Your pension is part of your pay
The Alberta Teachers’ Pension Plan is a compulsory plan in that all teachers employed under contract for public, separate and charter school jurisdictions in Alberta must be members of the plan. This is because the plan is a portion of teachers’ compensation, just like the compulsory salary grid, benefit plan or health spending account, and over years, teachers have negotiated with government that this compensation would come in the form of a defined benefit pension plan with contributions shared by both teachers and government.
The Alberta teachers’ defined benefit pension plan is an efficient vehicle for providing teachers with deferred compensation. A teacher with 30 years of service will receive a pension that is approximately half of the teacher’s highest five consecutive years of earnings, and that pension will be increased each year by 70 per cent of the Alberta Consumer Price Index for every year it’s in pay (60 per cent for service prior to September 1992).
However, the contributions made by government and teachers fund only approximately one-quarter of the eventual pension. The other three-quarters of the pension that teachers will be paid when they retire comes from returns on investments.
If teachers took their annual contributions in cash, for example, they would then have to invest those earnings in something that would generate the same amount of income in retirement that a current teacher is paid by the plan. Few people have the time or investment knowledge or are able to take the amount of risk necessary to generate such returns.
Teachers would also not have the value of belonging to a defined benefit pension plan, which takes the risk of saving for retirement off the shoulders of the individual pensioner. These risks include negative investment returns both prior to retiring or in retirement years. Negative returns can reduce pensioners’ standard of living and create a risk of pensioners outliving their retirement savings.
The other value of the pension plan comes from the structure and administration of the plan. The Alberta Teachers’ Retirement Fund (ATRF) is the administrator of the pension plan as well as the trustee and investor of the fund. With the power of more than $10 billion to invest and a time horizon that’s much longer than a teacher’s career, the ATRF can make investments that aren’t available to an individual or a mutual fund. These options include direct investments in real estate assets, including office towers and apartment buildings, and major infrastructure projects, such as toll roads and utilities.
The long-term average investment return required to fund the current benefits and the current contribution level is 6.25 per cent. The ATRF average rate of return for the four years ending Aug. 31, 2014, was 12.1 per cent, while the average rate of return over a 15-year period was 6.6 per cent. This latter period included two significant economic downturns.
When it invests, ATRF incurs much lower fees than an individual would be charged. In the year ending Aug. 31, 2014, investment costs were 34 cents for each $100 invested, or 0.34 per cent. By comparison, most mutual funds have a management fee of 2 to 2.5 per cent.
The value of the ATRF lies also in the cost-effectiveness of the pension plan administration, since the cost of paying the pensions comes from the plan. In 2013/14, the ATRF’s average cost per member of pension plan administration was $87 while the average of a number of larger public sector plans in Canada was $153 per member. ATRF’s cost to pay pensions was likewise lower, at $12 per Alberta Teachers’ Pension Plan pensioner compared to the average of $39 per pensioner.
Together, the low administration and investment costs and the access to a wide variety of investments make the plan a valuable component of teachers’ compensation. ❚