university of waterloo pension & benefits committee june 12/26, 2012 pension information...

University of Waterloo Pension & Benefits Committee

June 12/26, 2012

Pension Information Sessions

Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 2

Agenda for Pension Information Sessions

Welcome Pension and Benefits Committee Membership and Role Purpose of Pension Information Session Presentation Q&A


Pension & Benefits Committee Membership

Role

Janet Passmore, Chair Associate Provost, Human Resources

Rebecca Wickens, Secretary Associate University Secretary

Members

Darren Becks FUAC Representative

Monika Bothwell UW Staff Association Representative

James Brox Retiree Representative

Nelson Carrillos UW Staff Association Representative

Lori Curtis UW Faculty Association Representative

Stewart Forrest CUPE Local 793 Representative

Dennis Huber Vice-President, Administration & Finance

Ranjini Jha UW Faculty Association Representative

Sallie Ann Keller Vice-President, Academic & Provost

Cathy Newell Kelly President's Appointee

Christiane Lemieux UW Faculty Association Representative

Gerry Remers Board of Governors Representative

Karen Wilkinson Board of Governors Representative

Resources

Allan Shapira Consulting Actuary, Aon Hewitt

Kenton Needham Director, Human Resources


Terms of Reference of Pension & Benefits Committee

Pension & Benefits Committee is a Committee of the Board of Governors. The Committee is accountable to the Board for the administration of employee pension and benefits plans

Terms of Reference include “recommending changes in pension and benefits plans to keep them current with respect to other universities and major employers, being mindful of the financial context within which the University operates”

The Pension & Benefits Committee plays a key role in the stewardship of the University of Waterloo Pension Plan


Purpose of Pension Information Session

In the context of its stewardship role, the Pension & Benefits Committee will be recommending to the Board of Governors changes to the University of Waterloo Pension Plan to maintain the long-term health of the Plan

This session is designed to achieve 2 goals:

1) Describe the changes proposed by the Pension & Benefits Committee

2) Respond to your questions and hear your perspectives Following the Pension Information Sessions

– Finalize the recommendations and take them to the next meeting of the Board of Governors in October 2012


Consulting Actuary to the Pension & Benefits Committee

Introduction:

– Allan Shapira, Aon Hewitt, Consulting Actuary Today’s presentation will include:

– Description of the proposed changes

– Reasons for these changes; and

– Details of the proposed changes and transition


The Key Questions We Are Going To Address

What is the pension promise under the UW Pension Plan? How is that pension promise funded? Is there enough money to pay the pension promise? What are we doing to manage the long-term health of the UW Pension Plan? What is happening with other pension plans? What changes are being proposed to the UW Pension Plan?


The Big Picture Answers to These Questions

What is the pension promise under the UW Pension Plan?

– A defined benefit with the pension based on years of membership in the Pension Plan and salary near retirement, and with the pension benefit adjusted for inflation after retirement

How is the pension promise funded?

– By contributions from members and the University and from investment return on pension fund assets

Is there enough money to pay the pension promise?

– Pension Plan has a significant funding shortfall as a result of unfavourable markets, low interest rates and longer pension payment periods

What are we doing to manage the long-term health of the UW Pension Plan?

– Pension and Benefits Committee is constantly monitoring the three levers that can be used to maintain the long-term health of the Pension Plan—contributions, investment earnings and benefit levels


The Big Picture Answers to These Questions (continued)

What is happening with other pension plans?

– Also facing significant funding shortfalls, resulting in increases in contributions and decreases in benefits for plan sustainability

What changes are being proposed to the UW Pension Plan?

– Adjustments to both contributions (members and University) and benefits to try to shorten the timeframe over which the shortfall is funded

Details on the Responses to These Questions Presented on the Following Pages


What is the Pension Promise?


Plan Structure

Key Plan Provisions

Averaging Period for Earnings: Highest 36 consecutive months in last 120 months(subject to plan cap)

Benefit Rate for Each Year of Pensionable Service: Below CPP Wage Base: 1.4%Above CPP Wage Base: 2.0%

Cap on Pension Benefits: $3,200 per year of pensionable service

Standard Form of Payment: Lifetime pension with a 10-year guarantee

Earliest Age for Unreduced Early Retirement Pension: Age 62

Automatic Indexation of Pension Benefits After Retirement: 100% of increase in CPI up to 5% (each May 1st); P & B Committee decides above that


How is the Pension Promise Funded?


Funding the Pension Promise

Funding Sources

Member Contributions

University Contributions

Benefits paid to members, as determined by plan provisions

+

Costs to administer pension plan

Investment Earnings

Cost of Pension Plan



+



+


Funding Choices


Take Less Investment Risk Target Lower Expected Returns

Target Higher Expected Contributions

Portion Funded From Contributions

Portion Funded From Investment Earnings

Portion Funded From Investment Earnings

Portion Funded From Contributions

Take More Investment Risk Target Higher Expected Returns

Target Lower Expected Contributions



The Impact of Investment Return

Chart on the following page shows for an individual hired at age 30 and retiring at age 65, the breakdown between contributions and investment return based on different levels of investment return above inflation (real investment return):

– 3.85% per year (current valuation assumption), 3.00% per year, and 2.00% per year Other assumptions are as per the actuarial valuation


The Impact of Investment Return (continued)

28%

72%

34%

66%

43%

57%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Po

rtio

n F

un

ded

Fro

m C

on

trib

uti

on

s an

d I

nve

stm

ents

Real Investment Return (per year)

Investment Return

Contributions

3.85% 3.00% 2.00%


Is There Enough Money to Pay the Pension Promise?


Funded Status of Pension Plan

As of January 1 (in millions)

2007 2008 2009 2010 2011 2012

Value of Assets (no smoothing) $ 890 $ 917 $ 755 $ 855 $ 929 $ 967 Past Service Liabilities $ 846 $ 901 $ 948 $ 1,000 $ 1,042 $ 1,137 Funding Excess/(Shortfall) $ 44 $ 16 $ (193) $ (145) $ (113) $ (170)

Deteriorating Funded Status Despite Increase In Member and University Contributions

Past Service Liabilities as of January 1, 2012 reflect increase from change in assumption for pensioner longevity and

change in assumption for salary increases to reflect next three years of across-the-board increases under agreements


Annual Cost of Benefits Being Earned

For 2012

$ Amount

(millions)

% of Pensionable

Earnings

Total Current Service Cost $ 47.7 15.45% Less: Members’ Required Contributions (21.0) (6.80%) University Current Service Cost $ (26.7) 8.65% Pensionable Earnings $ 308.5


Contributions

Calendar Year


(millions)


(millions)

2011 $ 19.6 $ 31.8 2010 $ 19.1 $ 27.8 2009 $ 17.9 $ 26.1 2008 $ 15.1 $ 22.9 2007 $ 12.8 $ 21.1 2006 $ 11.3 $ 18.8 2005 $ 10.5 $ 17.4 2004 $ 9.8 $ 13.3

Increases in Member and University Contribution Rates Effective July 1, 2007, July 1, 2008 and May 1, 2009


Investment Returns—Market Indices

1.30%

-2.90%

-7.20%

6.40%

1.90%

-10%-9%-8%-7%-6%-5%-4%-3%-2%-1%0%1%2%3%4%5%6%7%8%

5-Y

ea

r A

nn

ua

lize

d R

etu

rn

Canada

US (CDN $)

Europe and Far East (CDN $)

Universe Bonds

Inflation


What Are We Doing to Manage the Long-Term Health of the UW Pension Plan?


Managing Long-Term Health of Pension Plan

ContributionsInvestment

EarningsBenefits


Managing Long-Term Health of Pension Plan (continued)

Member and University contributions have been increased Additional increases are necessary

Contributions



Investment returns have been lower than anticipated in setting contribution levels Continued uncertainty around future investment returns, particularly in short term UW pension fund has implemented currency hedging to reduce investment volatility and started

investing in infrastructure and looking at other asset classes such as real estate to try to generate additional investment returns at a reasonable level of risk

Investment Earnings



Core Benefit Promise Other Benefits

Pension formula Indexation after retirement Early retirement Survivor benefits Termination benefits

Indexation before pension start date for terminated members with shorter service

Interest credit on member contributions beyond statutory requirement

Excess refund under 50% cost-sharing rule beyond statutory requirement

Commuted value option after member eligible for an immediate pension

To ensure long-term sustainability of UW Pension Plan, core benefit

provisions need to be addressed

Changes have already been made to these provisions

Benefits


What Is Happening With Other Pension Plans?


Ontario University Pension Plans

Significant funding shortfalls across the university sector in Ontario and across Canada Most of the Ontario University pension plans have increased member contribution rates:

– Increases have typically been in the range of 2.0% to 2.5% of salary Other changes to pension plans have included:

– Lowering early retirement subsidies

– Introducing different provisions for new hires

– Reducing guarantees/controlling risk under hybrid pension plans

– Changing non-core benefits Ontario Budget in March set expectation of 50/50 sharing of current service cost within next five years


Other Large Ontario Public Sector Pension Plans

Significant funding shortfalls in most of the pension plans Significant increases in member and matching employer contribution rates Lowering or eliminating guaranteed indexation Changes to non-core benefits Ontario Budget in March set expectation that any further increase in funding shortfalls should be

met by reducing future service benefits rather than increasing contributions


What Changes Are Being Proposed to the UW Pension Plan?


Proposed Changes to Pension Plan

Contributions Benefits For Active Members

Increase University contributions by approximately 0.7% of salary effective May 1, 2012 (approved at June Board meeting)

Increase member contribution rates by approximately 0.5% of salary effective November 2012

Extend the averaging period for calculating highest average earnings from three years to five years, with a transition starting from January 1, 2014

Lower automatic indexation provision from 100% of CPI to 75% of CPI effective January 1, 2014, subject to transition provisions

Increase cap from $3,200 to $3,300 effective January 1, 2014 and $3,400 effective January 1, 2015

Details Provided on Following Pages


Financial Impact of Proposed Changes to Pension Plan

The following financial analysis is based on the January 1, 2012 actuarial valuation:

Members’ Required

Contributions

University’s

Current Service Cost University’s Contributions

$ Amount

(millions)

% of

Pensionable

Earnings

$ Amount

(millions)

% of

Pensionable

Earnings

$ Amount

(millions)

% of

Pensionable

Earnings

Funding

Shortfall

(millions)

Contributions

Directed To

Annual

Special

Payments1

(millions)

Years to

Pay Off

Funding

Shortfall

1 Will increase each year by increase in salaries

Current Provisions $21.0 6.8% $26.7 8.7% $32.8 10.6% $170 $6.1 25+

Proposed Increase In


and Increase In


$22.5 7.3% $25.2 8.2% $34.8 11.3% $170 $9.6 22

Proposed Changes to

Benefit Provisions

$22.5 7.3% $22.5 7.3% $34.8 11.3% $146 $12.3 14


Details on Proposed Changes to Pension Plan

Member Contribution Rates Increase member contribution rates by approximately 0.5% of pensionable earnings:

Pensionable Earnings Current Provision Proposed Provision

Up to 1x YMPE1 5.80% 6.25%

Between 1x YMPE and 2x YMPE2 8.30% 8.95%

Over 2x YMPE 9.65% 9.95%

1 $50,100 in 20122 $100,200 in 2012


Details on Proposed Changes to Pension Plan (continued)

Comparison of Member Contribution Rates

SalaryCurrent Provision

5.80% / 8.30% / 9.65%Proposed Provision

6.25% / 8.95% / 9.95%Increase in

Annual Contributions

$40,000 5.80% 6.25% $180

$50,000 5.80% 6.25% $225

$60,000 6.21% 6.70% $290

$70,000 6.51% 7.02% $355

$80,000 6.73% 7.26% $420

$90,000 6.91% 7.45% $485

$100,000 7.05% 7.60% $550

$110,000 7.28% 7.81% $581

$120,000 7.48% 7.99% $611

$130,000 7.65% 8.14% $641

$140,000 7.79% 8.27% $671

$150,000 7.91% 8.38% $701

$160,000 8.02% 8.48% $731

Member contributions to Pension Plan are tax-deductible



Final Average Earnings Starting January 1, 2014, final average earnings will be transitioned from a 3-year to a

5-year average Final average earnings will not decrease below the final 3-year average earnings as of

December 31, 2013 Example of how transition would work:

– At December 31, 2013, final average earnings based on 2011, 2012, 2013

– At December 31, 2014, final average earnings based on 2011, 2012, 2013, and 2014

– At December 31, 2015, final average earnings based on 2011, 2012, 2013, 2014, and 2015

– At December 31, 2016, final average earnings based on 2012, 2013, 2014, 2015, and 2016



Annual Pension Benefit Based on 30 Years of Pensionable Service

Final Average Earnings Based on

3-Year Average

Salary Increase In 5 Years

Prior to Retirement

Final Average Earnings Based on

5-Year Average 3-Year Average 5-Year Average

$ 50,000 3% per year $ 48,570 $ 21,480 $ 20,620 $ 50,000 4% per year $ 48,130 $ 21,480 $ 20,350 $ 100,000 3% per year $ 97,140 $ 51,475 $ 49,760 $ 100,000 4% per year $ 96,250 $ 51,475 $ 49,230

Examples of Impact of Change to Final Average Earnings



Inflation Protection (Indexation of Pension Benefits) Maintain 100% of CPI indexation on pension benefit earned up to December 31, 2013, with

balance of pension benefit indexed at 75% of CPI Maximum increase in CPI covered under guaranteed indexation provision continues to be 5% Results in a transition from guaranteed indexation at 100% of CPI to guaranteed indexation at

75% of CPI (example of transition shown on following page) If pension plan funded status improves, P&B Committee would consider top-up of indexation to

100% of CPI as part of its annual review process



Examples of Indexation Transition

Comparison of Proposed Pension to

Fully Indexed Pension2 At:

Pensionable Service at December 31, 2013

Pensionable Service After December 31, 2013

Indexation Rate on Total Benefit1

Retirement Date 10 Years 20 Years

25 years 5 years 91.9% of CPI 100% 98% 96%






1 Based on assumed future salary increase of 4.25% per year2 Based on increase in CPI of 2.25% per year


Q&A

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