A Look at LAPP's Funding Policy

Under the provisions of the Joint Governance of Public Sector Pension Plans Act, LAPP's Sponsor Board is responsible for establishing a funding policy under the Employment Pension Plans Act (EPPA) that addresses:

• The frequency of actuarial valuation of the Plan; and
• Investment (and other) risks.

The funding policy adopted by the Sponsor Board is further intended to:

• Enable the sound financial management of the Plan;
• Articulate the rationale behind the Sponsor Board’s funding practices;
• Provide guidance to LAPP Corporation as the administrator of the Plan and support the formulation of appropriate risk control constraints within the Statement of Investment Policies and Procedures (SIPP); and
• Establish a transparent framework for funding decisions.

Funding Objectives
When establishing the Plan funding levels, the key objectives in order of priority are:

• To secure Plan benefits;
• To ensure the financial sustainability of the Plan, including stabilization of contribution rates whenever possible to acceptable levels of stakeholder funding risk; and
• To ensure, to the extent possible after the first two objectives have been met, that each generation of active members funds only the benefits accruing for that generation of active members.

In outlining these objectives, the Sponsor Board recognizes the prudence of keeping the Plan fully funded whenever possible. Whenever circumstances arise which reduce the Plan’s funded position below a fully funded level, the Sponsor Board shall restore the Plan’s funded status over an appropriate period of time and in a manner that reflects these objectives, while adhering to the requirements of the EPPA.

Key Risks
Plan benefits are entirely funded from the combination of contributions and investment returns. Over the long term, investment returns fund the vast majority of the cost of pensions. Investment risk is necessary to maintain affordable contribution rates but introduces the potential for contribution rate volatility. Contribution rates above a certain level are not sustainable and the Plan design has no contingent benefits that can help to manage funding risk. Therefore, investment risk must be balanced against contribution volatility for the long-term sustainability of the Plan.

Funding Risk Appetite
As described under Funding Objectives above, the purpose of Plan funding is to secure Plan benefits, to achieve financial sustainability, and to ensure, to the extent possible, that each generation of active members fund only the cost of their own benefits. The Sponsor Board aims to achieve financial sustainability while balancing the stabilization of contribution rates and aligning, to the extent possible, the investment risk with an acceptable level of stakeholder funding risk.

To maintain the financial sustainability of the Plan, in Funding Target Ranges (see below) the Sponsor Board has defined a target contribution range for employer plus employee contributions to the Plan, as well as a targeted maximum contribution. Total contributions are expected to fluctuate within the target contribution range and, when within that range, are considered an acceptable level of stakeholder funding risk. Increases in future contribution rates that cause total contributions to increase to outside the target contribution range are considered acceptable for temporary periods of time. Any increase which causes total contributions to exceed the targeted maximum contribution, while possible in the short term, creates an unacceptable level of stakeholder funding risk and threatens the long-term stability of the Plan.

Funding Target Ranges
To maintain financial sustainability of the Plan and in consideration of the Plan’s current design and benefit structure, total employer plus employee (member) contributions to the Plan are intended to meet the following criteria whenever possible:

• Target contribution range: 17% to 20% of pensionable pay is desired approximately 75% of the time and represents the range where most stakeholders would be comfortable; and
• Targeted maximum contribution level: 25% of pensionable pay, with the probability of exceeding this threshold to be less than 5.0%. This represents the level where stakeholders would be concerned and/or there is a potential to create issues that would threaten the long-term sustainability of the Plan.

Frequency of Valuations
Actuarial valuations prepared in accordance with the EPPA and the Income Tax Act (ITA) are required to be filed with the Alberta Superintendent of Pensions and the Canada Revenue Agency, respectively, at least every three years.

Amendment and Review
The funding policy is the responsibility of the Sponsor Board. It may be revised by the Sponsor Board at any time; however, the Sponsor Board shall formally review the funding policy at least once every three years.