The Observer


Bringing defined benefit to Ontario’s nonprofit sector

by Dani Goraichy, Vice President, Actuarial Services and Plan Policy, OPTrust

There was a time when defined benefit (DB) pension plans were common in Canada. In 1977, one in three Canadians working in the private sector were members of an employer-sponsored defined benefit pension plan. Now, only one in ten workers have a DB pension. Before becoming the head actuary at OPTrust, one of Canada’s largest defined benefit pension plans, much of my career was spent helping companies wind-up their pension plans as a consulting actuary, so I’ve seen the impact firsthand.

The shift has been gradual, but the trend is clear; fewer and fewer Canadians will have access to the security and stability of a defined benefit pension, and that has left a significant void to fill. For the nearly one million workers in Ontario’s nonprofit sector, the numbers are even more stark. The Ontario Nonprofit Network (ONN), the independent network of the 58,000 nonprofit organizations in Ontario, has been working for years to support Ontario's nonprofits, including exploring pension plan options for the sector.

Through their research, the ONN found that while employers in the nonprofit sector want to provide their employees with retirement security, DB pensions are often out of reach due to their cost, administrative burden, and most importantly, the impact of uncertain contributions on their budgets. This is especially true for smaller employers. It was with this fact in mind that we created OPTrust Select, the new defined benefit pension offering for workers in Ontario’s charitable, nonprofit and broader public sectors. OPTrust Select was designed to address the specific needs of these sectors, providing the security and stability of a defined benefit pension, but at a moderate and stable cost.

Achieving this, however, was no easy task. In order to meet the needs of contribution stability for employers, while providing workers with the lifetime retirement income of a DB pension, a tailored plan design was imperative. 

Focusing on the core benefit
Because of budgetary constraints for employers, and more modest incomes for employees, we knew that the cost of a typical defined benefit plan was too steep and unpredictable for most nonprofits. Our research found that a contribution rate of 3% per side from employers and employees struck the right balance of making a meaningful contribution for retirement, without significantly impacting their monthly cost of living.

With the goal of providing the greatest level of retirement income at a lower contribution level, we focused our attention on the core benefit, removing valuable, but costly, ancillary features like early-retirement benefits and subsidized joint and survivor benefits. Ultimately, we were able to build a plan that produces approximately half of the lifetime benefit of our primary plan design, but at only a third of the cost.

Minimizing contribution rate volatility
One of the primary concerns voiced by the nonprofit sector was the risk of rising contribution rates. In a typical DB arrangement, if a plan is underfunded, the only options are future benefit reductions, or contribution rate increases. For a sector dependent on precarious funding sources, this risk is prohibitive. With OPTrust Select, we added additional levers to minimize volatility of contributions.

Under our primary schedule of benefits, members receive automatic indexation upgrades annually. Under OPTrust Select however, cost of living upgrades both before and after retirement are dependent on the funded status of the plan. This means if we are ever not fully funded, a proportion of cost of living upgrades will be paid depending on the level of funding of the plan. While the intention is to pay the upgrade in full every year, this conditionality leads to a significant reduction in the risk of contribution rate increases for employers and employees alike, addressing one of the greatest concerns we heard from the sector.

Increasing portability of pension
In September 2018, following years of research, the ONN’s Pensions Task Force recommended OPTrust Select as the pension plan of choice for organizations in the nonprofit sector. Their goal in recommending one plan was to maximize pension portability across the sector, and the response has been incredible.

As of writing this, 21 nonprofit organizations from across the province have joined OPTrust Select, resulting in close to 800 new members and a nearly two per cent increase in OPTrust’s total plan membership. We’ve heard interest from hundreds of additional employers, and there are a further 60 organizations currently in our application process. It is our hope that one day, workers in the nonprofit sector will be able to move throughout their careers with the security and stability of a defined benefit pension.

Replicating the model
OPTrust Select didn’t happen overnight. In fact, it’s an idea that was nearly 25 years in the making, but the lessons we’ve learned can be applied elsewhere. By focusing on the needs of our target market and leveraging our existing size and scale, OPTrust Select is able to provide the stability and security of a defined benefit pension, but at a moderate and stable cost. This is a model that can be replicated by others across the country.

A recent study by the Canadian Public Pension Leadership Council found that DB pensions “are not just better for Canadian workers, but for the Canadian economy overall” and they resulted in “lowered job stress, improved worker health and lower use of government funded assistance programs.” We are advocates of the defined benefit pension plans as the most efficient method to achieve financial security at retirement, and we stand ready to help those looking to replicate, and indeed, improve on our model.

Dani_sq_4177.jpgDani Goraichy, Vice President, Actuarial Services and Plan Policy, OPTrust 
Dani Goraichy is the Vice-President of Actuarial Services and Plan Policy at OPTrust, one of Canada’s leading defined benefit pension plans. In this role, he is responsible for the interpretation of the OPSEU Pension Plan text and monitoring regulatory changes.  His responsibilities also include providing actuarial support to the administration and funding decisions of the Plan and supporting asset liability modeling.

About OPTrust
With net assets of almost $20 billion, OPTrust invests and manages one of Canada's largest pension funds and administers the OPSEU Pension Plan, a defined benefit plan with almost 95,000 members and retirees. OPTrust was established to give plan members and the Government of Ontario an equal voice in the administration of the Plan and the investment of its assets through joint trusteeship. OPTrust is governed by a 10-member Board of Trustees, five of whom are appointed by OPSEU and five by the Government of Ontario.