Pension plans operate with an extended time horizon. After all, the benefits earned by members today may not start to be paid out for many years – in some cases, 30 or more years. With this in mind, pension plans need to manage their assets and liabilities with a view to the future.

Valuing assets

Like most pension plans, HOOPP uses market prices to determine the current value of its assets. In other words, the value of an individual asset is based on what that asset could be sold for in the current investment market.

Once the market value of assets has been determined, an “actuarial smoothing technique” is applied, which takes into account the market value of assets at the previous four year-ends, all of which are extrapolated to the end of 2007. This process minimizes the impact of market volatility in any one year and helps the Plan avoid making decisions based on short-term market fluctuations.

Valuing liabilities

The value of the Plan’s obligations are calculated using the “projected accrued benefit method,” prorated on service. This means that HOOPP calculates how much money must be invested today to pay – in the future – the benefits members have earned, based on the pension service earned up to the date the obligations are calculated.

To calculate liabilities, HOOPP takes into account any benefits that existing members will “grow into” as they earn more service (such as the early retirement bridge benefit).

HOOPP also makes a number of assumptions about future economic, market and demographic conditions. For example, assumptions are made about:

• when members will retire (or leave the Plan)
• how long members will live once they retire
• how much members’ salaries will grow
• the return HOOPP will get on its investments

These assumptions and economic forecasts are reviewed at least annually to ensure they remain appropriate in the face of evolving economic, market and demographic conditions.

Determining funded status

The funded status of the Plan is simply the ratio of the Plan’s total assets to its liabilities.

• If the Plan’s assets exceed its liabilities, then it should have enough money to meet future financial obligations. This means the Plan is fully funded.
  
  

• If the Plan’s liabilities exceed its assets, the plan has a shortfall, and is not fully funded.

In 2007, HOOPP was able to

• announce it will hold contribution rates stable until at least 2009
• provide a cost-of-living adjustment for all pensioners equal to 75 per cent of the increase in the consumer price index
• reduce the risk in the HOOPP investment portfolio