2008 Annual Report - IWA Forest Industry Pension Plan

PLAN’S FINANCIAL POSITIONSOLVENCY LIABILITYSolvency is the ability of an entity to pay future financial obligations. The Pension Benefits Standards Act of British Columbia regulatespension plans for solvency requirements. “Solvency valuations” are filed every three years with the Financial Institutions Commissionof BC. The solvency valuation provides an estimate of the ability to pay the obligations of the Plan assuming that the Plan is woundup on the valuation date.The assumptions used to determine the solvency liabilities are developed based on the manner in which benefits would likely besettled if the Plan was wound up on the valuation date. For this purpose, it is assumed that all members under age 55 would receivea commuted value and that all members age 55 and over would have an annuity purchased on their behalf. These assumptionschange over time, as economic conditions change.The key assumption is the interest rate used to calculate the solvency liability. The interest rate is determined based on yields onlong term bonds and is mandated by the government and the actuarial profession. The Trustees have no control over the selectionof this assumption. When the interest rate declines, the solvency liability increases. Conversely, when the interest rate rises, thesolvency liability decreases. In the last 10 years, the interest rate has declined by over 3%, from 8% to 4.5%. This decline in long terminterest rates alone has increased the solvency liability by nearly $1 billion.When the solvency liability is larger than the Plan’s current market value of assets, the shortfall must be paid into the Plan over aperiod of five years, or the benefit payments must be reduced.As of the last filed actuarial valuation, December 31, 2006, the ratio of the Plan’s market value of assets to solvency liabilities wasestimated at 94.0% at year-end, up from 89.4% two years earlier. This solvency ratio indicates that the Plan currently does not havesufficient assets to cover all the benefits that had been promised as of that date. The valuation is, however, within the limits of thePension Benefits Standards Act for solvency requirements.HISTORICAL SOLVENCY RATIO120%RELATIONSHIP BETWEEN MARKET VALUE OF ASSETS AND SOLVENCY LIABILITY100%80%60%40%20%0%1987198819891990199119921993199419951996199719981999200020012002200320042006IWA - Forest Industry Pension PlanAnnual Report 200816