Members > Newsletters > Winter 2009

Pension stability during volatile times

Funding

The market volatility that dominated the news during the second half of 2008 is still with us as the calendar turns over into a new year - and it may be with us for some time yet. Nevertheless, the current environment will have no short term impact on Member benefits or contributions, beyond the already announced increases, and Pensioners will not see any changes in their pensions.

Defined benefit pension payments are not directly affected by ups and downs in financial markets. The pension in a defined benefit plan is calculated based on a Member's best five-year average salary, and on the number of years of service. Therefore, unlike defined contribution pensions and registered retirement savings plans, the value of a defined benefit pension does not fluctuate as a result of market changes.

Current funding status

The Plan filed an actuarial valuation with the regulatory authorities as of January 1, 2008. At that time, factoring in the contribution increases that started in 2008, as is allowed for a valuation, the result was a going concern surplus of $320 million. (A going concern valuation assumes that the Plan will continue indefinitely.) With this surplus, the Plan was able to file the valuation without any need for further contribution increases, beyond those already announced, or other changes.

The valuation uses "smoothing", an actuarial technique in which the gains and losses in equity investments are averaged over a five year period. This is an acknowledgement of the fact that returns on equities can be volatile. Therefore the Plan is cushioned to some extent against market volatility. Only 20% of the losses experienced in 2008 need to be reported over each of the next five years, and the Plan will not be required to file a valuation again until the beginning of 2011.

We will not have an accurate, updated measure of the Plan's liabilities at the beginning of 2009 for several months. However, we do know that as of December 31 2008, the Plan's assets totaled $4.24 billion, a decline over the year of about 22%. This puts us in a similar position as other institutional investors. Clearly it will be some time before a loss of this size can be recouped.

The Plan's investment program and policies

Because pension liabilities extend for many years into the future, pension plans are long term investors. CAAT Plan officials expect that market returns will at some point, over any long period, experience significant short to mid-term volatility.

Our investment program has therefore been designed with the long-term horizon in mind, and an asset mix that promotes diversification. The pension fund has always been diversified across asset classes, industries, and geographic areas. Recently, new target allocations have been made to infrastructure, real estate, and private equity. These changes will help to reduce volatility, and, given the recent price declines in these asset classes, there may be increasing attractive opportunities for investors.

The Plan's formal investment policies govern the investment activity, and contain some very specific criteria concerning what investments can be held, asset mix and diversification requirements, and credit quality constraints.

The stringent policy restricting debt securities purchased to those with an investment grade rating, along with the high standards of due diligence displayed by the Plan's external investment managers, meant that the Plan had no direct exposure to the risky debt securities that first signaled the current market downturn.

The prudence demonstrated by this example, along with the patient, disciplined approach evident in all the Plan's policies, should provide the best opportunities for the fund to return to its former size, and thus ensure the security of the Plan's pension promise.

March 2009