A funding valuation is an assessment of the long-term financial health of a pension plan. The valuation shows whether the plan has a surplus of assets, a shortfall of assets or the right amount of assets needed to pay future pension benefits. A valuation is a good measure of the pension plan's financial health because it looks ahead to the remaining lifetime of each plan member.
A plan sponsor is responsible for ensuring that a defined benefit pension plan is fully funded.
The Ontario Teachers' Pension Plan has two sponsors:
These co-sponsors must agree to the use of surplus funds and when there is a funding shortfall, both share responsibility for eliminating it.
The sponsors are required to file a funding valuation with the regulators at least once every three years although they also have the option to file more frequently.
A filed valuation must show that the plan has enough assets to meet the projected cost of future pension benefits. The valuation cannot be in a deficit position when filed.
If a preliminary valuation shows a shortfall or a surplus, the sponsors jointly decide on how they will balance the plan before the valuation is filed with the regulators.
The sponsors have a Funding Management Policy that guides their decisions on how to use any surplus funds or resolve any shortfall.
To address a funding surplus or shortfall, they can:
We conduct two different actuarial valuations.
A key reason for the different results between the two valuations is how the discount rate is set. The lower the discount rate, the higher the liability.
Discount rate for funding valuation
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.
For the January 1, 2025 funding valuation, the nominal discount rate was 4.7% with an underlying real return of 2.65%.
Discount rate for financial statement evaluation
Our financial statement valuation discount rate (4.25%) is based on market rates. This is determined as at the valuation date of bonds issued by the province of Ontario. These bonds have characteristics similar to the plan’s liabilities. The discount rate was determined by applying a weighted average discount rate that reflects the estimated timing and amount of benefit payments
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:
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 our future pension obligations.
The discount rate is used to calculate the present value of future pension benefits and contributions.
Plan liabilities are sensitive to changes in the discount rate, with a lower rate resulting in increased liabilities and a higher rate resulting in decreased liabilities. The discount rate is a long-term assumption and is based on the expected rate of return on investments and considers interest rate trends, plan maturity, risk tolerance and major adverse events.
The discount rate is approved annually by the Board members. The process to set the discount rate is robust to ensure this assumption is reasonable and appropriate for the plan.
Taking into consideration directional trends in observed real yields over the last three years and their potential translation into higher expected returns, the board decided to increase the real discount rate by 0.1% to 2.65% for the January 1, 2025 preliminary valuation. At the same time, as we continue to live in an uncertain and unpredictable investment and geopolitical environment, the real discount rate continues to reflect prudent provisions to navigate headwinds posed by the plan’s maturity, global economic challenges and an uncertain long-term outlook. The change in the real discount rate increased the preliminary surplus by $5.4 billion. With respect to inflation, the board chose to hold the long-term inflation rate steady at 2.00%, consistent with the rate used for the January 1, 2024 valuation.
Regarding other non-economic assumptions, following a review of demographic experience, the board chose to make adjustments to assumptions relating to the rates of mortality, mortality improvement, withdrawal and reinstatement. These adjustments resulted in an increase in preliminary surplus of $3.7 billion.
The discount rate must be realistic to avoid masking plan funding issues that could impact future generations of retirees and plan members.
For example:
| Filed funding valuation1 | Discount rate/inflation rate |
| January 1, 2024 | 4.60% (2.55% real, 2.0% inflation) |
| January 1, 2023 | 4.50% (2.45% real, 2.0% inflation) |
| January 1, 2022 | 4.50% (2.45% real, 2.0% inflation) |
| January 1, 2021 | 4.50% (2.45% real, 2.0% inflation) |
| January 1, 2020 | 4.65% (2.60% real, 2.0% inflation) |
| January 1, 2018 | 4.80% (2.75% real, 2.0% inflation) |
| January 1, 2017 | 4.80% (2.75% real, 2.0% inflation) |
| January 1, 2016 | 4.80% (2.75% real, 2.0% inflation) |
| January 1, 2015 | 4.85% (2.85% real, 2.0% inflation) |
| January 1, 2014 | 4.95% (2.85% real, 2.1% inflation) |
| January 1, 2012 | 5.30% (3.1% real, 2.2% inflation) |
| January 1, 2011 | 5.40% (3.25% real, 2.15% inflation) |
Effective January 1, 2016, the real rate shown is the geometric difference between the discount rate and the inflation rate. Previously, the real rate shown was based on the arithmetic difference between the discount rate and the inflation rate.
1 Valuation filling dates are determined by the plan sponsors.