Questions about the unfunded liability

What is an unfunded liability?

The unfunded liability (UFL) of a pension plan is the amount by which the plan’s liabilities exceed its assets on a given date. The total liability of the plan is the amount of money that, according to the plan’s actuary, the plan will eventually need to pay all the benefits (including pension, death and termination benefits) that participants have earned to date based on their years of pensionable service and their salaries. As of August 31, 2006, the Teachers’ Pension Plan (the Plan) had a pre-1992 unfunded liability of $6.3 billion and a post-1992 deficiency of $742 million.

How does the unfunded liability affect pension contributions?

As a result of the unfunded liability, teachers contribute 3.1 per cent more of salary than would otherwise be necessary to support a pension plan having the same benefits. As of September 2007, teachers pay an average of 12.03 per cent of salary in pension contributions. If the Plan did not have an unfunded liability, teachers’ contributions would average 8.93 per cent of salary.

In what other ways does the unfunded liability affect the pension plan?

An unfunded liability means that making improvements to the Plan are almost impossible, because contribution rates would have to increase to support the improvements.

What caused the post-September 1992 deficiency?

For accounting purposes, the Plan’s assets are divided into two funds: the pre-1992 fund and the post-1992 fund. Since 1992, surpluses totalling $446 million have accumulated in the post-1992 fund. Under legislation, these surpluses were transferred to the pre-1992 fund to reduce the pre-1992 UFL. Since 2002, changes to actuarial assumptions and reduced market returns created a deficiency of $742 million in the post-fund. Had the surpluses remained in the post-1992 fund, they would have largely funded the deficiency. Under the legislation, the post-1992 deficiency is shared half and half by the government and teachers, and must be funded over a maximum of 15 years.

Can the Association take the government of Alberta to court to force it to pay the unfunded liability?

The major changes that occurred to the teachers’ plan in 1956, 1966 and 1992 were negotiated with the government and approved by teachers at the representative assembly held in each of those years. The changes were transparent, openly debated and well publicized in ATA publications. There are no grounds for court action.

Pension improvements have been the subject of ongoing discussions with government at every opportunity. The Association understands the need for pension reform and its members have adopted policies that will lead to improvements. Litigation would be counterproductive and could undermine the Association’s efforts to eliminate the entire unfunded liability.

Did teachers contribute enough to the Plan before 1992?

Before 1992, teachers contributed to the Plan the amount specified in legislation. Unfortunately, this amount was not enough to fund half the costs of the benefits that they were earning. The teachers’ contribution rate was stipulated in the Teachers’ Pension Plan Act, a piece of legislation controlled by the government of Alberta. Although teachers did lobby for changes to the legislation, only the Alberta government could change the rate.

The Association attempted to shame the government into increasing its contributions in 1951 by proposing that teachers increase their contributions from 4 per cent to
5.5 per cent if the government would match the increase. The government refused to do so but amended the legislation to allow teachers to increase their contributions. In 1952, teachers voluntarily began contributing at 5 per cent while the government continued to contribute at 4 per cent. This inequity continued until 1956.

When the 1992 memorandum came into effect and teachers began contributing half the normal costs of the Plan, their contributions (excluding their share of the unfunded liability and the amount they were paying for the additional 10 per cent COLA) rose from 4.4 per cent to 6.5 per cent of salary in the first year.

Is the unfunded liability a result of poor management of the Plan’s assets?

Since September 1992, the fund has consistently returned an average of 1.8 per cent per year more than is required to meet funding objectives. To compare, the Private School Teachers’ Pension Plan was invested exactly the same way, was properly funded and had teacher contributions of 7.92 per cent after nine years of using surplus to reduce contributions.

How are contribution rates set?

The Plan is a defined benefit plan, which means that the benefit pensioners receive is defined by the pension formula. Each teacher earns a certain amount of pension for each year of pensionable service. Contributions are determined by the amount of money required to fund the pension of each teacher. Actuaries determine the rate of contributions required to fund pensions by calculating such factors as when teachers retire, how long they live, the expected inflation rate and the expected return on investments.

The Teachers’ Pension Plan is integrated with the Canada Pension Plan (CPP). Therefore, the contributions are broken down into two rates based on the yearly maximum pensionable earnings (YMPE) from CPP. Pension contributions are less up to the YMPE and increase for salary earned above the YMPE, which in 2007 is $43,700. The current average contribution of 12.03 breaks down to 10.31 per cent of salary up to the YMPE and 14.73 per cent for salary above the YMPE.

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