What is an Actuarial Valuation?
An actuarial valuation is a financial check-up of the Staff Pension Plan (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 actuarial valuation performed as at December 31, 2019 helps us to assess whether the SPP’s funding is sufficient to support Plan benefits now and in the future, in particular, the level of post-retirement indexing that can be supported.
What is post-retirement indexing?
The SPP pays you a lifetime pension when you retire. Your pension may be increased on an annual basis if the plan funding is able to afford it. This is known as post-retirement indexing or a Cost of Living Adjustment. Increases, when granted, are provided to all deferred members and 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 importance of the SPP’s Funding Policy
A key feature of the SPP’s Target Benefit Plan design is its Funding Policy. As the contributions that you and UBC make to the SPP are fixed, the SPP’s Funding Policy states that the basic pension benefit and inflation adjustments (post-retirement indexing) are subject to the SPP’s ability to pay. Benefits are adjusted depending on whether the Plan is over or underfunded. It is a priority of the SPP Board to provide the basic pension benefit with a high degree of certainty, and to maximize post-retirement indexing. The SPP Funding Policy sets out how the level of indexing will be determined based on the results of the Benefits/Funding Test performed during the actuarial valuation. The strength of the Benefits/Funding Test is that it requires the SPP to hold a significant margin to keep the Plan sustainable over the long term.
What are the results?
The valuation results show that when post-retirement indexing is at a level of 50% of inflation, the SPP is in a reasonably healthy funded position with a 22.6% safety margin. SPP basic benefits are currently well funded and can be supported over the long term. Retirees will continue to receive an increase of 50% of inflation on their SPP basic pension benefit each year until the next valuation.
Even though the valuation was completed as at December 31, 2019, the SPP Board continues to closely monitor the Plan’s funded position and investment returns, especially in these uncertain times. It is the SPP Board’s ultimate goal to provide 100% indexing subject to the Plan’s ability to finance it in a stable and sustainable manner.
Although the COVID-19 pandemic disrupted the investment markets in 2020, the SPP is well funded and managed on a long-term basis and we hold a margin for adverse events. The next valuation is required in three years (i.e. As at December 31, 2022) and it will reflect the financial impact of COVID-19 on the Plan’s investments, as well as other changes that have occurred in the interim.
Lastly, the valuation confirms that the SPP is in compliance with regulatory requirements for target benefit plans and that our valuation report was filed with the pension authorities, the BC Financial Services Authority and the Canada Revenue Agency in October 2020.
