CANADA - Ontario Teachers' Pension Plan (OTPP) CEO Claude Lamoureux has defended his plan's discount rate, which is widely believed by the industry to be extremely low.
OTPP has seen its unfunded liabilities soar from C$19bn to $32bn in one year - despite enjoying double digit returns for two years.
According to Lamoureux, the plan uses a formula to calculate the discount rate based on the real return bond plus 1%. On a nominal basis, the rate would be 5.1%, he added, based on a 2.5% valuation rate and 2.6% inflation.
Watson Wyatt Canada pension innovation director Ian Markham (pictured) said: “OTPP measure deficit using a very low discount rate. The deficit would be a lot smaller if they allowed for an equity risk premium. Everyone is banking on equity risk premium, but [Lamoureux] has gone the other way.
“If you, as a teacher in Ontario, learned that by raising the discount rate - like 99% of other plans do - your contribution would not go up as much, would you not say let’s do that?”
He added: “It all comes down to funding policy - just about everybody says they want to take advanced recognition of equity risk premium. I think OTPP is either leading edge, or just out there where nobody will follow.”
Lamoureux rejected suggestions that changing the discount rate would help the plan and said: “The cost of a pension plan will be what it is. Changing the discount rate by itself does not change the situation at all. If you change assumptions it looks better, but it’s just a facade.”
OMERS CFO Paul Renaud said his fund used a real discount rate of 4.25%, but a 25 basis point reduction to four would result in a $1.6bn increase in liabilities. “It’s that sensitive,” he added.
Renaud said OMERS’ discount rate was approved by its actuary and added: “The OTPP use a very low discount rate. It’s always a debate what the right one is, and I don’t know the reasoning behind theirs.”
Lamoureux explained most actuaries had traditionally looked at history to come up with discount rate, but he stressed plans needed to be consistent between assets and liabilities.
“Personally I think ours is a much better way to do it than looking at history,” he said. “US equity market returns 6 - 7%, so it would be hard to justify today using the 11 - 12% discount rate history would [suggest] when you look at stocks.”
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