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Sandra Marcellus
The recent downturn in the stock market and the crisis in the world’s financial sector are worrisome. Should teachers be concerned about the effect this may have on their pensions? Sandra Marcellus, ATA executive staff member in Teacher Welfare, explains the difference between a defined benefit plan and a defined contribution plan and how the market influences these two different plans.
The Alberta Teachers’ Pension Plan (the Plan) is a defined benefit plan. In a defined benefit plan, the benefit (pension) that a member receives is defined by a formula, in our case, a formula contained in Alberta’s Teachers’ Pension Plan Act. The pension a teacher receives is calculated using the teacher’s salary and years of service, not using the contribution rate or the fund’s investment performance. A teacher retiring at the end of October 2008 will receive a pension similar to that of a teacher who retired in October 2007, as long as the teachers have the same five-year average salary and same length of service.
Defined benefit pension plans are often confused with defined contribution plans. In a defined contribution plan, it is the contributions that are defined, not the pension. The pension is made up of the sum of the employee’s contributions, the employer’s contributions and any investment earnings made on those contributions, much like an RRSP. Market declines have an enormous effect on defined contribution pensions because they can significantly reduce what employees have in their pension account when they wish to retire.
In defined contribution plans, the individual employees bear the risk of market decline. Employees enrolled in such a plan can’t fully predict what the pension amount may be. In a defined benefit plan, the pension amount is predictable and the risk is shared by the employer (the provincial government) and all plan members. For the Plan, the risk is not reduced pensions but, rather, increased contributions.
In defined benefit plans, contributions are made every year to fund future pensions. The amount of contributions required is determined by an actuarial valuation of the plan and an analysis of its members. A key assumption in an actuarial valuation is the market return; the higher the rate of return of the investments, the less the contributors have to contribute. If the market does not return as expected over time, contributions may have to increase to make up the required amount.
The Plan’s fiscal year is September 1 to August 31. Currently, a valuation is being conducted based on the Plan’s assets and liabilities as of August 31, 2008. The recent market decline will not affect that valuation but, as with any valuation, contribution rates may change as of September 1, 2009 because of other factors. The next valuation is scheduled for August 31, 2009, giving the markets 10 months to recover. That new contribution rate will go into effect September 1, 2010.
As administrator and custodian of the Plan’s funds, the Alberta Teachers’ Retirement Fund (ATRF) has more specific information on how the Plan’s assets are invested. For more information, visit ATRF’s website (www.atrf.com).
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