Nielson: Because it's being made up from the gains. It's again this credit note analogy that is there. If we look at it like you've got a savings account, normally your paycheque gets put into your chequing account and if there's an overdraft, your money just automatically comes in from the other account. So the pension fund is in no way shortchanged on any of this; we just have to have a mechanism to allow the teachers to have the money to reduce their days through the GLG, reduce the number of days they have to take off. We have agreement with the teachers and the pension board to do that.

Mr Phillips: With the pension board?

Ms Nielson: Yes. The pension board is the recipient of the funds.

Mr Phillips: Do I have any more time, Mr Chair?

The Chair: Ms Cunningham has one question and we have approximately four minutes left. So you have time for one more question, if you like.

Mr Phillips: I just want to confirm that we will get the schedule of the unfunded liabilities on the three bases. I know you've done a lot of analysis on it, because in this thing here you mention that you chose option 3 because it was the most advantageous. But if I can see the schedules of the unfunded liabilities on the other two over a period of time, just so I know the difference in the unfunded liability in each of the three scenarios. Not January 1, 1993; I know that number. You don't have to convince me of that.

Mr Pitcher: I assume what you're looking for is the number it would be at mid-1996 under the three methods.

Mr Phillips: Because I suspect you've done a lot of work on it, maybe you could just send me the charts that show, like, the three bell curves. We've got the one bell curve here, I guess getting up to about $13 billion.

Mr Pitcher: We don't have that specific information.

Mr Phillips: How did you determine which was the best option, then?

Mr Pitcher: This is all part of the negotiations, the discussions, that we undertook. We've already talked approximately of what those numbers would be.

The other thing I think you have to realize is that there is no way right today we could say what the present value of the future claims would be at mid-1996, because we don't know what the current circumstances are going to be at that time.

Mr Phillips: I just say that they did it on one set, and you've got the other two that you did your analysis on. I would have thought you'd have the three bell curves that you could say --

Mr Pitcher: Are you looking for a diagram similar to the graph that's on page 5 here? Is that what you're looking for?

Mr Phillips: Yes, that would be great, on the three.

Mr Pitcher: We can do that.

Mr Phillips: Good, and even if you could write the numbers in, because it's tough. We're talking billions here. Great. That's what I need. Thank you.

The other ones were that I understand the pension commission has given an opinion that you could withdraw money from the pension.

Ms Nielson: No. May I clarify that? We spoke to the pension commission and we asked what the process was. The section in the Pension Benefits Act says that an employer who wishes to do this must apply in writing, and we were given the notification procedures. We did not approach them to ask if we could do it or not. We asked them what the procedures were and they said, "These are the procedures that you follow," and we can supply you with the procedures.

The Chair: Do you want that, Mr Phillips?

Mr Phillips: Yes, that would be helpful. All I've heard on why you want the exemption from section 78 is for speed, but as I read section 78, I'm not sure that you would be allowed to withdraw money from here, because it refers to surpluses. I don't think this fund is in surplus.

Mr Robinson: In my discussions with counsel for the PCO, we ran through that issue that you're raising. It was his opinion that section 78 might well apply in these circumstances, but he wasn't prepared to make a detailed legal opinion over the phone. He and I discussed whether or not that would be appropriate and what the exemption procedures were which do exist and which the PCO controls. I discussed it with counsel from treasury. Our collective opinion was that the exemption from section 78 was the appropriate and legally valid way to go.

The Chair: Mrs Cunningham, we're running out of time. Would you like to ask that one question?

Mr Mills: According to my watch, it's 6 of the clock.

Mrs Cunningham: The committee has to stop right at 6: Is that the deal?

The Chair: We will adjourn at 6; that's right. We have run out of time, Ms Cunningham. There is no more time left.

Mrs Cunningham: Well, I wouldn't mind just making a statement then, just for a second. I just wanted to --

The Chair: Do we have unanimous consent to have her --

Mr Mills: All I'm saying, Mr Chairman, is the rule says 6 o'clock, and 6 o'clock it is, and I'm a stickler for time.

Mr Winninger: Dianne, you could talk to them privately.

Mrs Cunningham: Well, I mean, I've never been anywhere where --

The Chair: Ms Cunningham, there is not unanimous consent. We can't.

Mrs Cunningham: Well, thanks, Gord. Merry Christmas to you.

Mr Mills: Same to you.

The Chair: I want to thank the staff from the Ministry of Education and Training, Mr Pitcher from the Management Board, and cabinet staff for having come and provided this briefing to us and answering questions from the members. Thank you very much. This committee is adjourned.

The committee adjourned at 1801.