Every year at LAPP we estimate Plan costs by setting assumptions with our actuary and completing an actuarial valuation.
An actuarial valuation is a mathematical analysis of the financial condition of a pension plan. Normally, an actuary prepares an actuarial valuation for a pension at least once every three years. The valuation determines the financial position of the pension plan and the future contribution rates needed to ensure the long-term funding of the Plan. The actuary determines how much money the plan needs to pay pensions by making assumptions about future investment returns, future inflation rates, future increases in salaries, retirement ages, life expectancy, and other factors.
By regulation, an actuarial valuation must be conducted every three years and filed with the Canada Revenue Agency (CRA). At LAPP, we conduct an actuarial assessment every year to pay closer attention to the pension plan's assumptions, experience, and investment performance.
In the years an actuarial assessment is filed with the CRA, we complete a report called an Actuarial Valuation Report. Summaries of these reports can be found in Funding and Investment Publications.
Based on the valuation, the Sponsor Board decides what contributions rates will be.
Pension plans are only required to do an actuarial valuation once every three years, but LAPP does one annually to be sure we are always on top of any gap between what we hold in the Fund and what we estimate we will need to meet our pension obligation.
When our assets meet or exceed our liabilities it means we are fully funded, and if they do not, then we are considered underfunded. Because we can only estimate our liabilities, we have no way of ensuring we are balancing our assets and obligations appropriately until the year is over and we see what we experienced.
We review our actual plan experience every year, measuring what actually happened against what we assumed would happen, and then make adjustments to our assumptions as necessary. Given the number of assumptions and the uncertainty around each, careful management of your pension plan requires an understanding of the key drivers of risk and an ability to adapt to change, whether in the external environment or within the Plan.