Funding Challenges - Alberta Teachers' Retirement Fund (ATRF)

The ATRF Board carefully monitors several factors to ensure our plans are properly positioned for long-term sustainability and can address challenges that may arise. Some of the most significant actual and potential funding challenges include:

Change in plan assumptions– Actuarial assumptions and methodologies are regularly reviewed to ensure they continue reflecting the plans’ experience and are adequate and sound for the plans’ sustainable funding.
Plan maturity– In very general terms, a mature plan is one with a higher ratio of retired members receiving benefits compared to active members paying into the plan. Another measure of maturity is the proportion of retirees’ liabilities to the total liabilities in the plan.
Plan members’ increasing longevity– Increased life expectancy means pensions are paid for a longer period of time after retirement— and yet they still need to be funded with employer and employee contributions over a similar number of years in an average career.
Volatility of investment returns– A key assumption in funding pension plans is that the fund will earn an average net investment return each year at least equal to the discount rate used to determine future funding requirements. At ATRF, we’ve developed a strategy that carefully evaluates a number of factors to determine investment risk levels that are appropriate to fund our plans and to reduce the impact of volatile market returns.

Changes in Plan Assumptions

Actuarial assumptions and methodologies are regularly reviewed to ensure they are reflecting the plans’ experience and are adequate and sound for the plans’ sustainable funding. One way to do this is by conducting an experience study. An experience study was completed with ATRF’s actuary in the past two years in relation to terminations, retirements, deaths, and other economic factors, to update the assumptions used in the funding valuation of our plans.

Plan Maturity

As mentioned above, pension plan maturity can be defined in different ways, but in general a mature plan is one where there is a higher ratio of retired members compared to active members. Another measure of maturity is the proportion of retirees’ liabilities to the total liabilities in the plan, with an increasing percentage of retirees’ liabilities indicating a plan’s increasing maturity. Plan maturity presents a funding challenge, because a funding shock (such as investment losses, increased plan member longevity or lower expected returns) will be absorbed by a proportionately smaller number of members paying contributions.

Plan Members’ Increasing Longevity

Increased life expectancy presents a funding challenge for pension plans. It means pensions are paid for a longer period of time after retirement—and yet they still need to be funded with employer and employee contributions over a similar number of years in an average career.

The last several decades have seen significant changes in the plans’ retirement experience. Teachers are living longer and retiring earlier. In the 1970s, the average teacher retired at age 62. They could expect to live and collect their lifetime pension for another 20 years, on average. Now, the average teacher retires at age 60. They can expect to live and collect their lifetime pension for another 31 years, on average.

Volatility of Investment Returns

A key assumption in funding pension plans is that the fund will earn an average net investment return each year at least equal to the discount rate used to determine future funding requirements. Actual year-to-year investment returns can be quite volatile, and absent any adjustment could lead to frequent and significant contribution rate changes.

That’s why at ATRF we’ve developed a strategy that carefully evaluates a number of factors to determine the investment risk levels that are appropriate to fund our plans. It starts with an actuarial funding valuation that looks at investment results over five years. This is an asset smoothing practice and it is used to reduce the impact of volatile short-term market returns and results in more stable contribution rates and funded status.

While asset smoothing is effective in stabilizing contribution rates during short periods of market volatility, not achieving the assumed funding discount rate over the long term would still result in contribution rate increases.

That’s why so much work has gone into the ATRF investment strategy. We began looking in detail at this formula in 2018, with a focus on determining the best way to generate the returns needed to sustainably fund the plan, but to do so with less volatility over time. We continue refining our funding-focused investment strategy, where the investment portfolio is constructed to optimize the achievement of ATRF’s specific funding policy objectives of benefit security and contribution rate stability.

Handling Funding Challenges

The ATRF Board has two main levers at their disposal to achieve long-term sustainability:

1. Funding policy (contributions from teachers and government/employers)
2. Investment policy (how the assets are invested)

Plan sponsors have a third lever:

3. Benefits policy (level and type of benefits offered)

Like other retirement systems, the plans continue to face funding challenges due to long-term low interest rates, plan maturity, volatility and increasing plan member longevity. These challenges will continue to be managed by using the above levers, and focusing on long-term sustainability.