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 iffthey 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.
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
| where | Assets | = | market value of assets
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| | GA | = | value of the general account
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| | V | = | value of the reserve
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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 end before = Vstart fy x (1+i)
| where | Vfy end before | = | value of the reserve as at the valuation date, before plan experience is taken into account
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| | Vstart fy | = | value of the reserve at the start of the fiscal year, as defined in step 9
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| | i | = | pension fund return during the fiscal year.
The return can be negative.
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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.
GA fy end before = Assets fun - Vfy end before
| where | GA fy end before | = | value of the general account as at the valuation date, before plan experience is taken into account
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| | Assets fun | = | assets as at the valuation date, determined on a going concern basis
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| | Vfy end before | = | value of the reserve as at the valuation date, before plan experience is taken into account
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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 ; GA fy end before + [PV (C fun before ) + MDC] - (Liabilities fun - Wfun)}
| where | GA fy end before | = | value of the general account as at the valuation date, before plan experience is taken into account
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| | PV (C fun before ) | = | 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
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| | 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  . The accumulated value is based on the discount rate used in the latest actuarial valuation and determined on a going concern basis
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| | Liabilities fun | = | liabilities as at the valuation date, determined on a going concern basis
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| | Wfun | = | value as at the valuation date, on a going concern basis, of the additional obligations resulting from amendments valuated for the first time
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Actuarial gains are composed of:
- additional contributions
- technical gains or losses
- other gains.
Additional contributions are calculated as follows:
additional contributions = Max{0 ; CV(C paid) - CV (C required )}
| where | CV(C paid) | = | 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
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| CV (C required ) | = | 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 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 end after = Min {Vfy end before + (technical gains - Redemption) ; PAD before}
| where | Vfy end after | = | value of the reserve as at the valuation date, taking plan experience into account
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| | Vfy end before | = | value of the reserve as at the valuation date, before plan experience is taken into account
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| | 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 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. |
| | PAD before | = | provision for adverse deviation as at the valuation date, before plan experience is taken into account
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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 end after - Vfy end before ; 0} - Redemption
| where | Balance | = | balance of actuarial gains after the growth of the reserve resulting from plan experience
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| | Vfy end after | = | value of the reserve as at the valuation date, taking plan experience into account
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| | Vfy end before | = | value of the reserve as at the valuation date, before plan experience is taken into account
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| | 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 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.
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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.
GA fy end after = Assets fun - Vfy end after
| where | GA fy end after | = | value of the general account as at the valuation date, taking plan experience into account
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| | Assets fun | = | assets as at the valuation date, determined on a going concern basis
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| | Vfy end after | = | value of the reserve as at the valuation date, taking plan experience into account
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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 .
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 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 end after - Min {Vfy end after ; 0,5 x C tech}
| where | Vstart fol fy | = | value of the reserve at the start of the fiscal year following the valuation date
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| | Vfy end after | = | value of the reserve as at the valuation date, taking plan experience into account
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| | C tech | = | 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 , 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 deficiency | Date determined | Expiry | Monthly payment | Commuted valueNote |
|---|
| Technical | 2007-12-31 | 2022-12-31 | $143 | $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 end before | = | Vstart fy x (1 + i)
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| = | 0 x (1 + i)
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| = | 0
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Step 2
The value of the general account, before plan experience is taken into account, is $32 000.
| GA fy end before | = | Assets fun - Vfy end before
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| = | $32 000 - $0
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| = | $32 000
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Step 3
The amount of the provision for adverse deviation is $4000, that is, 7% of the liabilities determined on a solvency basis.
Step 4
| Actuarial gains | = | Max{0 ; GA fy end before + CV (C fun before ) - (Liabilities fun - Wfun)}
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| = | Max {0 ; $32 000 + $12 000 - ($43 000 - $0 ) }
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| = | $1000
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Actuarial gains include the following:
- additional contributions = $0
- technical gains = $1000
- other gains = $0.
Step 5
The value of the reserve, taking plan experience into account, corresponds to:
| Vfy end after | = | Min{Vfy end before + (technical gains - Redemption) ; PAD before
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| = | Min{$0 + ( $1000 - $0) ; $4000}
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| = | $1000
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Step 6
The balance of actuarial gains is $0
| Balance | = | Actuarial gains - Max{Vfy end after - Vfy end before ; 0} - Redemption
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| = | $1000 - Max{$1000 - $0 ; $0} - $0
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| = | $0
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Step 7
The value of the general account, taking plan experience into account, is $31 000.
| GA fy end after | = | Assets fun - Vfy end after
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| = | $32 000 - $1000
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| = | $31 000
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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 | = | Liabilities fun - Wfun - (GA fy end after + CV(C fun))
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| = | $43 000 - $0 - ($31 000 + $0)
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| = | $12 000
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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 deficiency | Date determined | Expiry | Monthly payment | Commuted valueNote |
|---|
| Technical | 2013-12-31 | 2028-12-31 | $100 | $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 end after - Min {Vfy end after ; 0,5 x C tech}
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| = | $1000 - Min {$1000 ; 0,5 x $100/month x 12 months})
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| = | $400
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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 deficiency | Amortization payments according to the actuarial valuation as at 31 December 2013 | Amortization payments to be offset by the reserve | Monthly payments to be paid into the fund |
|---|
| Technical | $100 | $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 deficiency | Amortization payment according to the actuarial valuation as at 31 December 2013 | Amortization payments to be offset by the reserve | Monthly payments to be paid into the fund |
|---|
| Technical | $100 | $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 deficiency | Amortization payment according to the actuarial valuation as at 31 December 2013 | Amortization payments to be offset by the reserve | Monthly payments to be paid into the fund |
|---|
| Technical | $100 | $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
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