Pension Wars: Teachers vs Healthcare

Ask anyone in Ontario. What is the best pension plan out there? The answer I’ve most often come across is the Teachers’ pension! Not only is it widely touted (perhaps not by Teachers themselves) that they are paid well, but that they also seem to have the best pension plan in existence.

If you ask the same question of healthcare workers, they may also name the Teachers. But healthcare in much of the province has their own solid pension which many also rave about.

Do Ontario Teachers really have the best pension? Or do healthcare workers have the best? And what exactly does it mean to have “the best” pension? Are there better ones out there? And can we figure out all of this without the topic ending up dryer than sand-paper in the desert? And will we run into any cactuses along the way? And will I ever stop making really terrible desert jokes? Let’s find out!

Welcome to Pension Wars!

A Pension In Review

Pensions are a key part to Canadian society. So key in fact, that the Canada Pension Plan (CPP) was created as a social support to provide financial assistance and stabilization to Canadians to help guide them through their golden years, aka retirement. The CPP was created in 1966 and is a staple to the retired workforce. Most employees are required to partake in it (with some exceptions). It does not necessarily provide a lot of income for retirement, because it’s meant more as a social safety net in an effort to reduce poverty. You can read more about the history of the CPP here.

The idea behind how pensions are supposed to work is that the people who are currently in the workforce contribute a portion of their earnings toward the pension fund, which invests said money to maintain and even increase the value of the fund. The people who are currently retired receive a portion of the investment returns and possibly even some of the investment principal until they die. New, young, workers join the workforce as older workers retire, and the cycle continues.

There are supposed to be more contributors than there are takers for pensions to work, because otherwise you would run out of money. There has been some concern in recent years regarding the sustainability of the CPP and other pensions due to the influx of large amounts of baby boomers transitioning into their retirement years, and general market and geopolitical instability, as well as life expectancy increasing.

Of course, if a pension fund begins to lose value consistently, then some changes may have to be made, such as increasing the amount that workers are contributing, decreasing the benefits that retirees are receiving, or even changing how soon one can retire and take a pension.

When the topic of pensions comes up, the term “full pension” is often referred to. “Full” is somewhat of a misnomer, as the official term is actually “unreduced”. Even “unreduced” is also oddly arbitrary in its own way, because if you retire before you meet the requirements for the “unreduced” pension, you’ll receive a pension penalty. However, if you delay retirement past those requirements, you will actually receive a pension boost. The standard age that an unreduced CPP pension can be taken is 65, but you can take it as early as age 60, albeit at a reduced amount.

Those of society who are more fortunate may have private pension plans to enjoy as an additional income cushion for retirement. These plans often will allow one to start receiving pensions at even younger ages, such as 55.

But for now, we’ll be focusing on the two main pensions for Education and Health Care. The names of these two heavy weights are the Ontario Teachers’ Pension Plan (OTPP) and the Healthcare of Ontario Pension Plan (HOOPP). Both of them are classified as defined benefit pensions, which means that the employee contributes a percentage of their income each pay, resulting in a set retirement pension amount. Defined Benefits are generally considered more favorably and valued than Defined Contribution plans due to the predictability and stability of retirement income.

Ontario Teachers’ Pension Plan (OTPP)

The OTPP in its current form was established in 1990. It has approximately 330,000 members, with over 200 billion dollars in assets.

One of the great things about this plan is that it has an employer matching feature at a ratio of 1 for 1. Thus every dollar an employee contributes to their plan is matched by an equivalent dollar from the employer.

The total contributions made to the plan throughout a teacher’s working career are input into a pension formula that also combines how many years you worked and your best average consecutive five years salary.

To determine WHEN you can retire with an unreduced (aka full) pension, OTPP uses what’s called a “qualifying factor” or the “85 factor”. This combines your age plus years you’ve worked to determine your eligibility on how soon you can retire. You need to reach 85 in some form or fashion to receive your full pension.

Here are some examples:

1) Let’s say you began your teaching career at age 35, and remained full time throughout. By age 60, you would have accumulated 25 years of pension service contributions. At this point, your age (60) plus years of service (25) equal 85; you can now take an unreduced pension.

2) You start your teaching career at age 25, fulltime. By age 55, you would have 30 years of pension service. At this point, your age (55) plus years of service (30) equal 85; you can now take an unreduced pension.

The earliest that OTPP will let a teacher retire is age 50, but this will be at a reduced pension amount.

(Un)Realistic Expectations

To become a teacher in Ontario, you need at least a 3-year post-secondary degree, plus two years of teacher’s college. So, if your average high-schooler graduated at 18, and then immediately completed all these requirements in a perfect world, they wouldn’t start teaching till age ~23-24. The earliest possible age for an unreduced pension would 53/54.

The Bridge Benefit

OTPP also provides a bridge benefit on top of your pension. A bridge benefit is an extra payment that is meant to supplement your pension income until you start receiving CPP at the traditional age of 65. The bridge benefit ceases at this point and the CPP takes over, but your overall income from your pension and CPP should stay relatively the same. Fortunately, taking the CPP early will not affect the bridge benefit. Unfortunately not all pensions have this benefit. Also of note, OTPP’s bridge is actually baked into their pension calculations, where as other pension providers may include it as a separate calculation.

OTPP Contributions:

So how much do you actually contribute to the OTPP pension? It’s based on the Year’s Maximum Pensionable Earnings (YMPE), which is the maximum yearly salary than can be considered towards your CPP for contribution purposes. The amount is set out each year by the federal government. The current 2021 YMPE is $61,600 and is indexed to the average earnings growth in Canada.

The OTPP requires teachers to contribute 10.4% of their annual salary up to the YMPE limit, plus 12.0% of any salary you make above the YMPE.

Here’s an example from the OTPP website on what this looks like:

A teacher earning $78,000 will pay $8,374.40 for 2021 pension contributions.

A teacher earning $65,000 will pay $6,814.40 for 2021 pension contributions. Because of the lower salary than the previous example, almost all of the contributions will be made at the lower 10.4% rate.

OTPP also lists what examples of contribution rates are at different salary increments for employee contributions.

The above chart can be broken down further. In 2021, for every $10,000 of income, $1,040 are contributed in annual pension contributions upto the YMPE. Every $10,000 of income made above the YMPE results in $1,200 of annual contributions.

The OTPP Calculation

As mentioned previously, the bridge benefit is baked into OTPP’s pension calculation, and we’ll look deeper into this later on. But for now, OTPP’s annual pension calculation is as follows:

2% x years credit x average best-five years’ salary

So for example, if your average best-five years’ salary if $85,000 and you have 30 years of service (credit), your basic pension would be:

2% x 30 x $85,000 = $51,000

A traditional unreduced pension is made up of 30 credit years. This results in a pension value worth 60% of your best five year average salary. ($85,000 x 60% = $51,000)

Penalties

If teachers retire earlier than 55 or if they haven’t reached the 85 factor yet, this will result in the following penalties to their pension:

-Minus 2.5% for each point you’re away from your 85 factor; or

-Minus 5% for each year you’re under age 65, whichever is less:

Example:

Let’s assume you want to start your pension immediately after retiring at age 52, with 27 years of credit.

52 +	27 =	79
Age	Qualifying Years	Your Qualifying Factor

Since you are six points shy of your 85 factor (85 – 79 = 6), your pension is then reduced by 15% (2.5% x 6).

$51,000 –	15% =	$43,350
Basic Annual Pension	% Reduction for 6 points short of 85 factor	Reduced Basic Pension

Some other good stuff that OTPP has is annual cost-of-living adjustments and disability benefits.

OTPP Death Benefits

I won’t be digging too much into these survivor benefits because I want to focus on the main pension side of things. The one where you’re still alive to receive it.

However, in the case that you don’t make it to that point, here’s a quick run down.

If you die while receiving an OTPP pension, your spouse receives a default amount of 60% of your pension until they die. The amount can be adjusted upto 75% or down to 50% but at the cost of permanently affecting your pension amount that you receive (about 1% to 2.6% depending on which option you choose). You can also opt to have a 10-year 100% pension guarantee (at additional cost), where if you pass away before the first 10 years of your pension have been paid to you, your spouse will receive 100% of your pension amount on the remainder of the 10 year balance. Then it defaults back to the 60% amount.

In the unfortunate event that you kick the bucket before you even retire, then your spouse will receive a “pre-retirement survivor benefit”. Your spouse is eligible for a survivor pension (immediate or deferred) or a lump sum payment, based on the commuted value of your pension.

Healthcare of Ontario Pension

Healthcare Of Ontario Pension Plan (HOOPP) was established in 1960 by the Ontario Hospital Association (OHA), to assist with retirement support for its members. Anyone who works for a Hospital that is part of the OHA is able to be part of HOOPP (anyone from nurses, to housekeeping and maintenance, to allied health professionals, etc.) It is one of the largest pension plans in Ontario with over 400,000 current members and over 100 billion in assets.

Unlike the OTPP where you can retire as early as age 50, HOOPP’s earliest possible retirement age is age 55. However, you can retire at 55 with a full/unreduced pension if you have completed 30 years of eligible service by then. Otherwise, 60 is the normal age for an unreduced pension.

As with OTPP, HOOPP provides employer matching contributions. But instead of $1 for $1, HOOPP mandates employers contribute $1.26 for every $1 contributed by employees.

HOOPP Contribution Rates:

HOOPP’s current contribution rates are also based on the 2021 YMPE ($61,600), but at different (lower) percentages than OTPP:

6.9% of earnings up to YMPE

9.2% of earnings above YMPE

So for every 10,000 you earn (upto YMPE), you contribute $690

AND for every $10,000 you earn above YMPE you contribute $920

These contribution rates are notably lower than OTPP’s 10.4% ($1,040) and 12% ($1,200)

How HOOPP’s Pension Is Calculated:

HOOPP has a slightly different formula than OTPP.

Although HOOPP also uses your best 5-year average salary like OTPP, instead of multiplying by 2% across the board, your average salary is split between amounts below YMPE and amounts above YMPE. So for each year of contributory service, the employee receives 1.5% of avg annual earnings upto the YMPE, plus 2% of average annual earnings above YMPE. The HOOPP rate is lower on earnings below YMPE to reflect that you’ll also receive bridge benefits on these earnings which we’ll look at shortly.

The HOOPP formula looks like this:

[1.5% x under YMPE + 2% x above YMPE] x Years of Service = Annual Pension

*So, unlike OTPP, where all of the calculation is based around 2%, and thus a 30 year work career would result in 60% equivalent of your work salary, HOOPP is more inline around 45% to ~50% of your salary.

Ie: If your best 5 year average is $85,000, then

{[1.5% x amounts under YMPE ($61,600)] + [2% x amounts above YMPE ($23,400)]} x 30 years service =

{ 924 + 468 } x 30 = $41,760

Pension Percentage of Work Salary: $41,760 / $85,000 = 49%

HOOPP Death Benefits:

HOOPP currently provides a spousal benefit of 66 and 2/3% (excluding bridge benefit) if you pass away during retirement.

When a HOOPP member retires, they can opt to increase this benefit to 80% or 100% at a cost of a permanent pension reduction to the member (about 0.6% to 1.8%).

If you have retired, but then pass away within 5 years of your retirement date, the survivor benefit will provide 100% of your pension to your spouse for the remainder of the 5 years, at which point it reverts back to the 66 + 2/3%, or 80% or 100% depending on your choice made at retirement.

HOOPP also has a similar pre-retirement survivor benefit like OTPP, where the benefit is a lump sum of commuted value or a monthly lifetime pension.

Bridge benefit

HOOPP’s Bridge Benefit is equivalent to 0.5% of your average earnings up to the YMPE. This means that you receive an overall increase in the percentage of average annual earnings up to the YMPE, from 1.5% to 2% for each year of service. This brings the overall pension formula in line with OTPP’s of 2% x years worked x avg salary; equivalent to 60% of pre-retirement income.

Retiree Health And Dental Plans

These extra benefits are beyond the scope of this article. Even though retiree benefits may be associated with pension plans, they are not technically a benefit under the pension plan, and not maintained by them, nor funded by them. These benefits are typically organized through the employer and the related union who purchase wholesale insurance together. The result is that these health and dental plans will vary significantly, thus it is difficult to provide a direct value comparison between them. The premiums are paid by the employee, the employer, or shared by both.

Disability Pensions and Pension Deferrals

Both of these are also beyond the scope of this article for direct comparison purposes. The majority of pensioners will not be on disability pensions. Deferring is also in a similar boat.

Summary Comparisons

The below chart is a summary of the general similarities and differences of the OTPP and HOOPP pensions.

A Future Case Study In The Present:

So, to really dig deep into which one is the overall better plan, we’re going to conduct an experiment.

It’s going to be a bit tricky because there are quite a few factors involved, but we’ll do our best to nail it down as much as possible.

We’ll compare two specific groups. The first group will represent the Teacher’s Pension (OTPP). Ontario secondary school teachers belong to a union called the Ontario Secondary School Teachers’ Federation (OSSTF). Ontario is divided into various districts which each have their own respective boards and thus own specific collective agreements. Wage grids are generally the same among the different districts. We’re going to specifically use the Toronto District School Board (TDSB) because it is the largest one by far.

Teachers are also divided into 4 sub-groups (see page 14) with different pay scales. Group 1 has the least qualifications/training/education, etc, thus the lowest wages, whereas Group 4 has the most training, and therefore the highest wages. We’ll be using the Group 3 teachers as they are the most common type. In general*, they require an undergraduate degree and good marks. See their wage grid here, on page “Part B-17”.

The second group will represent the Healthcare Pension (HOOPP). We will be specifically using Registered Nurses (RNs), as they make up the majority of HOOPP members. Nurses do have multiple categories based on education and training, but Registered Nurses are again the most common type. The majority of RNs are also part of the Ontario Nurses Association (union). Also, most work in hospitals, so we’ll be using the hospital provincial wage grid. RN’s require a 4 year undergraduate degree. I would say that RN’s are the equivalent of Group 3 teachers when it comes down to length of training and comparable wages.

So now that we’ve got that sorted, we are going to imagine that an RN and a Group 3 Teacher are starting their careers at the same time (now/2021) and working for the next 30 years. At this point they will retire with their full pensions, and we’ll see which one comes out on top. Of course, unless we’ve got Doc Brown and a Delorian with us, we won’t be able to truly predict the future. Be that as it may, the best we can do with this experiment is to isolate as many variables as possible to attain as accurate a result as possible.

Some variables we’ll try to account for are as follows:

• Both Teachers and RNs will be based on their current (2021) provincial wage grids, starting at the bottom and progressing to the top (via the ONA Grid and Secondary School Teaching Grid for Group 3).
• wage grid increases will be frozen (as we can’t predict what future wages increases may or may not occur)
• YMPE will be frozen as well for the same reasons
• Inflation and pension indexing will be frozen (thus wages will keep up with inflation)
• Employer pension matching will be frozen at current rates
• Pension contribution rates will be frozen at current rates
• The “best 5 years” will be the top pay scale for each profession and will be used for pension calculations

In the following chart, I’ve laid out how much each group would earn each year, and how much they would contribute to their pensions per year based on their respective YMPE rates. After that, I’ve tallied the total earned throughout their 30 year careers, as well as sums like total pension contributions. Then we get into pension calculations and the resulting totals of how much each group earns from their pensions over a 30 year retirement timeline.

(*In the ONA grid, “Start” is the very beginning of the first year of work. Then “1 year” is the beginning of their 2^nd working year, etc. The Teachers’ grid is similar whereas year “0” is the beginning of their first year of work, and year “1” is the start of the second year, etc.)

Based on our hypothetical example of future estimated pension totals, it appears that the OTPP is ever so slightly better than HOOPP for total pension income. OTPP provides an extra ~$17,000 over the first 10 years, and $71,200 over a 30 year period).

Now, I know that we’re not exactly comparing apples to apples here. But if we were, and we had teachers and nurses making the exact same salary over 30 years, then we could take the main salary part out of the equation and just focus on the pension calculations.

By doing this, both the pensions would be exactly the same for the first 10 years of retirement. But after that, HOOPP would then make about $1000 less per year than OTPP due to HOOPP having a larger initial bridge benefit (0.5%) compared to OTPP (0.45%). In this more comparative sense, OTPP still appears to have won, if slightly.

But going back to our hypothetical experiment, since we ARE comparing the total higher wages of teachers (and thus higher pension) versus the lower nurses’ wage and lower pension, this should put OTPP and an even greater lead.

HOWEVER….

And this part’s important… Due to higher YMPE contribution rates, the OTPP employee contributed ~$93,000 more over their 30 year career than the HOOPP employee did. Even discounting any investing returns (opportunity loss) of the $93,000, that’s still a SIGNIFICANT amount of savings over OTPP. Essentially HOOPP “saved” that employee an average of ~$3,000/year during their 30yr work career). The OTPP employee still hadn’t made up that difference in pension wages even 30 years into retirement. And if that average $3,000 per year savings had been invested and had obtained a measly 5% return, it would be worth north of $220,000 by retirement.

Who Won The War?

In the matter of Pension Wars, based on this hypothetical scenario, I would actually give the win to HOOPP. And I’d even go so far as to say by a wide margin. Of course, we can’t predict the future. There could be major changes to either pension in the future that could flip the tables. And if you die prematurely, well, then all this won’t really matter to you, will it.

So what’s it all mean? Well, if we are looking at OTPP and HOOPP as income provisions for a 30 year retirement, then they’re both indeed solid pensions. Both provide early retirement options. Both provide somewhat similar pre and post retirement survivor/death benefits, though these can be difficult to compare because they depend on factors like which options you choose at retirement and when you or your spouse dies, which is also difficult ot predict. Both have bridge benefits until age 65, and both provide a fully unreduced pension (with the Bridge) worth ~60% of your pre-retirement income. Once the bridge benefit drops off, the HOOPP and OTPP values drop to approximately 50% and 51.5% respectively. But the OTPP is still a more “expensive” plan for the value you get out of it compared to HOOPP.

I find this especially interesting if you recall that HOOPP has ~100 billion in assets with ~400,000 members, while OTPP has twice that – 200 billion – but only ~330,000 members. It’s also interesting to note that HOOPP still won even considering that OTPP had a much higher total employee/employee contributions amount of ~$588,000 versus HOOPP’s ~$454,000. However, these exploratory curiosities will be reserved for another time.

So what do you think? Which pension do you think is better?











*This article is based on 2021 data. Some of this data sourced from the various pension websites may have been updated to 2022 YMPE and Contribution rate levels. This is a small, yet negligble change on the overall result of our pension comparisons.

Bonus Materials

As promised, let’s take a quick look at some of the other “good pensions” to see how they compare.

HOOPP’s website has a list of the top 10 public sector pension funds in Canada, based on total retirement asset size and among other factors such as being global leaders, solid performance, well-known, etc.

They list the following:
CPP-IB, OMERS, HOOPP, OPB, OPSEU (OPTrust). Public Sector Pension Investment Board (PSP Investments) and others. A few of these pensions are in other provinces, but we’re only going to focus on the ones in Ontario. Some types of employees that are part of these pensions are ones such as municipal employees, parks and recreation, the armed forces, paramedical, civil servants, etc.

Here’s a chart for some quick comparisons:

HOOPP still manages to beat these other pensions, with only OPB really coming close to it in regards to YMPE Contributions. The rest are generally quite similar to OTPP contribution rates as well as pension matching.

What ultimately gives HOOPP the biggest advantages is having very low YMPE contribution rates, and this is accomplished in a large part by having a higher than normal pension matching ratio.