How your pension is funded

How Your Pension Is Funded

� Account A current funded status = 101.5% (2021)

� Account A is secure and sustainable.

� Provides 50% of your base pension, of which 15% is from your contributions and 35% is from the investment earnings over time.

� Provides 50% of COLA adjustment from Pension Adjustment Account.

� Money in the PAA comes from member contributions and amounts above the actuarial sustainability target for each year’s investments.

� Account B current funded status = 60% (2021)

� Government pays some from Account B and the rest from annual revenues. The amount from revenues will have to increase substantially if the current pattern remains.

� Provides 50% of your base pension.

� Provides 50% of COLA adjustment.

� All money in Account B is from government.

What Does the Future Hold?1

he future for Account A (your monthly contributions and the revenue they generate) looks sustainable and stable. It ended the 2021 fiscal year with a balance of $5.444 billion. Projections for the next 30 years (the average a currently retiring member will draw pension) indicate that it will remain so, subject to some minor contribution level adjustments as the economy changes.

TThe future for Account A (your monthly contributions and the revenue they generate) looks sustainable and stable. It ended the 2021 fiscal year with a balance of $5.444 billion. Projections for the next 30 years (the average a currently retiring member will draw pension) indicate that it will remain so, subject to some minor contribution level adjustments as the economy changes.

Account B ended the 2021 fiscal year with a balance of $2.975 billion. Currently government is matching your annual contributions, but it has not done so throughout the history of the plan. For part of that history, a pay as you go practice has funded the government side along with Account B funds

Account B ended the 2021 fiscal year with a balance of $2.975 billion. Currently government is matching your annual contributions, but it has not done so throughout the history of the plan. For part of that history, a pay-as-you-go practice has funded the government side along with Account B funds.

In 2007 the government of the day made a $1.5 billion backfill payment to Account B with a plan for additional annual funding to bring Account B to fully pre-funded status by 2035. After the interest on the loan for the backfill was calculated, this decision showed a $566 million savings benefit by the end of 2021. Later governments have not followed through on that plan.

If the current practice of matching member contributions without additional funding to Account B persists, government will continue to draw down the balance of Account B until the balance is consumed. This is projected to happen in 2052, when the cost to government of funding TRAF pension payouts will be $270 million of annual cash flow; in 2054, if government chooses the pay-as-you-go road, their annual cash flow to fund TRAF pension payouts will be in the order of $589 million. That represents a very large annual flow that would have huge tax implications.

Certainly, such an annual draw on the treasury is unsustainable. There are some solutions, however, to keeping TRAF fully sustainable. If government were to backfill Account B to match Account A (approximately $1.6 billion) and continue to match the regular member contributions, it would pre-fund the TRAF pension sustainably in a year. The cost of borrowing would need to be considered, but previous experience shows that to be a good investment. This would allow Account B to echo the growth patterns of Account A, in which your contributions (15% of total, or 30% of Account A) funded the investment pool that became the balance (35% of total, or 70% of Account A).

In 2007 the government of the day made a $1.5 billion backfill payment to Account B with a plan for additional annual funding to bring Account B to fully pre funded status by 2035. After the interest on the loan for the backfill was calculated, this decision showed a $566 million savings benefit by the end of 2021. Later governments have not followed through on that plan. If the current practice of matching member contributions without additional funding to Account B persists, government will continue to draw down the balance of Account B until the balance is consumed. This is projected to happen in 2052, when the cost to government of funding TRAF pension payouts will be $270 million of annual cash flow; in 2054, if government chooses the pay as you go road, their annual cash flow to fund TRAF pension payouts will be in the order of $589 million. That represents a very large annual flow that would have huge tax implications.

Another approach government could take is to continue matching the annual member contributions and to add further contributions regularly over time to bring Account B to fully funded status. TRAF notes that this could be done at $98 million per year over the next 40 years. This would be budget-friendly, but at the cost of losing the investment revenue over time that an immediate backfill would provide with an accompanying tax burden. In total, it would probably cost considerably more than the previous strategy.

Certainly, such an annual draw on the treasury is unsustainable. There are some solutions, however, to keeping TRAF fully sustainable If government were to backfill Account B to match

Finally, government could choose the pay-as-you-go option. While this would delay budget hits, it would result in a large annual need for cash flow after 2052. That cash, remember, comes from your taxes.

As we approach an election in the very near future, you may want to ask your local candidates what their plan is to maintain a sustainable pension plan for Manitoba’s teachers.