Frequently Asked Questions
Please note that the system is governed by the Regulations and the Trust Deed used to establish the regime, as well as any amendments to these documents. In case of discrepancy between the FAQ and Regulations or the Trust Agreement, the provisions of the Regulations or the Trust Deed shall prevail.
We are happy to provide this Frequently Asked Questions (FAQ). We hope you will find answers to your questions! We plan to add topics to the list of FAQ with time. If you have a question that you think might interest other members, please contact us at email@example.com
If your question is not answered here, you may find the answer in our Plan Summary.
Type of plan/how it works
What does asset smoothing mean?
Asset smoothing is a technique used when an actuarial valuation is performed. The purpose of asset smoothing is to average investment performance over a period of years. In this way, the positive and negative gains/losses of a pension fund are “smoothed” over a period of years.
Smoothing allows the Trustees to focus on the long-term funding and well-being of the plan.
In the case of the Musicians’ pension plan, investment gains and losses are “smoothed” over a period of five years.
When I look at the fund’s audited financial statements, it often appears that payouts are a lot less than income. (For example, in 2010 payouts were approximately $30 million and income was around $60 million). With significant differences between income and expenditures, why can’t we pay more in benefits?
This question touches on some fundamental issues surrounding defined benefit pension plans. When the Trustees consider what benefits the plan can afford, they are required by legislation to assess the cost of providing all benefits earned, and not just those which are currently being paid.
Of course it’s important to have enough money in the fund to pay pensions to those who have already retired, but it’s equally important to build up assets in anticipation of paying pensions to those who have not yet retired. Assets also need to be there to cover benefits on termination and pre-retirement death.
The process involves something called an actuarial valuation. An actuary is a specialist in the mathematics of risk, especially as it relates to insurance and pension calculations such as premiums, reserves, dividends, insurance and annuity rates, and pension costs.
The Trustees employ the actuarial services of The Segal Company Ltd. Actuaries with that company are responsible for producing the actuarial valuation which is required by legislation to be performed at least once every three years. An actuary cannot operate independently — the Trustees are involved in the setting of the actuarial assumptions that are used in performing the valuation. As always, the Trustees must act in the best interests of the members when they are working through this process.
An actuarial valuation looks at the cost of benefits for everyone in the plan — active members, terminated deferred vested members, retirees, and beneficiaries. There’s a “backward looking” exercise and a “forward looking” one.
First, the actuarial report compares the assets of the plan to the cost of benefits earned (“the liabilities”) to the valuation date. It’s important to know that the plan is well funded in terms of the benefits earned to the valuation date.
As of the last filed valuation, the liabilities for retirees represented about 45% of the total liabilities. Liabilities for non-retired members represented about 55% of the total liabilities. Back to the question above — the Trustees are not permitted to focus only on the 45% of liabilities that are connected to benefits of the current retirees and beneficiaries. They must also ensure that the money is there to support the other 55%.
Next, the actuarial report examines the cost of future benefits being earned in the plan — it answers the question, “How much money is needed to be paid in the year following the valuation to pay for the benefits we expect will be earned in that year?”
Pension legislation requires an actuarial valuation to be performed periodically – at least once every three years. Our valuations are filed with the regulatory authorities and are available to members upon request.
The plan is a registered pension plan (RPP) — but there are two types. Which type of plan is our plan?
The two types of RPP are defined benefit and defined contribution. Your plan is a defined benefit plan.
A defined contribution plan works much the same as RRSPs — money is contributed, it accumulates with tax-sheltered investment income, and the resulting accumulated amount is used at retirement to produce income. The amount of the income depends on the amount of contributions, the investor’s ability to maximize investment income, and the type of income option(s) chosen at retirement.
A defined benefit plan (such as the Musicians’ pension plan) is very different. The member’s benefit at retirement is based on a defined formula. The pension based on that formula is guaranteed to be paid for the member’s lifetime (and sometimes longer depending on the survivor benefits provided by the plan).
In a defined benefit plan, the contributions coming into the plan (and investment income) are used to pay the promised benefits. The contributions and earnings are not made to an account in respect of a single member (as they would be if the plan was a defined contribution plan) — they are all commingled in a single fund which is used to pay benefits to all plan members and beneficiaries.
What is solvency funding?
Solvency funding starts with a solvency valuation which looks at what would happen if the plan were wound up immediately. As required by provincial law, it takes a very short-term approach and measures the level of benefit security in case a plan is suddenly terminated (e.g., if the plan is cancelled or the sponsoring company goes out of business). This could be a real concern with a single-employer plan, but is less likely in a multi-employer pension plan like ours where many employers are involved and contribution rates are set out in negotiated agreements.
Ontario legislation permits plans like ours to apply for an exemption from funding the plan on a solvency basis. The Musicians’ pension plan has been exempt from the requirement for solvency funding since 2008. This exemption has been approved to continue until August 31, 2017. For more information on this exemption, please link to the in In concert, Winter 08 / 09 posted on our website.