In the May 2017 SPP Update newsletter, we advised that the actuarial valuation was underway for the UBC Staff Pension Plan (SPP) with four main purposes:
- Evaluate the present financial status of the SPP;
- Assess the ability of the SPP to pay pension benefits over the long term;
- Comply with regulatory requirements for actuarial valuations and filings with pension authorities; and
- Determine the level of indexing the SPP can afford to pay.
|What is an Actuarial Valuation?
An actuarial valuation is a financial check-up of the SPP performed at least every three years by the SPP’s actuary. The actuary estimates the cost of future SPP benefits by making assumptions about future conditions. The actuary compares these estimated costs (such as current and future pension payments) with the estimated funding (the SPP’s assets and expected contributions) – money going out versus money coming in.
The following are the results of the valuation:
- The SPP is in a reasonably healthy funded position with a 20% safety margin.
The December 31, 2016 actuarial valuation reveals that the SPP’s financial status is in a reasonably healthy funded position with a 20% safety margin of assets over the actuary’s best estimate of plan liabilities. A safety margin is necessary since the actuary is making assumptions about future conditions (e.g. how long retirees will live and receive their pensions and what the future investment returns will be on the pension fund assets) which can be estimated but cannot be predicted accurately.
- Current SPP benefits can be supported over the long term.
The Funding Policy developed by the Pension Board describes the Benefits/Funding Test which the actuary uses to assess the long-term sustainability of the SPP. By comparing current assets and future contributions against benefits earned to date and in the future, this test ensures benefits are provided that are consistent across the whole SPP membership. The Benefits/Funding Test in this valuation shows that the current SPP benefits can be supported over the long term.
- The SPP is in compliance with regulatory requirements for actuarial valuations and filings with pension authorities.
As a Target Benefit Plan, there are new regulatory funding rules that must be used to assess the Plan’s financial status. The actuarial valuation report must demonstrate how the SPP meets these new rules. With the increase in the employer contribution rate effective October 1, 2017 (see article below for more information), the SPP is able to meet the new rules. The actuarial valuation report was filed with the pension authorities, the Financial Institutions Commission of British Columbia and the Canada Revenue Agency in September 2017.
- The SPP can afford to pay indexing at 50% of inflation for the next three years.
The actuarial valuation of the SPP determines how much indexing can be applied to benefits payable from the SPP. The SPP pays you a lifetime pension when you retire. Your pension is reviewed annually and may be increased if the plan funding is able to afford it. Increases, when granted, are provided to all retirees and are a percentage of inflation for the year. Inflation is measured by the year over year increase in the Consumer Price Index (CPI). Since 2011, an increase to SPP pensions has been granted of 50% of inflation (CPI) in each year.The Funding Policy sets out how the level of indexing will be determined based on the results of the Benefits/Funding Test. This test shows that the SPP is expected to continue to provide indexing at 50% of inflation for the next three years. This means that retirees will continue to receive an increase of 50% of inflation on their SPP basic pension benefit each year until the next valuation.