General Superannuation Plan Proposed Pension Changes – CUPE 2669

Prepared by Aon Hewitt

General Superannuation Plan

Proposed Pension Changes – CUPE 2669

Background

December 31, 2012 Valuation– Revealed a significant going-concern deficit due to:

• Poor investment returns• People retiring earlier and living longer• Decreases in interest rates • Change in economic environment• Maturing of pension plan (less actives paying for retirees)

– Deficit needed to be amortized (paid) over a period of no more than 10 years

– Valuation needed to be filed by Trustees no later than Dec 31, 2013• Trustees responsible for setting appropriate margin or “buffer” to include

in the valuation based on advice from Superintendent of Pensions and actuary for the Plan

Background

Late 2013, parties reviewed options to address shortfall as at December 31, 2012

Considerations/Principles– Contribution rate affordability– Sustainability– Equity amongst all plan members– Human resource challenges– Compliance with regulatory authorities– No reduction in past service benefits

Background

Various options and scenarios were reviewed trying to balance interests amongst all parties

December 19, 2013 - Tentative Agreement (subject to ratification) agreed to in principle resulting in the following changes to the pension plan:– Increase in contribution rates for Members and City– Reduction in future service benefits (i.e. no change in past service)– Remove and/or modify certain provisions that result in subsidization – Development of mechanism for dealing with possible future deficits that

may be revealed

Proposed Changes -

Contribution Rates

Proposed Changes to Contribution Rates

Current matching Member & City Contribution Rates– 7.5% of Earnings up to YMPE– 9.1% of Earnings in excess of YMPE – Average of 7.9% of Earnings– YMPE for 2014 = $52,500

Proposed increase in contribution rates for both Member and City

Prior to 2014 Jan 1, 2014 Jan 1, 2015 Jan 1, 2016

Earnings up to YMPE 7.5% 7.8% 8.1% 8.4%

Earnings in excess of YMPE 9.1% 9.4% 9.7% 10.0%

Average 7.9% 8.2% 8.5% 8.8%

Proposed Changes -

Early Retirement Provisions

Proposed Changes to Early Retirement Provisions

Current Provisions– Members can retire from the Plan on the earlier of:

1. Age 55

2. Date when age plus contributory service equals 80 (i.e. Rule of 80)

3. 35 years of contributory service

– Members can retire with an unreduced pension at earlier of:1. Age 60

2. Date when age plus contributory service equals 80 (i.e. Rule of 80)

3. 35 years of contributory service

– Members pensions reduced by 0.3% per month (3.6% per year) for retirement prior to unreduced retirement date

Example #1 – Current Provisions– Age at retirement = 55– Contributory service at retirement = 23 years– Age + Service = 55 + 23 = 78– Unreduced pension at retirement = $1,000 per month

– Months prior to earlier of:• Age 60 = (60 – 55) x 12 = 60 months• Rule of 80 = (80 – 78) x 12 = 24 months• 35 years of service = (35 – 23) x 12 = 144 months

– Reduction at retirement = 0.3% x 24 months = 7.2%

– Reduced pension at retirement = $1,000 x (1 – 7.2%) = $928 per month

Proposed Changes Effective January 1, 2015– Service accrued prior to 2015

• no change in early retirement eligibility or early retirement reduction

– Service accrued after 2014• No change in early retirement eligibility (i.e. members can still retire at

earlier of age 55, rule of 80 or 35 years of service)• Unreduced retirement age increased to earlier of:

Age 62 Rule of 85 35 years of service

– Need to split into two separate calculations

Example #2 – Proposed Changes– Date of retirement = January 1, 2016 (i.e. 1 year under new rules)– Age at retirement = 55– Contributory service at retirement

• Pre-2015 = 29 years• Post-2014 = 1 year• Total = 30 years

– Age + Service = 55 + 30 = 85– Unreduced pension at retirement

• Pre-2015 Unreduced Pension = $970• Post-2014 Unreduced Pension = $30

Example #2 – Con’t– Pre-2015 Reduction = 0.3% x Months prior to earlier of:

• Age 60 = (60 – 55) x 12 = 60 months• Rule of 80 = (80 – 85) x 12 = 0 months• 35 years of service = (35 – 30) x 12 = 60 months

– Pre-2015 Reduction = 0.3% x 0 months = 0%

– Post-2014 Reduction = 0.3% x Months prior to earlier of:• Age 60 = (62 – 55) x 12 = 84 months• Rule of 85 = (85 – 85) x 12 = 0 months• 35 years of service = (35 – 30) x 12 = 60 months

– Post-2014 Reduction = 0.3% x 0 months = 0%

– Reduced pension at retirement = $970 x (1 – 0%) + $30 x (1 – 0%) = $1000

Example #3 – Proposed Changes– Date of retirement = January 1, 2016 (i.e. 1 year under new rules)– Age at retirement = 55– Contributory service at retirement

• Pre-2015 = 27 years• Post-2014 = 1 year• Total = 28 years

– Age + Service = 55 + 28 = 83– Unreduced pension at retirement

• Pre-2015 Unreduced Pension = $970• Post-2014 Unreduced Pension = $30

Example #3 – Con’t– Pre-2015 Reduction = 0.3% x Months prior to earlier of:

• Age 60 = (60 – 55) x 12 = 60 months• Rule of 80 = (80 – 83) x 12 = 0 months• 35 years of service = (35 – 30) x 12 = 60 months

– Pre-2015 Reduction = 0.3% x 0 months = 0%

– Post-2014 Reduction = 0.3% x Months prior to earlier of:• Age 60 = (62 – 55) x 12 = 84 months• Rule of 85 = (85 – 83) x 12 = 24 months• 35 years of service = (35 – 30) x 12 = 60 months

– Post-2014 Reduction = 0.3% x 24 months = 7.2%

– Reduced pension at retirement = $970 x (1 – 0%) + $30 x (1 – 7.2%) = $998

Things to Keep in Mind– Changes only impact service you accrue on or after January 1, 2015

• Will not impact what you have accrued to date

– Full impact of change will not be realized until members change retirement behaviors and all members are under proposed provisions

– Rationale for proposed changes to early retirement provisions:• Enhance sustainability of Plan• Reduce impact of members receiving a pension longer than they worked

Proposed Changes -

Normal Form of Pension

Proposed Changes to Normal Form of Pension

Normal Form of Pension– Forms the baseline of how your pension will be payable– At a minimum, in a defined benefit plan, the normal form must at least

provide for a lifetime pension to you until you die – Normal form must be defined for both married and single members

Current Provisions– Current normal form is a Subsidized Normal Form

• Single Members = Life pension with a 10 year guarantee• Married Members = J&S 60%, with a 5 year guarantee

– Considered subsidized, since married members and single members start out with the same pension, even though a married members pension is expected to paid longer since their spouse is included

– Plan is picking up premium for married members when they retire

Example #1 – Subsidized Normal Form– Formula Pension = $1,000 per month– Married member premium = Approx. $70 per month

Guaranteed Period (Years)5 10 15

Single Life Options

N/A $1,000 $983

Joint Life Options- J&S 60% $1,000 $996 $989- J&S 75% $980 $977 $973- J&S 100% $948 $948 $947

Proposed Changes Effective January 1, 2015– Service accrued prior to 2015

• No change in normal form

– Service accrued after 2014• Removal of subsidization of normal form• Normal form

Single Members = Life Pension with a 10 year guarantee Married Members = J&S 60%, with a 5 year guarantee, but will be

actuarial equivalent to Single Life normal form

– Need to split pension into two separate calculations

Example #2 – Proposed Changes– Date of Retirement = January 1, 2016– Service at retirement

• Pre-2015 = 27 years• Post-2014 = 1 years• Total = 28 years

– Formula Pension at retirement• Pre-2015 = $970• Post-2014 = $30• Total = $1,000 per month

Example #2 – Calculation #1– Pre-2015 Pension – Subsidized Normal Form

Single Life Options N/A $970 $954

Joint Life Options- J&S 60% $970 $966 $959- J&S 75% $951 $948 $944- J&S 100% $920 $920 $919

Example #2 – Calculation #2– Post-2014 Pension – Non-subsidized normal form

Single Life Options N/A $30 $29

Joint Life Options- J&S 60% $28 $28 $28- J&S 75% $27 $27 $27- J&S 100% $26 $26 $26

Example #2 – Calculation #3– Combine Pre-2015 and Post-2014 Pension

– $2 per month reduction for married members due to changes

Single Life Options N/A = $970+$30 = $1,000 = $954 + $29 = $983

Joint Life Options

- J&S 60% = $970 + $28 = $998 = $966 + $28 = $994 = $959 + $28 = $987 - J&S 75% = $951 + $27 = $978 = $948 + $27 = $975 = $944 + $27 = $971- J&S 100% = $920 + $26 = $946 = $920 + $26 = $946 = $919 + $26 = $945

Estimated Impact on married members at various service levels– Formula Pension $1,000 per month with 28 years of service

Pre-2015 Service

Post-2014 Service

Estimated Reduction in Total Pension for

Married Members

27 1 $2 per month

23 5 $12 per month

28 10 $25 per month

13 15 $38 per month

8 20 $51 per month

3 25 $63 per month

0 28 $70 per month

Things to Keep in Mind– Changes only impact service you accrue on or after Jan 1, 2015

– Removal of subsidized normal form does not mean that your spouse will not be entitled to benefits

– Optional forms will still be available to members – Full impact of change will not be realized until all members are under

proposed provisions– Rationale for proposed changes to early retirement provisions:

• Enhance sustainability of Plan• Remove subsidy which only benefited married members yet all members

Proposed Changes

Earnings and Best Average Earnings (BAE)

Proposed Changes to Earnings and BAE

Current Provisions– Earnings currently includes all remuneration paid to a Member,

including overtime– Formula pension based on Best Average Earnings (BAE) where

BAE is based on the 48 consecutive months of employment with the City during which the Member’s Earnings (including overtime) were the highest (i.e. best average 4 years of Earnings)

– Many, if not all, CUPE 2669 members are not eligible for overtime so overtime changes have been removed from this presentation

Example #1 – Current Provisions– Date of retirement = December 31, 2013– Age at retirement = 58– Service at retirement = 28 years

Base Earnings(no overtime)

Overtime Earnings

(B)Earnings

(C = A + B)

2002 50,690 0 50,690

2003 51,958 0 51,958

2004 53,257 0 53,257

2005 54,588 0 54,588

2006 55,953 0 55,953

2007 57,352 0 57,352

2008 58,785 0 58,785

2009 60,255 0 60,255

2010 61,761 0 61,761

2011 63,305 0 63,305

2012 64,888 0 64,888

2013 66,510 0 66,510

BAE = $64,116

Proposed Changes effective January 1, 2015– Change in definition of Earnings and BAE calculation for service

accrued on or after January 1, 2015– Change in treatment of overtime earnings (not applicable for all

unions and/or associations)– BAE calculation split into two calculations

Proposed Changes – CUPE 2669 with no overtime– Pre-2015 BAE

• No change in BAE (i.e. 48 consecutive months where Earnings were the highest, including overtime earnings)

– Post-2014 BAE• Equal to the average “base earnings”, excluding overtime, for the 60

consecutive months of employment with the City during which the member’s earnings (excluding overtime) were the highest (Best Average 5 Years with no overtime)

Example #2 – Proposed Changes– Date of retirement = December 31, 2021– Age at retirement = 58– Service at retirement

• Pre-2015 service = 21 years• Post-2014 service = 7 years

Overtime Earnings

Pre-2015 Earnings

(C = A + B)

Post-2014 Base Earnings

2010 50,690 0 50,690 50,690

2011 51,958 0 51,958 51,958

2012 53,257 0 53,257 53,257

2013 54,588 0 54,588 54,588

2014 55,953 0 55,953 55,953

2015 57,352 0 57,352 57,352

2016 58,785 0 58,785 58,785

2017 60,255 0 60,255 60,255

2018 61,761 0 61,761 61,761

2019 63,305 0 63,305 63,305

2020 64,888 0 64,888 64,888

2021 66,510 0 66,510 66,510

Example #2 – Calculate BAE for Pre-2015 Service

– Pre-2015 BAE = BAE from Current Provisions (with overtime)– Pre-2015 BAE = ($61,761 + $63,305 + $64,888 + $66,510) / 4

= $64,116

Overtime Earnings

Pre-2015 Earnings

(C = A + B)

2010 50,690 0 50,690

2011 51,958 0 51,958

2012 53,257 0 53,257

2013 54,588 0 54,588

2014 55,953 0 55,953

2015 57,352 0 57,352

2016 58,785 0 58,785

2017 60,255 0 60,255

2018 61,761 0 61,761

2019 63,305 0 63,305

2020 64,888 0 64,888

2021 66,510 0 66,510

Pre-2015 BAE = $64,116

Example #2 – Calculate BAE for Post-2014 Service

– Post-2014 BAE equal to Best 5 Year Average Base Earnings (no overtime); and

Overtime Earnings

Post-2014 Base Earnings

2010 50,690 5,000 50,690

2011 51,958 5,000 51,958

2012 53,257 5,000 53,257

2013 54,588 5,000 54,588

2014 55,953 5,000 55,953

2015 57,352 5,000 57,352

2016 58,785 5,000 58,785

2017 60,255 5,000 60,255

2018 61,761 20,000 61,761

2019 63,305 20,000 63,305

2020 64,888 20,000 64,888

2021 66,510 20,000 66,510

Post-2014 Best 5 Year Average

Base Earnings = $63,344

Example #2 – Calculate BAE for Post-2014 Service

– Post-2014 BAE equal to:1. Best 5 Year Average Base Earnings (no overtime) = $63,344

Things to Keep in Mind– Changes only impact service you accrue on or after Jan 1, 2015

– Full impact of change will not be realized until all members under proposed provisions

– No impact for members whose overtime usage is consistent throughout the last 7 years of employment

– Only overtime earnings earned on or after Jan 1, 2015 will be used in the calculation of Post-2014 BAE

– Rationale for proposed changes to early retirement provisions:• Enhance sustainability of Plan• Reduce impact of overtime usage patterns for members who earned

significantly more overtime near end of their career as compared to throughout their careers

Other Proposed Changes

Other Proposed Changes – January 1, 2014

Removal of Commuted Value Option on Reduced Retirement– Current Provisions

• Members who qualify for an reduced pension, but not an unreduced pension are currently eligible to transfer out the value of their pension on retirement rather than take a pension

– Proposed Change• Remove the option for members to transfer out the value of their

pension

– Rationale for Proposed Change• Each transfer was costing the Plan approximately $100k to $150k due

to low interest rate environment• Only eligible for certain subset of members• Plan viewed as a DB plan, not a DC plan

Other Proposed Changes – January 1, 2014

Administration Costs– Current Provisions

• Plan covers certain administrative costs up to a certain prescribed level (based on plan membership), with the remaining expenses covered by the City

• 2013 limit equal to approx. $130,000

– Proposed Change• Increase limit to $250,000, with remaining expenses covered by the

City, with limit increasing with average GEI each year

– Rationale for Proposed Change• City is covering certain administrative expenses for the Plan that would

not exist if the Plan does not exist• Costs have increased over the years, yet provisions within the plan

document have not • Common amongst other plans to cover all administrative expenses

Other Proposed Changes – Future Funding Requirements

Mechanism to deal with future funding requirements for valuations on or after December 31, 20151. Increase Member and City contribution rates by 0.2% each side (i.e.

average contribution rate of 9.0% of Earnings)

2. If additional funding is needed, a one time temporary increase in Member and City contribution rates by 0.5% each side (i.e. average contribution rate of 9.5% of Earnings)

• If temporary increase is activated, parties agree to make plan changes within 6 years that make the plan sustainable and that can be supported with an average contribution rate of 9.0% of Earnings

• If within the 6 year window, a contribution rate greater than 9.5% of Earnings each side is required to meet minimum funding requirements, the parties agree to reduce future service benefits to address

• If a decision to reduce benefits cannot to reached within 90 days, either party may refer the matter to an arbitrator for a binding arbitration

Final Thoughts

No changes made to pension formula

Proposed changes were developed based on minimum acceptable level of margin

Superintendent likely to require Trustees and actuary to include higher levels of margin over time which could result in further contribution rate increases and/or benefit reductions– Changes to plan will be dependent on experience in plan and

investment returns over the next few years

Next Steps

Step 1 – Ratification of collective agreement by all Unions and Associations

Step 2 – Approval by Superintendent of Pensions Step 3 – Trustees make official change to bylaw to reflect

ratified changes

How is my pension calculated?

Before age 652.0% of BAE

multiplied by

Total Contributory Service

After age 651.4% of BAE up to Avg. YMPE plus 2% of BAE over Avg. YMPE

multiplied by

Contributory Service before 1966, between Jan 1, 1990 and Dec 31, 1993, and after Dec 31, 2013

(Non 2% Service)

2.0% of BAE

multiplied by

Contributory Service between Jan 1, 1966 to Dec 31, 1989 and Jan 1, 1994 to Dec 31, 2013

(2%Service)

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