A funding valuation uses a number of 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 for the board to consider is the discount rate,which is used to calculate the present value of future pension beneﬁts 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.
As noted in the Report from the Chair, Ontario Teachers’ is facing imposing headwinds and after years of strong financial market returns, the threat of an economic downturn is real. In addition, there has been a sustained decline in long-term interest rates, reflecting a “low for longer” expectation. With these factors in mind, for the first time since 2016, the board decided to lower the real discount rate from 2.75% to 2.60%. This is a prudent decision, particularly given the maturing demographics of the plan’s membership.
At Ontario Teachers’, the assumption setting process is extremely robust and includes detailed stochastic analysis to support the board in setting the discount rate as well as an annual in-depth analysis of plan experience by the plan’s external actuary. If assumptions show a pattern of deviating from actual experience, they are reviewed and may be adjusted. The external actuary works closely with the board to set assumptions and confirm they are appropriate. The Canadian Institute of Actuaries (CIA) Standards of Practice require that each assumption is independently reasonable and that assumptions are appropriate in aggregate.