The CAAT Plan has again posted strong results and remains fully-funded. For members this ensures ongoing stability of both contributions and benefits.
The CAAT Plan takes a disciplined approach to funding
The CAAT Plan funding reserve is $525 million - an increase from $347 in 2013
Strong results grow reserves
The January 1, 2014 valuation shows the Plan has increased its going-concern funding reserve to $525 million, up from $347 million at the last valuation (January 1, 2013). The Plan is 105% funded on a going-concern basis.
The valuation has been filed with the regulators. This valuation demonstrates the ongoing stability arising from prudent risk management, and a disciplined approach to funding.
The Plan conducts a valuation every year as part of the process of monitoring the health of the Pension Plan. By law, a valuation must be filed at least every three years, however, during the JSPP agreement signed with the Province in 2012 (and in effect until the end of 2017), the Plan may choose a 4-year period before it must file another valuation. Filing the 2014 valuation reinforces the Board’s ongoing commitments to delivering stability and value to members. As a result of filing this valuation, the next required valuation must be filed with an effective date no later than January 1, 2018.
Contributions remain stable
One of the Board’s objectives is to limit or minimize contribution volatility. With the 2014 valuation, members can be sure that their contributions will be stable until at least January 1, 2019. The current contribution rates are 8.2% up to the YMPE and 11.8% above the YMPE + 3% stability contributions, resulting in total contributions of 11.2% up to the YMPE and 14.8% above the YMPE. Read more about the Plan's funding policy here.
Conditional Inflation protection on post 2007 service extended
The other benefit impacted by the valuation is conditional inflation protection (increases on pensions in payment for service earned after 2007). As a result of this valuation, the Plan can extend conditional inflation protection payments to January 1, 2018. This is a key priority of the funding policy.
Service between 1992 and 2007 is not impacted by valuation results. It is guaranteed to be paid.
However, the Board cannot extend ad hoc inflation protection increases for service earned prior to 1992. Retired members will not lose any past inflation protection increases they received. The Funding Policy determines that the Board can consider granting inflation protection for pre-1992 service when funding reaches Level 6.
Supports the Plan’s merger proposal to universities
The Board has invited interested universities to join the Plan. One of the key principles for merging is that the CAAT Plan cannot assume any university pension deficit. The updated valuation provides a more current basis for pricing the additions of past service liabilities for employers interested in joining. Learn more about the Plan’s merger proposal here.
Assumptions reflect reality
A valuation is a crucial exercise in prudent pension plan management. There are a number of factors that impact the results of a valuation, including assumptions about longevity, the discount rate, and the treatment of asset smoothing. The setting of these assumptions affects the valuation. The Board takes a measured approach, adopting assumptions that reflect current experience and expected future realities that impact the Plan and its desire for benefit security and contribution stability.
Appropriate assumptions lead to stability, and secure retirement incomes, at appropriate costs. Stale assumptions can lead to problems for jointly sponsored pension plans like ours, and create unwanted intergenerational inequity. Reviewing assumptions regularly is part of good governance.
What assumption changes are in this valuation?
The longer a member lives, the longer the pension is paid, and the more funds must be set aside now, to pay the pension in the future. Past valuations have already recognized that CAAT Plan members live longer than the average Canadian. The 2014 valuation recognizes the increasing lifespan of members – a 60 year-old member is expected to receive 5 more monthly pension payments than the previous valuation expectations. This change helps ensure that the Plan can pay the promised pensions to members in the future.
The increased longevity assumption increased the Plan’s liabilities by $94 million but this is already fully reflected in the valuation results, and the Plan has the assets needed to back these additional payments without the need to increase contributions.
Additional reserves actually grew since January 2013, despite this assumption change and increase in liabilities.
Smoothing is a technique used in measuring the assets to be used in the actuarial valuation. It is an important tool in maintaining stability in contributions because it allows investment gains and losses to be recognized over a period of years, (as was done after the 2008 market downturn) instead of all at once.
Previous valuations smoothed only equity returns, but treated fixed income and alternative asset classes at market value.
As the Plan’s investment program has shifted to include more alternative investments, the Board determined in 2013 that for future valuations, the smoothing methodology was changed to amortize gains and losses in all asset classes, relative to the discount rate. This reflects our more diverse investment program, and the new method better aligns with industry practice.
The January 1, 2014 valuation is the first to use the new smoothing methodology. It is being implemented on a prospective basis to avoid any shocks from altering methods.
Using the market value of assets, without smoothing, the surplus would be $868 million. However not using smoothing presents an unacceptable risk to the Plan and is not aligned to its objectives.
The short-term financial impact of this change was not a key consideration in the Board’s decision: the change is appropriate for the Plan going forward given its risk tolerances and investment program features. The new method increased the actuarial value of assets by $161 million. After the change, the Plan has an asset smoothing reserve of $343 million.
Discount Rate is the estimate of the investment returns that the Plan will earn in the future. The 2014 valuation used a discount rate of 5.8% including inflation which is the same rate as was used in 2013, despite the fact that bond rates have gone up. The discount rate reflects the Plan’s approach to prudently managing risk. So although the discount rate did not change, it is listed here as a change to reflect the additional risk reduction compared to the 2013 valuation assumptions.
Shared governance is key to success
The Plan is a Jointly Sponsored Pension Plan (JSPP), meaning members and employers, together are responsible for the Plan, and share any funding risks. This shared governance has been key to the Plan’s ongoing stability: employers and members share responsibility for the stability and security of the Plan, including the cost.
The Plan is considered a model JSPP, and effective shared governance, together with a formal funding policy that outlines funding options has resulted in stability, and judicious decision-making.
To learn more about the Plan’s governors, visit the Governance page.
Funding Policy guides use of reserves
Decisions about the use of reserves are guided by the Funding Policy, which outlines 6 funding levels, and the options available to the Board and Sponsors’ Committee at each level. These are grouped thematically into reserves, contributions and conditional benefits. At level 1 there are no reserves to use.
Inflation protection increases for post-2007 service (conditional inflation protection) is the first call for any surplus (starting with level 2). Restoration of ad hoc inflation protection for service earned before 1992 is not contemplated until the Plan reaches funding level 6.
Some contribution rate decreases are a possibility starting at Level 4 and further decreases are options at levels 5 and 6. At level 4, Plan governors can begin to decrease the 3% stability contributions currently paid by members and employers. At level 5, the 3% stability contributions can be eliminated, and at level 6, further basic contribution reductions are possible.
With a funding reserve of $525 million, or 105%, the Plan remains at Level 3. Level 4 starts at approximately 107% funded based on current liabilities.
Reading a valuation
The Plan regularly completes actuarial valuations, and other measures of Plan health. These all help the Board manage risk and build stability.
The valuation summary shows the going-concern funding results. This is the most important measure for determining the funded status of the Plan, and making benefit decisions. The valuation summary chart below shows the asset values, and liabilities.
Going concern funding results
January 1 2014
|Asset values||($ millions)|
|Market value of net assets||$7,127|
|Present value of future contributions|
|Total actuarial value of assets||$10,750|
|Liabilities for accrued benefits||$7,650|
|Present value of future benefit for active members||$2,554|
|Provision for indexation adjustments relating to post-2007 service
for 4 years following valuation date
|Total actuarial liabilities||$10,225|
Going-concern and solvency valuation disclosure
Going-concern and Solvency valuation disclosure
A going-concern valuation assumes the Plan will continue indefinitely and is used to measure whether contribution rates are sufficient to keep the Plan fully funded in the long term. A valuation must be filed in accordance with pension law in Ontario and meet the standards of the actuarial profession. The Plan is 105% funded on a going-concern basis, which means it is at funding level 3 in the Funding Policy.
The solvency valuation shows the status of the Plan if it had been wound up on the valuation date. For jointly sponsored plans like ours, the results are hypothetical only, as we are not required to fund for solvency deficiencies reflecting the ultra-low probability of the cessation of all participating employers at once and, instead, base funding requirements on the going-concern valuation. The solvency status is for disclosure purposes only. The Plan’s solvency position as of the January 1, 2014 valuation shows a deficit of $1.2 billion and a solvency ratio of 0.86.