Funding

Defined benefit pension plans, such as HOOPP, are unique in their reporting of assets and liabilities.

That's because defined benefit plans must be able to meet financial obligations - in the form of benefits owed to members - that may not be paid for many years. So, both assets and liabilities must be assessed with a long-term view.

Despite the long-term view, to manage risk HOOPP conducts a funding valuation each year. The funding valuation determines the Plan's liabilities - the amount of money needed to pay the benefits earned to date by members - and the Plan's assets. To determine the benefit obligations, the valuation uses assumptions about when members will retire, terminate, and die, as well as future rates of interest, inflation, and salary increases, to determine how much will be needed to pay benefits and for how long. In estimating the funding value of the Plan's assets, the valuation employs a five-year average of previous year-end asset values, all extrapolated to the valuation date. This lessens the impact of short-term volatility in financial markets, to better match the value of assets to the long-term nature of the liabilities.

The funding valuation is also used to determine the amount of money the Plan needs, via member and employer contributions, to fund benefits as they continue to be earned.

As part of the valuation process, the Plan's actuary reviews the economic and demographic assumptions used in the last valuation and adjusts them where necessary. The actuary also conducts a gain/loss analysis comparing the Plan's experience - the actual benefits earned and paid out and the year's actual smoothed investment returns - with the projections from the last valuation.

The valuation produces an actuarial balance sheet comparing the Plan's liabilities to its assets to determine if sufficient funds have been set aside to date. The valuation may show that the Plan is fully funded, in a surplus position, or underfunded (has a funding deficiency). Federal tax law limits the amount of funding surplus a pension plan can carry, while provincial pension law requires that funding deficiencies be made up within set time limits to ensure members' benefits are adequately protected.

HOOPP is required to file a valuation report with the Financial Services Commission of Ontario at least every three years.