laurier pension plan town halls wilfrid laurier university | march 21 / 22, 2011 allan h. shapira,...

Laurier Pension Plan Town Halls

Wilfrid Laurier University | March 21 / 22, 2011

Allan H. Shapira, FCIA, FSA

Consulting | RetirementProprietary & Confidential | Wilfrid Laurier University - Laurier Pension Plan Town Halls - March 21, 22, 2011.ppt/AHS/kn/20 03/2011 2

Agenda

A Quick Look at the Laurier Pension Plan Funding the Pension Promise—Back to Basics Current Pension Environment—How Did We Get Here? Pension Risk Matters Solvency Funding Relief For Ontario Universities Laurier Application For Solvency Funding Relief What Are Other Universities Doing?


Starting Point for Any Presentation on University Pension Plans

Goals for All Stakeholders:

– To ensure an effective and sustainable pension system for Ontario universities, with reasonable risk sharing and greater cost certainty for universities and members

– To continue to recognize the importance of pensions in the total compensation package for university faculty and staff

– To have a system that facilitates the systematic retirement of faculty and staff with safe and secure retirement income

A Quick Look at the Laurier Pension Plan


Pension Plans in Ontario University Sector

Three types of pension plans within Ontario university sector:

Defined Benefit (DB) Pension Plans

Hybrid Pension Plans

Defined Contribution (DC) Pension Plans

Greater of Pension From DB and DC Provisions

Test to Determine Which Provision Provides

Higher Pension Made at Date of Retirement

Test to Determine Which Provision Provides

Higher Pension Made at Date of Retirement and Each Subsequent Year

Laurier Pension

Plan


Defined Benefit Provisions

Pension benefit for each year of service:

1.37% of best 5-year average earnings up to average CPP Wage Base,

plus

2.00% of best 5-year average earnings above CPP Wage Base

Subsidized reductions on early retirement

Pension indexed each year by 100% of increase in CPI up to 4%

Overview of the Laurier Pension Plan

Defined Contribution or Money Purchase Provisions

MP Account converted to pension at retirement based on long-term Government of Canada bond rates

(the “conversion rate”)

Pension adjusted each year by difference between 4-year average rate of return on pension fund and

conversion rate

Members and University each contribute 7.0% of earnings to Money Purchase (MP) Account

which is invested in pension fund

Laurier funds cost of DB pension greater than MP pension

Greater of Two Pensions at Retirement

Greater of Two Pensions Each Year

after Retirement

Funding the Pension Promise—Back to Basics


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



+



+


Balancing Contributions and Investment Earnings


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



Pension Funding Risk

Long-Term Risk Short-Term Risk

Expected investment return that was used to set the funding balance between contributions and investment income is not achieved

Short-term volatility of investment return could generate unfunded liabilities which require special payments

Higher pension benefits than expected due to levels of inflation and salary increases

Short-term fluctuations in inflation, interest rates and salary increases could generate unfunded liabilities which require special payments

More pension benefits than expected due to retirement ages and retiree longevity

Short-term fluctuations in retirement ages and mortality rates could generate unfunded liabilities which require special payments


Managing Long-Term Health and Sustainability of a Pension Plan

Contributions

Reviewing member and University

contribution levels

Investment Earnings

Monitoring if investment return

expectations are achievable

Benefits

Assessing cost of the various

benefit provisions


Comparison of Going Concern and Solvency Valuations

Going Concern Valuation Solvency Valuation

Basis for Valuation Plan continuing Plan winding up

Discount Rate Expected long-term rate of return on pension fund based on asset mix, with margin for adverse deviation

Annuity purchase rates and market interest rates for lump sums based on Government of Canada bonds

Future Salary Increases Included Excluded

Future Indexation of Pension Benefits

Included Excluded

Retirement Ages Range of retirement ages based onplan experience which reflects plan provisions

Earliest possible retirement age which generates the highest value based on plan provisions and legislated “grow-in” provisions

Amortization Periods for Deficits 15 years 5 years (10 years with temporary solvency relief)

Current Pension Environment—How Did We Get Here?


A Confluence of Factors

The “perfect storm” that keeps returning

Market cycles that have created long periods of favourable returns (leading to funding excesses) and unfavourable returns (leading to funding shortfalls)

Plans not establishing sufficient reserving mechanisms to set aside surplus funds generated during the “good times”

Low limits set by the Federal Government on the amount of surplus that could be retained in a registered pension plan (essentially 10% of liabilities)

Market meltdown that created unprecedented negative rates of return

Lower interest rates driving up liabilities

Continually increasing longevity driving up liabilities


A Confluence of Factors (continued)

Continued deferral in the 1980’s and 1990’s of increases to the Income Tax Act maximum pension, followed by significant increases after surpluses were essentially used up

Expectations from Ontario government in the 1990’s that universities should use surplus in their pension funds to address shortfalls in university funding from the province

Growth in the size of pension plans relative to the size of the operating budgets, including significant portion of fixed retiree liabilities

Continuing cuts to university operating budgets which diminish ability to cope with pension funding variability

Pension Risk Matters


What Risks Are We Typically Talking About?

Investment risk Inflation risk Longevity risk Other demographic risks Default risk


Who Can the Risks Be Shared With?

Employer Active Members Pensioners


How Could These Risks Be Shared?

Directly Through the Pension Plan:

– Through increases/decreases to the member contributions to the pension plan or increases/decreases in retirement income from the pension plan

Indirectly Through the Operating Budget:

– Universities do not have external shareholders; increases/decreases in University contributions flow directly through to the operating budget


What Are the Objectives of Any Risk Sharing Discussion?

Finding the right balance between benefit security, contribution rate stability and intergenerational equity


Declining nominal and real interest rates

More equity risk premium required to achieve expected real rate of return on which current allocation of pension cost between contributions and investment earnings is based

Yields on Long-Term Government of Canada Bonds

Year Nominal Bonds Real Return Bonds

1993 7.85% 4.28% 1997 6.42% 4.14% 2001 5.78% 3.58% 2005 4.39% 1.82% 2009 3.89% 1.91% 2010 3.73% 1.40%

Investment Risk


Longevity Risk

Improving longevity has lengthened pension payment period

Life Expectancy at Age 65 (yrs)

Mortality Table Male Female

1971 Group Annuity Table 15.2 19.2 1983 Group Annuity Table 16.7 21.3 1994 Uninsured Pensioner Table With Projection to 2009

18.6 21.4

1994 Uninsured Pensioner Table With Projection to 2020

19.4 21.8

Solvency Funding Relief For Ontario Universities


Government’s Perspective on University Pension Funding Issues

Government has expressed concerns over sustainability of university pension plans without a reconfiguration of current cost sharing with members and without an improvement in cost efficiency of operating the plans

Government has focused on the level of member contribution rates and benefit changes made to the large Ontario public sector pension plans to address their funding issues


Government’s Perspective on University Pension Funding Issues (continued)

Recent changes to Ontario public sector pension plans:

– Ontario Teachers’ Pension Plan increased member and matching employer contribution rates to 10.4%/12.0%; reduced guaranteed indexation for post-2009 benefits from 100% of CPI to 50% of CPI (indexation beyond 50% of CPI based on plan funded status)

– Colleges of Applied Arts and Technology Pension Plan increased member and matching employer contribution rates to 12.1%/10.3%/12.1%; guaranteed indexation at 75% of CPI eliminated for post-2007 benefits

– Healthcare of Ontario Pension Plan eliminated guaranteed 75% of CPI indexation for post-2005 benefits

– Ontario Public Service Pension Plan increased member contribution rates to 6.4%/9.5%

– OPSEU Pension Trust is increasing member contribution rates and matching employer contribution rates from 6.4%/8.0% to 9.4%/11.0% over a three-year period

– OMERS is increasing member contribution rates and matching employer contribution rates from 6.4%/9.7% to 9.3%/12.6% over a three-year period


Timeline of Events

March 2010 Ontario Budget signals solvency funding relief for broader public sector, including universities, under certain conditions

August 2010 Government releases technical paper on two-stage solvency funding relief program for broader public sector as part of pension reform legislation

September 2010 Regulation issued to extend valuation filing dates for Lakehead and Laurier pension plans from September 30, 2010 to March 31, 2011

February 2011 Release of proposed regulation to extend filing date for valuations with effective dates from December 31, 2009 up to and including August 1, 2010, to May 31, 2011

Posting of solvency funding relief regulation paper

March 2011 March 23rd deadline for filing of application for Stage 1 solvency funding relief for universities who have to file valuation by May 31, 2011, or any other university who is able to make an early application

April/May 2011 Government to review and approve/not approve above applications

May 2011 Regulations will name university pension plans approved for Stage 1 solvency funding relief

Actuarial valuations filed by May 31, 2011


Elements of Solvency Funding Relief For Broader Public Sector

Solvency funding relief driven off date of required valuation:

– December 31, 2009 for Laurier Pension Plan Two stages to solvency funding relief:

– Stage 1:

• Three-year moratorium from December 31, 2009 valuation date on funding solvency deficit, subject to minimum special payments (e.g., going concern special payments cannot be less than interest charge on solvency deficit)

• Requires University to submit a plan on how it intends to address sustainability (to be shared with members and bargaining agents)

• No requirement to file actuarial valuation in three-year period (i.e., next required valuation as of December 31, 2012)

– Stage 2:

• Funding of solvency deficit at end of three-year Stage 1 solvency funding relief period required but based on 10-year amortization period (versus regular 5-year period)

• Requires University to demonstrate changes have been made to enhance sustainability; otherwise solvency deficit at end of three-year Stage 1 solvency funding relief period has to be amortized over 5 years

Contribution holidays limited and funding of any benefit improvements accelerated, for a specified period of time

Laurier Application For Solvency Funding Relief


Funded Status of Laurier Pension Plan as of December 31, 2009

Going Concern

Ratio of Market Value of Assets to Going Concern Liabilities

82.2%

Solvency

Ratio of Market Value of Assets to Solvency Liabilities

89.7%

If going concern or solvency funded ratio is less than 90%, a pension plan can apply for solvency funding relief


Member Contributions University Contributions

$Amount

(000’s)

% of Pensionable

Earnings $Amount

(000’s)

% of Pensionable

Earnings

Contributions to MP Account $ 8,005 7.0% $ 8,005 7.0% Current Service Cost For DB Provision 4,046 3.5% Special Payments to Amortize Going Concern Unfunded Liability

6,112 5.3%

Total $ 8,005 7.0% $ 18,163 15.8%

Plan Funding For 2010

Increase from $2.4 million or 2.1% of pensionable earnings

based on prior valuation


Potential Plan Changes to be Considered as Part of Sustainability Plan

MP ComponentDB Component

(For Pension Earned For Future Service)

Increase employee contributions to the MP Account Reduce benefit formula

Increase early retirement reductions

Reduce level of automatic inflation protection

Provide new hires with investment choice for their MP Account

No DB component for new hires

What Are Other Universities Doing?


Recent Changes to University Pension Plans

University of Waterloo

– Increased member contribution rates from 4.55% up to YMPE / 6.50% above YMPE to 5.80% up to 1x YMPE / 8.30% between 1x and 2x YMPE / 9.65% above 2x YMPE

– Removed indexing in deferral period (except for long-service employees)

– Removed commuted value option for members age 55 and over Trent University (Faculty Plan)

– Raised threshold for excess interest indexing and limited indexing in any one year to 50% of CPI

– Increased member contribution rates from 6.5% to 7.0% permanently and to 9.0% for a three-year period

McMaster University

– Increased member contribution rates to 6.50% up to YMPE / 8.75% above YMPE (all groups except Faculty)

– 80-point rule changed to 85-point rule for new hires and phased in over 10 years for existing members (Faculty and management)

– Added age 60 requirement to 80-point rule for unionized administrative staff and introduced lower level of pension benefits for new hires


Recent Changes to University Pension Plans (continued)

Guelph (CUPE 1334)

– Increased member contribution rates from 5.62% up to YMPE / 7.32% above YMPE to 7.60% up to YMPE / 9.90% above YMPE

Alberta Universities Academic Pension Plan (jointly-trusteed plan)

– Increased member contribution rates from 8.27% up to YMPE / 11.21% above YMPE to 9.77% up to YMPE / 12.71% above YMPE

McGill University

– Removed DB guarantee and annuitization option from hybrid pension plan for new hires (i.e., defined contribution plan for new hires)

University of Montreal (risk-shared plan)

– Increased member contribution rates to 7.40% up to YMPE / 9.90% over YMPE UBC Staff Plan (risk-shared plan)

– Increased member contribution rates

– Lowered benefit formula for future service

– Removed commuted value option for members age 55 and over

Questions?

laurier pension plan town halls wilfrid laurier university | march 21 / 22, 2011 allan h. shapira,...

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