Monday, August 16, 2010

Canadian Pension Fund Ratio Calculations

The recent Bulletin (August 6, 2010), provides estimates for both negotiated and non negotiated Defined Benefit pension plans to have a wind up ratio of approximately 64%(including indexing). Estimates on a solvency basis, stated that the Negotiated Plan is estimated to be funded at 76% while the Managerial Plan is estimated to be funded at 72%"

A retiree wrote to Kosie Monsky asking for clarification of the calculation methods and this is the response he received:

“The numbers are estimates, based on a monthly funded status prepared by Nortel's actuaries as at June 30, 2010, and are subject to many variables and fluctuate with interest rates and market conditions.

Solvency ratios use assumptions consistent with the plan being terminated, and are based on current financial market conditions. While in regular actuarial reports the solvency ratio often coincides with the wind up ratio, when a pension plan is actually wound up, the wind up and solvency ratios are often different amounts. The wind up ratio is subject to the reality of paying the lump sums on the annuity contracts as well as the costs of the wind up, which is a reason why the wind up ratio is lower than the solvency ratio.

The Nortel pension plan offers a specific benefit known as indexing, which means that the pension amounts are adjusted to provide for inflation-related increases. The Plans are either related to the Consumer Price Index or are adjusted based on a fixed percentage. However, the solvency ratios of 76% and 72% do not include indexing. This is another reason why the wind up ratio is lower than the solvency ratio.”

Another retiree wrote that he thought the wind up ratio calculation procedure may be more complex than that. In order to place the pension claim against Nortel in CCAA proceedings some estimates will have to be made, perhaps before the plan is fully wound up.

Nortel's actuaries will table an 'estimated' windup ratio. Koskie Minsky's actuarial consultants will table one as well on behalf of the NRPC/pensioners. However the operative windup ratio will be determined (later) by the insurance company which ultimately (will or would like to be) providing the annuity, if the NRPC are not successful in getting the Ontario government to allow a private company to continue to run the pension fund without annuitizing it.

So, since the claim submission to the court will be done before the annuity quotes are received (and certainly before they are finalized), how will the likely insurance company view be reflected in the claims and what steps are planned to insure that the expected (10-20%) insurance company hit is properly reflected in the claim.

So the operative insurance company quote and/or delivered pension may be 10-20% lower than a Nortel or other actuarial estimate which means that the real pension pay out ratio could drop by a further 6 to 12 percentage point or between 52% and 58% funded ratio.

Hence it would be wise to assume for budgeting reasons that the cut to our pension could be anywhere from 40% -50%.

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