A funding valuation uses several actuarial assumptions to project the value of future pension plan liabilities and contributions. Assumptions using professional judgment are made about future inﬂation, salary increases, retirement ages, life expectancy and other variables.
One of the most important assumptions is the discount rate, which plays a key role in assessing whether the pension plan has enough assets to meet its future pension obligations. The discount rate is used to calculate the present value of future pension benefits that the plan expects to pay to members as well as contributions it anticipates receiving. Plan liabilities are sensitive to changes in the discount rate, with a lower rate resulting in increased liabilities. The discount rate is derived from the expected rate of return on investments and takes into consideration the cost of running the plan and provisions for plan maturity as well as major adverse events, such as the 2008 financial crisis and the volatile effects of COVID-19 on the markets.
Ontario Teachers’ is facing imposing headwinds and an uncertain and unpredictable investment and geopolitical environment. In addition, there has been a sustained decline in long-term interest rates, reflecting a continuing “lower for longer” expectation. With these factors in mind, the board decided to lower the real discount rate from 2.6% to 2.45%. This is a prudent decision, particularly given the maturing demographics of the plan’s membership.