Funding Basics

 

Funding Basics

TRAF is a defined benefit pension plan. Members accrue a benefit during their working years that is determined by a formula based on average salary and years of pensionable service. Member contributions do not directly determine the amount of pension a member will receive. At retirement, a monthly pension is payable for the lifetime of the member.

"Funding" is the process of setting aside assets to pay for the benefits promised under the plan. Funding a pension plan can promote the long-term sustainability of the plan and improve benefit security.

TRAF uses various metrics to monitor the current and projected funding levels of the plan. A key metric used by TRAF is the "funded status."

Funded Status

One measure of the financial health of a pension plan is its “funded status.” The funded status compares the value of the assets of the plan to the expected costs of future benefits payable from the plan as at the valuation date (the “liabilities”). Funded status can be expressed in dollar terms (a “surplus” or “deficit”) or by comparing the assets as a percentage of the liabilities (a “funded ratio”).

If the value of the plan assets exceeds the value of the liabilities at any point in time, the funded ratio will be greater than 100% and the plan will be considered to be in a "surplus" position. If the liabilities exceed the value of the plan assets, the funded ratio will be less than 100% and the plan is considered to be in a "deficit" position.

Determining Funded Status

The funded status is determined through actuarial valuations. In accordance with The Teachers’ Pensions Act, an actuarial valuation must be prepared at least every three years. TRAF retains an independent plan actuary (who is appointed through an Order in Council) to prepare the actuarial valuation.

The most recent actuarial valuation was prepared as at January 1, 2018. The next actuarial funding valuation is scheduled to be prepared as at January 1, 2021.

Monitoring Funded Status

At TRAF, we have developed models that allow us to monitor the funded status on a regular basis. These models must be based on reliable and supportable assumptions, so we focus considerable time and attention on them.

In order to assess the funded status and sustainability of the plan over the longer term, TRAF also engages the independent plan actuary to prepare a projection of the funded status over a 20-year period. The projection takes into consideration the evolving demographic composition of the plan membership and includes the impact of new entrants into the plan over the projection period.