Financial Markets and Our Pension Fund

Dr. Cornelis van de Panne has recently written a small piece in which he gives his opinion on the effects of the recent financial turmoil on our pension fund and our pensions.

The daily dives of the stock-market may have frightened many pensioners who know that their pension-funds have invested in stock-market shares. As our pension-fund, the Universities Academic Pension Plan, has large investments in various stock-markets, we may want to know how the financial turmoil will affect our pension-fund and also our pensions.

I did some calculations, the results of which are given below. They are based on very rough assumptions, which means that the results can easily be wrong. I used some stock-market indices and results for some TD mutual funds that I thought might be used to estimate what happened to the UAPP investment portfolio. I assumed that the investments have stayed the same from the beginning of the year, and that the liabilities remain the same. I also assumed that there will be no unpleasant surprises in terms of contracts. Anyway, this is the best I can do.

Millions of $ Dec. 31, 2007 %age Decline Value Oct.22, 2008 Fixed Income Securities $685 0.00% $685 Canadian Equities $493 33.23% $329 US Equities $498 21.77% $390 Int. Eq.(excl. Em. M.) $523 31.93% $356 Em. Markets $76 50.53% $38 Other Investment $226 30% $158 Total $2,501   $1,956 Relative value 100%   78% Percentage decline   22%   Estimated Funded Ratio 82.5%  



The results are as follows. The value of the portfolio from the beginning of the year has gone down by 22%. This means that the funded ratio has gone down from 82.5% to 64.5%, so that the liabilities (pensions to be paid out) are only covered by 2/3, or that there is shortfall of 1/3. This does not mean that they are going to pay out only 2/3 of our pension, because of the following.

1. The sponsors of the fund, the Employers (Alberta Universities) and the Employees (Faculty of these universities) are legally responsible for the payments to which the pensioners are entitled.

2. Payments are spread over time and in the coming years the stock-market may yield returns compensating for the current losses.

3. The liabilities depend on the long bond interest rate. If it increases in the future (not unlikely), the liabilities go down.

For the real results we will have to wait until the results for the fourth quarter and for the entire year of 2008 are out.

I have no reason to think that the UAPP is not well managed. They have good people in the investment committee. If you compare the UAPP annual results with those of your own investments, you will probably find they did rather well.

Cornelis van de Panne.