The Plan’s liabilities are calculated using an actuarial valuation which provides an estimate of the value of the Plan’s commitment to its beneficiaries. The most recent actuarial valuation was completed as at December 31, 2016 by Morneau Shepell, the firm appointed by the Board of Trustees to provide the Plan’s actuarial services. The 2016 valuation estimated the liabilities for the Plan to be $83.0 million. This figure includes both active in-force claims as of the valuation date and an allowance for claims incurred before the valuation date but not yet reported or adjudicated. It also includes a provision for future administrative expenses on claims incurred as of the valuation date. The market value of the assets in the Plan at December 31, 2016 was $154.0 million, resulting in a funding margin of $71.0 million and a funded ratio of 186%.
The estimated cost to provide ad hoc indexing to qualifying claims in payment at the end of 2017 and 2018 is $1.9 million. If this ad hoc indexing is approved, the funding margin of the Plan is reduced to $69.1 million and the funded ratio to 181%.
The Plan continues to have a strong funding position. Since the last full actuarial valuation as at December 31, 2014, the Plan’s funding margin has improved by $3.4 million (excluding the $1.9 million estimated cost of ad hoc indexing for 2017 and 2018). The main factors contributing to this improvement are:
The Plan’s investments earned approximately 3.7% per annum over the past two years versus the 3.0% per annum rate of return assumed in the 2014 valuation. In addition, the Plan had a significant funding margin as at December 31, 2014 ($67.6 million) on which to earn additional investment income. Taken together, these two items contributed $6.1 million to the Plan’s funding position.
The Plan also enjoyed a gain on claims incurred as at December 31, 2014 of $7.9 million due to a combination of factors. The main contributors were: better than expected claim termination experience ($1.7 million), lower than expected net benefit amounts ($1.5 million), and less claims than provided for in the incurred but not reported liability from the last valuation ($4.1 million).
On the other hand, experience on claims incurred since the last valuation has detracted from the Plan’s funding position. In particular, the estimated cost of new long-term disability claims (including associated administration expenses) has exceeded the premiums (including EI rebates) collected since the previous valuation. This gap between premium revenue and claim costs has reduced the Plan’s funding position by $10.6 million.
Going forward, current premium levels are expected to be below the best estimate range for the cost of new disability claims including associated administrative expenses. Given the Plan’s significant funding margin, this is not a cause for immediate concern. However, Plan staff continue to monitor emerging experience to ensure the balance between new disability costs and premiums is manageable for the Plan.
In addition to the Plan’s current funding position and the adequacy of current premium levels, the Board of Trustees review certain other metrics as part of its Risk Oversight function. In particular, the Board assesses the adequacy of the Plan’s funding level and the match between Plan assets and liabilities at each full actuarial valuation.
In terms of assessing the Plan’s funding level, the Board supplements the regular funded ratio with two additional measures. The first measure is to compare the funding levels to targets established in the Minimum Continuing Capital and Surplus Requirements (“MCCSR”) for insurance companies operating in Canada. The MCCSR is used by the Office of the Superintendent of Financial Institutions (OSFI) in its mandate to review the continuing viability of insurance companies in Canada. The MCCSR standard establishes target surplus requirements based on the amount and nature of both the benefits promised and the assets held to secure the commitment. As at December 31, 2016, the minimum target surplus requirement for the Plan according to MCCSR calculations is $20.7 million.
The second measure used to assess the adequacy of the Plan’s funding level is to compare its funding margin to a plan-specific target contingency reserve. This target is meant to constitute a reasonable, prudent contingency reserve for the Plan based on the major risks for the Plan beyond investment risk (which is largely mitigated through the use of a liability-hedging portfolio). It includes the risk of deteriorating experience on both in-force and new disability claims. The focus of the contingency reserve is to preserve the stability of Plan benefits and premiums. In particular, a fully funded contingency reserve should be able to withstand reasonably adverse experience for up to five years without premium or benefit changes being required to maintain the Plan’s fully funded status. In comparing the Plan’s funding levels to its target contingency reserve, the Plan’s funding margin is adjusted to reflect the relationship between premium revenue and expected new claim costs through an adjustment to Plan assets (i.e. premium levels greater than the expected costs of new claims would result in a positive asset adjustment while the opposite case would result in a negative asset adjustment). As at December 31, 2016 the Plan’s target contingency reserve is $47.0 million and its adjusted funding margin is $64.0 million.
The following table shows the funding position of the Plan for the last five years along with the additional funding adequacy measures monitored by the Board. Please note that the MCCSR and target contingency reserve figures are only calculated for those years where a full actuarial valuation was performed.
Source: Morneau Shepell
At December 31, 2016 the Plan had a funded ratio of 186%, an MCCSR ratio of 343%, and a contingency reserve ratio of 136%. A basic level of security is provided by a funded ratio of at least 100% (i.e. current claims are fully funded). A funded ratio of less than 100% indicates potential security concerns for current claims. An MCCSR ratio of 100% indicates that the Plan can withstand a short-term deterioration in claim costs and related factors similar to requirements that would be imposed on private sector insurers; this provides an additional level of security for the operations of the Plan compared to the regular funded ratio. The contingency reserve ratio is a target specific to the Plan’s internal policy and is based on an analysis of the Plan’s major risks and operations. A contingency reserve ratio of 100% indicates that, even in relatively adverse conditions, the Plan should be able to maintain the basic benefit security of a funded ratio of 100% or more without increasing premiums or reducing benefits for a period of at least 5 years. As illustrated in the preceding table, the Plan is presently well funded under all measures considered.
In addition to assessing the adequacy of its funding level, the Board of Trustees also review the Plan’s exposure to asset-liability mismatch risk. In particular, it compares projected benefit payments from the Plan to expected cash inflows from the Plan’s liability-hedging portfolio. By maintaining a good alignment between asset cash inflows and projected benefit payment outflows, the Plan can significantly reduce its interest rate risk. Projections from the current valuation show a good match between expected future benefit payments and expected asset cash flows from a fully-funded liability-hedging portfolio (130% of Plan liabilities).
Going forward, the Plan is considering a number of initiatives related to measuring and responding to the Plan’s funded position. A thorough review of the assumptions and methods used to estimate the Plan’s benefit liabilities is intended prior to the next actuarial valuation. In addition, a review of the Plan’s funding targets and approach is planned. This will include an evaluation of both the appropriate level of contingency reserves for the Plan and actions to be considered when the Plan’s funding margin is outside its target range. Care will be taken to ensure that the Plan’s valuation basis, funding approach and funding targets are consistent with one another and with the rules governing Health and Welfare Plans.
In summary, the Plan is currently financially sound and well able to meet the commitments made to existing disability claimants. At the same time, current premium levels are expected to be below the best estimate range for the cost of new disability claims including associated administrative expenses. Given the Plan’s strong funding position, this is not a cause for immediate concern. The Board will continue to monitor and respond to emerging Plan risks going forward. The actuarial valuation is performed every two years; accordingly, the next formal actuarial valuation of the Plan is scheduled for December 31, 2018.