Actuarial Notes

Funding Policy for the Public Sector Pension Plans

By Treasury Board of Canada Secretariat · 2019

Study guide: Exam RET-201

The funding policy for the defined benefit pension plans the Government of Canada sponsors for the public service, the Canadian Forces (Regular Force and Reserve Force) and the Royal Canadian Mounted Police, administered by the President of the Treasury Board. Its purpose is to provide the decision framework to support the funding of the plans, formalizing the relationship between the Treasury Board of Canada Secretariat, the Office of the Chief Actuary and the Public Sector Pension Investment Board. The policy was approved by the Treasury Board in 2018.

On the syllabus

  • Exam RET-201 — RET201-120-25: Funding Policy for the Public Sector Pension Plans; outcome 5b.

Introduction

1 Purpose and scope of the funding policy

  • The scope is limited to the government's liabilities from pensionable service accrued since April 1, 2000 under each plan (2007 for the Canadian Forces Reserve Force plan).

2 Funding policy objectives

  • Accumulate and sustain sufficient assets to provide the accrued pension benefits.
  • Limit the volatility in plan funding and achieve stable and predictable current service cost and special payments.
  • Keep the plans affordable and sustainable over the long term.
  • Support intergenerational fairness.

3 Guiding principles

4 Funding risks

5 Actuarial methods

  • Valuations for funding are conducted by the Chief Actuary at least every 3 years.
  • The projected unit credit method determines plan liabilities and current service cost, on a going concern basis with discount rates based on the Chief Actuary's expected return on the invested assets.
  • A smoothed value of assets is used, and best estimate assumptions are used without additional margins.

6 Current service contributions

7 Deficits and surpluses

  • A deficit is normally amortized in equal annual special payments over 15 years.
  • A surplus below the non-permitted surplus limit is normally retained in the plan as a prudent margin; above the limit, government contributions cease.

8 Risk management

  • The funding risk is limited to a lower than 5% chance of being less than 70% funded over a 10-year horizon, assuming a fully funded initial position.
  • A sustainability review is conducted at least every 5 years.

9 Reporting and monitoring

10 Communication

11 Policy approval, review and compliance

Appendix 1: Illustration of investment risk

Sources