Briefly Summarize the Situation That William Booth Faces
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Briefly summarize the situation that William Booth faces.
Ontario Teachers Pension Plan is the largest funded pension plan in Canada, which has over $30 billion in assets and 200,000 members. Any investment decisions made by Ontario Teachers Pension Plan could exert a huge influence on a great many people. As a member of the management team of the Ontario Teachers Pension Plan Board, William Booth was reviewing the diversification strategy of the pension plan. The consideration faced by William Booth was whether the investment in equity should be limited at 66 per cent, or whether it should continue to grow to a higher rate. Indeed, a higher allocation to equities would bring an increased return and reduce the cost of funding the plan. However, on the other hand, it would add extra risk into the portfolio, which means a higher volatility in the rate of return. It is notable that even 66 per cent has already exceeded the average Canadian pension plan. William Booth needed to make his option between them.
What type of pension plan is this? How is a defined benefit plan different from a defined contribution plan (read about pension plans in BKM)?
The Ontario Teachers Pension Plan was a defined benefit plan. The essential difference between a defined benefit plan and a defined contribution plan is how benefits are calculated. For the defined benefit plan, benefits are fixed. Usually a formula is used to determine benefits, and the formula is based on the employees salary and tenure of service and age. For the defined contribution plan, the benefits employee received depend on how much has been contributed to the plan and how much earnings the investment can generate. In addition, the other several differences between them are in who makes the investment decisions, who funds the plan, and the benefits amount from the plan are guaranteed or not. With defined benefit plans, the benefit amount is guaranteed; mostly the plan is funded by sponsors, and the investment decisions are making by the plan sponsors. With defined contribution plan, the benefit amount is not guaranteed; the plan is funded by the employee, the employer, or both and generally the investment decisions are made by the employee.
The key stakeholders seem to be the older teachers who are either retired or close to retirement, the younger teachers who still have many years left until they retire, and the taxpayers of Ontario. What are the primary concerns of each of these groups?
The primary concern for older teachers is that how much they can earn after retirement. As a result, they seem to focus more on higher annual earnings before retirement (which is used to calculate their pensions) and a guarantee of payment after retirement.
The younger teachers have more concerns on their contribution