About the deficit

If it made no adjustments, the Plan would have had a going-concern deficit for the next actuarial valuation to be filed – based on data as of January 1, 2011. A pension plan has a going-concern funding deficit when its actuarial liabilities exceed the actuarial value of its assets.

What’s driving the deficit?
Improving life spans and very low interest rates are key factors driving up the Plan’s liabilities

Pension promises or liabilities extend as much as 70 years into the future. Even though the Plan has an actuarial deficit – created largely by historically low interest rates, increased life expectancy of members and the impact of the 2008 investment markets – pensions to be paid now and in the future are secure.

Recent investment losses

The recent investment losses caused by the market collapse of 2008 are recognized over a five-year average period as permitted by legislation and professional actuarial standards for pension plans. Using these “smoothing” methods allows pension plans to better manage market volatility and avoid sharp changes in contribution rates and/or benefits.

Low interest rates

Interest rates determine the amount of funds a pension plan must be investing now to pay a future pension. The lower the interest rate the more funds need to be put aside. Unprecedented low interest rates are having a significant impact on the size of the Plan’s funding position and deficit. 

All defined benefit pension plans, like ours, have been feeling the effects of these economic conditions. Due to our funding policy decisions in the past, the CAAT Plan is in a better financial position than many.

Increased member life expectancy

In addition to these economic pressures, the average member is living to 87.7 years, up from 85.3 years, which means the Plan needs to put away funds based on the assumption it will make more pension payments per member.

How the Plan is managing the deficit

The Funding Task Force was set up to research and investigate ways to address the funding deficit expected with the Plan’s next filed valuation, as of January 1, 2011, with the goal of keeping the Plan financially healthy over the long term. The Board considers a financially healthy plan to be one that can meet its commitments of future benefits owed to members and manage through the ups and downs of investment markets and interest rates while keeping contribution rates reasonably stable and equitable.

The work of the task force builds on actions by the Plan to address the funding shortfall brought about by earlier market losses. Those actions included aligning its investment strategy with funding policy objectives. It extended the duration of the bond portfolio, increased its allocation to infrastructure, real estate and real return bonds, and introduced currency hedging. The target is a fully funded plan.

“The Plan’s deficit is manageable. We are on track with actions already taken to eliminate it. The fact that stability contributions have remained at 3% despite the worst economic conditions for pension plans in more than 50 years proves that the Funding Policy is working,” says Derek Dobson, Chief Executive Officer and Plan Manager .

Read more about the funding policy here.