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The Alberta Teachers’ Retirement Fund employs pension counsellors who conduct personal interviews with plan members in Edmonton and throughout Alberta.
During 2015-16, more than 800 members visited the ATRF office for an interview and nearly 1,110 interviews were conducted elsewhere in the province. Photo: ATRF
Derek Brodersen
Julie Joyal
Teachers’ pension plan remains secure while changing with the times
We often hear in the news about the state of different pensions. From time to time, questions about the security of defined benefit pension plans arise, leaving plan members asking: “Is my pension safe?”
Good governance
In 75-plus years of operations, the Alberta Teachers’ Retirement Fund (ATRF) has been part of the ever-changing, growing, dynamic landscape of fund investment and pension delivery in Alberta.
The ATRF is governed by a board that consists of members nominated by the Alberta government and the Alberta Teachers’ Association. All appointments to the board are made by the cabinet.
The focus of the ATRF board is to ensure that teachers’ pensions are secure, fully funded and well managed. There are many elements that the board considers when approving the long-term funding policy, including interest rates, market volatility and significant changes to plan member demographics (including longer life expectancy). When the board approves the detailed, long-term funding policy, it is with the sole objective of ensuring the plan becomes and remains fully funded.
Each year the ATRF conducts an actuarial valuation that reviews all critical aspects of the funding formula. This includes a review of key questions including
- At what age do plan members retire?
- How many years of pensionable service do they have when they retire?
- What is the expected average salary increase in the future?
- How long are plan members expected to live after retirement?
- What is the expected long-term return on investments?
ATRF employs more than 30 investment professionals to manage its assets, which exceed $13 billion in value. Photo: ATRF
The valuation helps the board establish an appropriate contribution rate to reduce the unfunded liability, ensure the plan is fully funded and thereby make the pensions more secure.
Fully funding the plan
In spite of the best efforts to predict the outcome of all the moving parts that affect the plan, unexpected events—such as a global financial crisis—can set pension plans back and may result in the plan not being fully funded. This is called an unfunded liability, which means the assets in the fund today do not meet the present value of the future pension payments.
Currently the ATRF plan does have an unfunded liability, which developed as a result of three main factors:
In 2002 and 2008 the world faced financial crises that negatively impacted returns on investments. Investment returns go in cycles. Some years are very strong, but periods of very weak returns have a significant impact on plan assets.
- Changing member demographics
People are generally living longer than before, with teachers living longer than most. Additionally, teachers now retire on average two years sooner than they did in 1970. On average, teachers now collect pensions for 30 years, which is up to 10 years longer compared to the average in 1970. These changes are good news for individual plan members, but the longer pensions put a strain on the plan.
As part of the board’s vigilance in securing long-term sustainability, prudent steps have been taken to use more conservative assumptions than in the past to calculate the value of the plan’s liabilities. These assumption changes reflect the current realities of lower expected long-term investment returns and the improving member demographics. While these more conservative assumptions cause the value of the plan’s liabilities to increase in the short term, they reduce the risk for the plan in the long run.
When an unfunded liability does arise, the contributions made by active teachers and the government are adjusted so that any deficiency is eliminated over a 15-year period, as required by legislation.
With current contribution rates, the unfunded liability is expected to be eliminated over the next 11 years, so provided that no new deficiencies arise, the fund is expected to be fully funded by 2027.
Predicting returns
How do we know that we will earn the investment returns expected in the funding formula? Unfortunately there are no guarantees in investments; however, the ATRF has a 35-person investments team that’s dedicated to managing the plan’s $13.4 billion in assets.
The plan’s portfolio is highly diversified across many different geographies and types of assets, from publicly traded securities such as stocks and bonds to private market assets such as private equity, real estate and infrastructure. Risk in both the markets and the investment portfolio is constantly monitored, and adjustments are made when needed in order to achieve the returns needed to fund the plan over the long term.
Conclusion
ATRF plan members can be confident in the board’s continued focus on funding valuation, actuarial assumptions and a strong funding policy for the plan. We continue to work diligently in partnership with our plan sponsors and stakeholders to ensure your pensions are as secure as they can be, now and in the future.
Derek Brodersen is the chief investment officer with the Alberta Teachers’ Retirement Fund and Julie Joyal is vice-president of pension services.
