Benefit Improvements A Sign New Plan Design is Working

July 6, 2022

It has been seven years since significant design changes were made to the STRP to deal with a mounting deficit in Plan funding. Now, with the Plan reaching fully funded status and providing its first conditional upgrade since the changes were made, it’s clear to see that those alterations are beginning to pay off.

The first decade of the new millennium was not kind to pension plans in Canada – the STRP included. The bursting of the tech bubble in 2001 and the financial crisis of 2008 had many pension plans facing funding deficits and re-evaluating whether or not they were going to be able to meet their pension obligations.

Many plans abandoned the defined benefit model, opting instead for defined contribution plans that make no guarantees on future retirement income, and offer less employer risk. Others continued on with defined benefit models, which promise more benefits up front in the hope that they will be able to pay those benefits in the future.

A graph showing the last 21 years of funding.

Since inception, the STRP was designed as a target benefit plan, which mirrors a defined benefit plan but with more flexibility around the promised benefits. Before 2015, the Plan had a final-average-earnings formula and include  guaranteed cost-of-living allowances, two generous benefits that were becoming harder to confidently fund.

However, in 2015 the Plan went through major design changes to manage the growing deficit caused by the recession in 2008. The goal of those changes was to provide more flexibility in managing a riskier future – one where a more volatile investment landscape and longer life expectancies would be making it a lot more challenging for pension plans to fund their pension promises.

“Under the old design, the best tool we had to deal with fluctuations in our funding levels was to look at increasing contributions,” said Troy Milnthorp, Senior Managing Director of Corporate Fund Services, STF. “But with the STRP, government contributions are negotiated at the bargaining table which makes for a lot less flexibility, and it ended up putting pressure on members to contribute more. It wasn’t sustainable.”

The result of the Plan changes was the innovative benefit members now earn on post-2015 teaching service. Rich benefits like the final-average-earnings formula and guaranteed cost-of-living adjustments were traded for lesser core benefits (a career-average-earnings formula with no guaranteed indexing) that are much more affordable in the long-term. But the new design also allowed for conditional increases to be applied to the earned benefits when the Plan is financially healthy. This way, the Plan would determine if it could afford the improvement before providing for it, instead of promising it up front and hoping to pay for it down the road. In the end members get a comparable benefit to what they would have had under the old design, with much less risk of the Plan being underfunded.

“The future will invariably reveal periods of economic difficulty,” said Simon Deschênes, the STRP’s actuary. “However, the Plan as designed is equipped to handle fluctuations because it only improves benefits in consideration of affordability.”

But any innovation faces obstacles before it can be fully realized, and the new STRP design has been no different. While the Plan immediately began moving toward fully funded status following the changes in 2015, it had yet to be able to provide conditional increases to its members until this year. The main reason for that was ill-fitted pension regulations that barred the STRP from providing benefit improvements. The STF began working with the government to change the regulations in 2018, and finally saw them amended in 2021.

“The regulation amendments were key for us,” said Milnthorp. “They’ve really enabled us to manage the Plan the way it was designed to work.”

Now, with all the pieces in place to administer the Plan as it was designed, the future for the STRP is looking much brighter than it was seven years ago. With the deficit eliminated and regulations amended, the Plan was able to offer a conditional upgrade to active members this year. And the door remains open for more should the Plan continue to see positive financial results.

“This really is a different sort of plan that fits perfectly for teachers in Saskatchewan,” said Milnthorp. “It’s exciting to be part of it.”

The Pension and Benefits Board of Directors will be evaluating the viability of further increases this fall.