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OMERS cost to its Member

July 7, 2013

By Gulshan Malhotra

Overview

The purpose of this article is to find out the justification of Ontario Municipal Employees Retirement System (OMERS) benefits with its cost to collect by them.

Pension Plan

A type of retirement plan, usually tax exempt, wherein an employer makes contributions toward a pool of funds set aside for an employee’s future benefit. The pool of funds is then invested on the employee’s behalf, allowing the employee to receive benefits upon retirement.

In many ways, a pension plan is a method in which an employee transfers part of his or her current income stream toward retirement income. There are two main types of pension plans: defined-benefit plans and defined-contribution plans.
In a defined-benefit plan, the employer guarantees that the employee will receive a definite amount of benefit upon retirement, regardless of the performance of the underlying investment pool.
In a defined-contribution plan the employer makes predefined contributions for the employee, but the final amount of benefit received by the employee depends on the investment’s performance. [Source http://www.investopedia.com/terms/p/pensionplan.asp%5D

OMERS

OMERS manage a define pension Plan for Ontario Municipal employees. Each Employee and employer contributes equally to the plan. In lieu OMERS provides 2% of the annual salary (average of five highest annual salaries) of employee as a guarantee pension as a benefits.

Analysis

I am looking for an answer that how OMERS management justify the contribution. Through the following example I can explain my analysis shows the gaps between benefits OMERS provides and contribution an employee makes to the OMERS.
Pooja Malhotra salary is $100,000 per annum. OMERS contribution rates are 2 tires. OMERS contribution rates for the year 2013 are as table 1 shown below.


Table 1: OMERS Contribution Rates for year 2013 (Source: OMERS Website)


Table 2: Analysis on OMERS Cost vs. Benefits

Based on the analysis as per table 2, if OMERS makes a return of 10% which is equivalent to the TSX index average return of 10 years, the contribution should be 4% ($4k) which is contribution is 23% ($23k) for a member whose salary is $100k. So, OMERS contribution is over by $19k each year compare to what it should be.

Conclusion

Based on the current cost to the benefits provided by OMERS, the return is 2.3%, which is close to the inflation. The above analysis is raising the question:

  • Why OMERS members need to penalise for the mismanagement of funds by OMERS?
  • Why the plan is not optional to it member?
  • Why employers are not coming together to raise their voice.
  • How OMERS justify their investment plan?

References

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