#5 Shared Risk Indexing Explained

 

Shared Risk Indexing

Shared risk, if approved, draws a line in the sand.  Inflation increases are fully granted until the Board decides that the Plan must make changes for the overall health of the Plan.

 

People Asked

Q -  What does that mean?

A - This means that anyone retiring after January 1, 2023 may have the inflation increase of their pension that was earned after January 1, 2023 altered for a year to help bring the pension fund to a healthy position.

 

Q - So, if I retire after January 1, 2023, my pension is no longer indexed for inflation?

A - NO! Incorrect!

  • OMERS pensions will still be fully indexed except for pensions earned AFTER Jan. 1, 2023
  • If you earn pension time after January 1, 2023, only that portion is subject to adjustment
  • The OMERS Board of the day MUST vote 2/3 in favour to make any reduction in the indexing for that particular year (for those years earned after 2022).
  • The reduction of that portion of indexing is assessed on an annual basis.
  • OMERS can also still change contribution rates of active employees and employers to address the health of the plan.

 

Q - So, if I worked 20 years before January 1, 2023 and 10 years after (retiring in 2033) how would it work?

A - Simply, if in 2035, OMERS voted to reduce your indexing from 2% to 1%...

  • Full index on 20 years of earned service     = 2%
  • Partial index on 10 years of earned service = 1%
  • Simple math, (2% x 66.6%) + (1% x 33.3%) = 1.66% Annual Raise for that year

 

Q - What are the different impacts of Shared Risk Indexing between active and retired members?

A - 

  • For members who are currently retired – there will be absolutely no impact…except that their Pension Plan will be more sustainable as a whole!
  • For active members, the service you earn after 2022 may not grow as fast as inflation in a given year. – but only if the SC Board determines when the health of the Plan cannot sustain full inflation increases
  • As the numbers grow the responsibility is shared by more.  This means individually, the need is less and the impact on an individual is less
  • It’s important to remember that your pension will never go down – regardless of when you earn it and your benefits earned before 2023 would increase every year with inflation
  • OMERS recognizes inflation increases are a valued benefit, which it intends to provide.

 

Q - What factors are considered when the SC Board determines the “Health of the Plan”?

A - There are several factors which are considered when determining the Health of the Plan including:

  • Contribution Rates levels
  • Our Funding Status
  • Ratio of active to retired members
  • The status of the economy

Inflation increases would only be reduced when it was required to maintain Plan sustainability, and then, only as contribution rate increases become unaffordable

 

Q - Why not simply increase contribution rates?

A - Active Members are paying a lot (especially NRA 60 groups).

  • OMERS had to increase contributions after the 2008-2009 recession and have kept contributions at those levels since then
  • As the Plan is maturing, there will be a relatively smaller group of active members and their employers from whom to collect contributions.
  • Therefore, the impact of increasing contributions rates to address future shocks will be less helpful than it was in the past (there are less people to pay the costs relative to retirees.)

Q - Do other Defined Benefit Pension Plans have Shared Risk Indexing?

A - YES – other plans including HOOPP (Healthcare of Ontario Pension Plan) and OTPP (Ontario Teachers’ Pension Plan) have similar concepts in place. However, the OMERS proposal is a step above these plans,

  • Those plans have Conditional Indexing which is similar to Shared Risk Indexing with one important difference:
    • With Conditional Indexing, pension plans decide every year how much indexation to grant, if any.
  • Shared Risk Indexing is different because inflation increases would be fully granted for pension payments until the SC Board determines that it should reduce inflation increases