Reserve of pension plans of the municipal and university sectors

For a complete actuarial valuation after 30 December 2012 for a pension plan of the municipal and university sectors, actuaries must apply the rules concerning the reserve.

Those rules deal with the growth and use of the reserve as well as the treatment of amortization payments. To apply them, actuaries should follow the steps in the following sections.

Note that...

The rules regarding pension plans of the university sector also apply to pension plans for Québec emergency medical technicians and early childhood centres (CPEs) and accredited private daycares in Québec.


Definitions and clarifications

Definitions

The reserve is a mechanism that is implemented to ensure a degree of stability for the plan's funding. It allows the monthly payments related to the technical deficiency to be reduced. It increases according to the technical gains determined during the complete actuarial valuations. It is mainly reduced when amortization payments are offset by the reserve.

Plan experience is the process whereby gains and losses are determined as part of a complete actuarial valuation.

Clarifications

The rules concerning the reserve apply on a going concern basis.

The value of the reserve is equal to zero prior to 31 December 2012.

For a fiscal year that does not follow the date of a complete actuarial valuation, the calculation of the reserve at the start of the fiscal year must take into account:

  • the pension fund's return for the previous fiscal year
  • the monthly payments to be offset by the reserve during the fiscal year.

To simplify, the steps below assume that the complete actuarial valuations are as at the end date of the fiscal year.

Contents of the report

The actuarial valuation report must indictate amounts for the following (even if they are nil):

  • the reserve before and after the plan experience is taken into account
  • the reserve as at the the day following the date of the actuarial valuation
  • actuarial gains
  • additional contributions
  • technical gains or losses
  • other gains.

Basic formula

Assets on a going concern basis include two components: the general account and the reserve.

The market value of plan assets is equal to the sum of the values of the general account and the reserve.

Assets = GA + V

whereAssets=market value of assets


GA=value of the general account


V=value of the reserve

Growth of the reserve

The reserve can grow in two ways:

  • a complete actuarial valuation determines technical gains
  • pension fund investments deliver positive returns.

Step 1: Reserve before plan experience

Determine the value of the reserve before taking plan experience into account.

The value of the reserve as at the valuation date, before plan experience is taken into account, is equal to the value of the reserve at the beginning of the fiscal year, multiplied by the sum of one plus the pension fund's return during the fiscal year.

Vfy endbefore = Vstart fy x (1+i)

whereVfy endbefore=value of the reserve as at the valuation date, before plan experience is taken into account


Vstart fy=value of the reserve at the start of the fiscal year, as defined in step 9


i=pension fund return during the fiscal year.
The return can be negative.

Step 2: General account before plan experience

Determine the value of the general account, using the basic formula, before taking plan experience into account.

The value of the general account, before plan experience is taken into account, is equal to the difference between the assets as at the valuation date, determined on a going concern basis, and the value of the reserve as at the valuation date, before plan experience is taken into account.

GAfy endbefore = Assetsfun - Vfy endbefore

whereGAfy endbefore=value of the general account as at the valuation date, before plan experience is taken into account


Assetsfun=assets as at the valuation date, determined on a going concern basis


Vfy endbefore=value of the reserve as at the valuation date, before plan experience is taken into account

Step 3: Provision for adverse deviations

Determine the amount of the provision for adverse deviations using the financial data on a solvency basis. For plan assets, use the value of the general account before taking plan experience into account.

Step 4: Actuarial gains

Determine the financial situation on a going concern basis using the value of the general account (instead of the value of the plan assets), before taking plan experience into account.

Actuarial gains are positive or nil. If they are positive, they are calculated as the sum of the value of the general account as at the valuation date, before plan experience is taken into account along with the commuted value of amortization payments remaining to be paid on the valuation date to amortize the funding deficiencies in the previous complete actuarial valuation and in subsequent complete partial actuarial valuations. From that amount must be subtracted the difference between liabilities on a going concern basis minus the value as at the valuation date, on a going concern basis, of the additional obligations arising from amendments valuated for the first time.

Actuarial gains = Max{0 ; GAfy endbefore + [PV (Cfunbefore ) + MDC]- (Liabilitiesfun - Wfun)}

whereGAfy endbefore=value of the general account as at the valuation date, before plan experience is taken into account

PV (Cfunbefore )=present value at the discount rate used in the latest actuarial valuation of the amortization payments remaining to be paid on the valuation date to amortize the funding deficiencies presented in the previous complete actuarial valuation and in subsequent partial actuarial valuations

MDC=accumulated value of monthly payment reductions since the last complete actuarial valuation, which result from instructions given to the administrator in accordance with sections 39.1 and 39.2 of the Regulation respecting the funding of pension plans of the municipal and university sectors This link will open in a new window.. The accumulated value is based on the discount rate used in the latest actuarial valuation and determined on a going concern basis


Liabilitiesfun=liabilities as at the valuation date, determined on a going concern basis


Wfun=value as at the valuation date, on a going concern basis, of the additional obligations resulting from amendments valuated for the first time


Actuarial gains are composed of:

  • additional contributions
  • technical gains or losses
  • other gains.

Additional contributions are calculated as follows:

additional contributions = Max{0 ; CV(Cpaid) - CV (Crequired )}

whereCV(Cpaid)=commuted value, based on the rate of return of the pension fund, of the amortization payments made to the pension fund since the latest complete actuarial valuation

CV (Crequired )=commuted value, based on the rate of return of the pension fund, of the amortization payments required according to the latest actuarial valuation (between the date of the latest complete actuarial valuation and the the current actuarial valuation)

Amounts paid in accordance with section 146 of the Supplemental Pension Plans Act This link will open in a new window. are not part of the additional contributions, nor are they technical gains or losses.

Step 5: Reserve after plan experience

Determine the value of the reserve taking plan experience into account. However, the value of the reserve cannot exceed the provision for adverse deviations.

The value of the reserve, taking plan experience into account, is equal to the provision for adverse deviations as at the valuation date, before plan experience is taken into account, or the result of the following calculation, whichever is less: the sum of the value of the reserve as at the valuation date, before plan experience is taken into account, and the technical gains, minus the technical gains allocated to the redemption of the municipal bonds provided for in section 53.1 of the Regulation respecting the funding of pension plans of the municipal and university sectors.

Vfy endafter = Min {Vfy endbefore + (technical gains - Redemption) ; PADbefore}

whereVfy endafter=value of the reserve as at the valuation date, taking plan experience into account

Vfy endbefore=value of the reserve as at the valuation date, before plan experience is taken into account


Redemption=technical gains allocated to the redemption of the municipal bonds set out in section 53.1 of the Regulation respecting the funding of pension plans of the municipal and university sectors This link will open in a new window.
This value corresponds to the value of the redeemable municipal bonds held by the pension fund or 25% of the technical gains outlined in the actuarial valuation, whichever is less.

PADbefore=provision for adverse deviation as at the valuation date, before plan experience is taken into account


Step 6: Balance of actuarial gains

Determine the balance of actuarial gains.

The balance of actuarial gains corresponds to the actuarial gains minus the following two amounts. The first is the maximum between zero and the difference between the values of the reserve, as at the valuation date, before and after plan experience is taken into account. The second is the technical gains allocated to the redemption of municipal bonds provided for in section 53.1 of the Regulation respecting the funding of pension plans of the municipal and university sectors.

Balance = Actuarial gains - Max {Vfy endafter - Vfy endbefore ; 0} - Redemption

whereBalance=balance of actuarial gains after the growth of the reserve resulting from plan experience

Vfy endafter=value of the reserve as at the valuation date, taking plan experience into account


Vfy endbefore=value of the reserve as at the valuation date, before plan experience is taken into account


Redemption=technical gains allocated to the redemption of the municipal bonds set out in section 53.1 of the Regulation respecting the funding of pension plans of the municipal and university sectors This link will open in a new window.
This value corresponds to the value of the redeemable municipal bonds held by the pension fund or 25% of the technical gains outlined in the actuarial valuation, whichever is less.


Step 7: General account after plan experience

Determine the value of the general account as at the valuation date using the basic formula.

The value of the general account as at the valuation date, taking plan experience into account, is equal to the difference between the assets, as at the valuation date, determined on a going concern basis, and the value of the reserve as at the valuation date, taking plan experience into account.

GAfy endafter = Assetsfun - Vfy endafter

whereGAfy endafter=value of the general account as at the valuation date, taking plan experience into account

Assetsfun=assets as at the valuation date, determined on a going concern basis


Vfy endafter=value of the reserve as at the valuation date, taking plan experience into account

Treatment of amortization payments


Step 8: Determine amortization payments

Once plan experience is reflected in the value of the general account and the reserve, eliminate certain amortization payments determined before the valuation date.

Optional: If the balance of actuarial gains is sufficient, reduce other amortization payments and then redeem the municipal bonds as provided for in the second paragraph of section 53.1 of the Regulation respecting the funding of pension plans of the municipal and university sectors This link will open in a new window..

Determine the financial situation on a going concern basis using the value of the general account, taking plan experience into account.

Lastly, determine the funding deficiencies and the related amortization payments.

Important

Sections 44, 45, 47 and 48 of the Regulation respecting the funding of pension plans of the municipal and university sectors This link will open in a new window. set out the rules for eliminating certain amortization payments.


Use of the reserve

The reserve allows the monthly payments related to the technical deficiency to be reduced. This reduction, as a percentage, applies to each monthly payment to be made in the fiscal year, in proportion to the value of the amortization payments, up to 50% of their amount.


Step 9: Reserve at the start of the fiscal year

Determine the value of the reserve at the start of the fiscal year following the valuation date.

The value of the reserve at the start of the fiscal year following the valuation date is equal to the value of the reserve as at the valuation date, taking plan experience into account, minus the minimum between the value of the reserve as at the valuation date, taking plan experience into account, and half the amortization payments for technical deficiencies for the fiscal year following the valuation date.

Vstart fol fy = Vfy endafter - Min {Vfy endafter ; 0,5 x Ctech}

whereVstart fol fy=value of the reserve at the start of the fiscal year following the valuation date

Vfy endafter=value of the reserve as at the valuation date, taking plan experience into account


Ctech=amount of the amortization payments for technical deficiencies, for the fiscal year following the valuation date
The instructions to the administrator to reduce certain monthly payments, as provided for in section 8 of the Regulation respecting the funding of pension plans of the municipal and university sectors This link will open in a new window., must be considered, as applicable

For plans that undergo a complete actuarial valuation every year, the value of the reserve at the start of the fiscal year, determined in step 9 (Vstart fol fy), is used in step 1 (Vstart fy) of the subsequent actuarial valuation.


Step 10: General account at the start of the fiscal year

Determine the value of the general account using the basic formula in order to reflect the use of the reserve at the start of the fiscal year following the valuation date.


Step 11: Adjust monthly payments

Calculate the monthly payments relating to technical deficiencies, taking the use of the reserve into account.

Example

An actuary carries out a triennial actuarial valuation as at 31 December 2013 for the Pension Plan of ABC Municipality for which:

  • the employer has chosen not to use the relief measures
  • no plan amendment is valuated for the first time
  • the pension fund holds no redeemable municipal bonds.

In addition, the plan administrator has asked the actuary to determine the monthly payments to be paid from the reserve for 2014 to 2016.

For simplification purposes, some values have been rounded.

Steps to follow for the actuarial valuation as at 31 December 2013

As at 31 December 2013:

  • the value of plan assets on a going concern basis is 32 000 $
  • the value of plan liabilities on a going concern basis is 43 000 $
  • the value of plan liabilities on a solvency basis is 57 000 $.

The last actuarial valuation (as at 31 December 2010) indicated the plan had a technical deficiency. As at 31 December 2013, before the deficiency was eliminated, the commuted value of the amortization payments remaining to be paid to amortize the deficiency is 12 000 $.

Table 1. Amortization payments according to the actuarial valuation as at 31 December 2010
Type of deficiencyDate determinedExpiryMonthly paymentCommuted valueNote
Technical2007-12-312022-12-31143 $12 000 $
Note Commuted value of amortization payments remaining to be paid as at 31 December 2013 (discount rate of 6%).

Step 1

Since the reserve is equal to zero before 31 December 2012, the value of the reserve as at 31 December 2013, before plan experience is taken into account, is also equal to zero, regardless of the pension fund return in fiscal year 2013.

Vfy endbefore=Vstart fy x (1 + i)

=0 x (1 + i)

=0

Step 2

The value of the general account, before plan experience is taken into account, is 32 000 $.

GAfy endbefore=Assetsfun - Vfy endbefore

=32 000 $ - 0 $

=32 000 $

Step 3

The amount of the provision for adverse deviation is 4 000 $, that is, 7% of the liabilities determined on a solvency basis.


Step 4

Actuarial gains=Max{0 ; GAfy endbefore + CV (Cfunbefore ) - (Liabilitiesfun - Wfun)}

=Max {0 ; 32 000 $ + 12 000 $ - (43 000 $ - 0 $ ) }

=1 000 $

Actuarial gains include the following:

  • additional contributions = 0 $
  • technical gains = 1 000 $
  • other gains = 0 $.

Step 5

The value of the reserve, taking plan experience into account, corresponds to:

Vfy endafter=Min{Vfy endbefore + (technical gains - Redemption) ; PADbefore

=Min{0 $ + ( 1000 $ - 0 $) ; 4 000 $}

=1 000 $

Step 6

The balance of actuarial gains is 0 $

Balance=Actuarial gains - Max{Vfy endafter - Vfy endbefore ; 0} - Redemption

=1 000 $ - Max{1 000 $ - 0 $ ; 0 $} - 0 $

=0 $

Step 7

The value of the general account, taking plan experience into account, is 31 000 $.

GAfy endafter=Assetsfun - Vfy endafter

=32 000 $ - 1 000 $

=31 000 $

Step 8

The technical deficiency presented in the complete actuarial valuation report as at 31 December 2010 is eliminated.

The balance of actuarial gains that can be used to reduce certain amortization payments is nil. In addition, since no plan amendment is valuated for the first time as at 31 December 2013, no improvement unfunded liability has been determined. The technical deficiency is 12 000 $.

Technical deficiency=Liabilitiesfun - Wfun - (GAfy endafter + CV(Cfun))

=43 000 $ - 0 $ - (31 000 $ + 0 $)

=12 000 $

Important

Since the technical deficiency presented in the actuarial valuation report as at 31 December 2010 has been eliminated, the commuted value of the amortization payments remaining to be paid to amortize the funding deficiencies presented in the previous complete actuarial valuation is 0 $.


Table 2. Amortization payments according to the actuarial valuation as at 31 December 2013
Type of deficiencyDate determinedExpiryMonthly paymentCommuted valueNote
Technical2013-12-312028-12-31100 $12 000 $
Note Commuted value of amortization payments remaining to be paid as at 31 December 2013 (discount rate of 6%).

Step 9

As at 1 January 2014, the value of the reserve is 400 $.

Vstart fol fy=Vfy endafter - Min {Vfy endafter ; 0,5 x Ctech}

=1 000 $ - Min {1 000 $ ; 0,5 x 100 $/month x 12 months})

=400 $

Step 10

Since the reserve has decreased by 600 $, the value of the general account must increase by the same amount in accordance with the basic formula. As a result, the value of the general account as at 1 January 2014 is 31 600 $.

Step 11

The monthly payments relating to the technical deficiency are adjusted for 2014 to reflect the use of the reserve to offset a percentage of the amortization payments.

Table 3. Monthly payments to be paid into the pension fund in 2014
Type of deficiencyAmortization payments according to the actuarial valuation as at 31 December 2013Amortization payments to be offset by the reserveMonthly payments to be paid into the fund
Technical100 $50 $50 $

Determining amortization payments to be offset by the reserve for 2015

No complete actuarial valuation was carried out as at 31 December 2014. However, the plan administrator asked the actuary to determine the amortization payments to be offset by the reserve for 2015. The actuary must therefore consider the pension fund return in 2014.

The pension fund's rate of return for 2014 is 5%. The value of the reserve as at 31 December 2014 is 420 $ (400 $ x 1,05).

As at 1 January 2015, the general account is increased by 420 $ (35% of the amortization payment) and the reserve is reduced to zero.

Consequently, the monthly payments to be paid into the pension fund for 2015 are 65 $ (65% of the amortization payment).

Table 4. Monthly payments to be paid into the pension fund in 2015
Type of deficiencyAmortization payment according to the actuarial valuation as at 31 December 2013Amortization payments to be offset by the reserveMonthly payments to be paid into the fund
Technical100 $35 $65 $

Determining amortization payments to be offset by the reserve for 2016

No complete actuarial valuation was carried out as at 31 December 2015. The value of the reserve on that date is nil.

The monthly payments to be paid into the pension fund for 2016 are 100% of the amortization payments (100 $) required according to the actuarial valuation as at 31 December 2013.

Table 5. Monthly payments to be paid into the pension fund in 2016
Type of deficiencyAmortization payment according to the actuarial valuation as at 31 December 2013Amortization payments to be offset by the reserveMonthly payments to be paid into the fund
Technical100 $0 $100 $

Legal references

Note that...

A municipal sector pension plan is a plan where the employer is a municipality, a body referred to in section 18 of the Act respecting the Pension Plan of Elected Municipal Officers or a municipal housing bureau.

Important

View the full version in order to print it with a description of all variables.



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