Understanding the Funded Status

Featured Image

ATRF refers to the plans’ funded statuses regularly, but what does that mean?

Every year ATRF provides commentary on the teachers’ pension plans in the annual report. Many factors are covered including governance, contribution rates, investment results, and of course the funded status of the plans.

When we talk about the funded status, we are referring to a measure of a plan’s financial health at a point in time. A funded status is usually expressed as a percentage of pension assets compared to pension obligations (the estimated amount of money we need to pay pensions today and into the future). The funded status assumes that the plans have a long-term horizon and are maintained indefinitely.

If the ratio is less than 100%, then the plan is in a deficit position and, over the long term, does not have enough assets to cover the estimated obligations. In this case, additional contributions are required to bring the funded status back up to 100%.

On the other hand, a plan with a funded ratio of 100% or more is in a surplus position and is better positioned to weather adverse events (e.g. financial market downturns or increasing plan member longevity) without needing to immediately resort to increasing contribution rates.

For the Teachers’ Pension Plan (TPP), the most recent funded ratio was 99% and for the Private School Teachers’ Pension Plan (PSTPP), the funded ratio was 108%. These are robust, healthy funded ratios indicating that both plans have enough assets to pay the estimated obligations over the long term. It’s not uncommon to see defined benefit (DB) plans in a surplus position.

The Income Tax Act recognizes that a healthy funded status is important to act as a buffer in case of adverse experience and does not limit the level of contributions remitted to the plans until the funded ratio exceeds 125%. The TPP and PSTPP are both subject to the Income Tax Act as a registered pension plan and are well within the tax rule limits.

Members sometimes ask why the funded ratio of the two plans are different. Differences are due to several reasons. The two plans have different starting points, membership demographics, risk profiles, as well as plan experience (gains and losses), and therefore also have different funded statuses. The differences are not due to one plan receiving more contributions than the other, nor preferential treatment of one type of education over others (public versus private). The PSTPP is funded by members and private school employers’ contributions, not by the government.

Keep in mind that no one really knows how much money the plans’ assets will earn in the future or how membership (and therefore pension obligations) might change, and both factors can impact the funded ratio. What we do know is that we need to put money aside today, and invest it, to pay pensions in the future. Part of ATRF’s mandate is to regularly review the funded status of the plans and to take action to ensure the security of members’ pensions. The funded ratio is one measure used to determine whether the plans are saving enough today to meet the obligations of tomorrow.