Board of Governors PENSION & BENEFITS COMMITTEE Friday 23 ... · 1 The 2014 version of the SIPP was...

Board of Governors

PENSION & BENEFITS COMMITTEE

Friday 23 January 2015

9:30 a.m. to 12:00 noon

NH 3001

OPEN SESSION

ACTION

1. Approval of the Minutes* and Business Arising Decision

2. Execution Against the Work plan* [Wickens] Information

3. Update on Government Pension Plan Initiatives [Shapira] Information

4. Investment Status of the Payroll Pension Plan* [Huber] Information

5. Approval of the Actuarial Valuation Assumptions** [Shapira] Decision

6. University Sector Jointly Sponsored Pension Plan Initiative* [Shapira] Information

7. 30-Year U.S. Treasuries: Amendment to the Sell Order* [Huber] Decision

8. Other Business

9. Next Meeting: Friday 27 February 2015, 9:30 a.m. – 12:00 noon in NH 3001

~ Please join us afterwards for the annual committee lunch. ~

CONFIDENTIAL

10. Accelerator Centre** Decision

11. Update re: RFP Evaluation Panel [Wagner] Information

12. Update: Global Investment Manager Performance [Huber] Information

IN CAMERA SESSION

*attached/to be distributed**

6 January 2015 Rebecca Wickens

Associate University Secretary & Legal Counsel

Please convey regrets to Cindy Baker at 519-888-4567 x32623 or [email protected]

mailto:[email protected]

Board of Governors

PENSION & BENEFITS COMMITTEE

Minutes of the Friday 19 December 2014 Meeting

Present: Monika Bothwell, Gary Goetz, Peter Forsyth, Mary Hardy, Dennis Huber, Ramesh Kumar, Cathy

Newell Kelly, Christine Wagner, Bill Watson [chair]

Regrets: Lori Curtis, Ian Orchard, Marilyn Thompson, Karen Wilkinson

Secretariat: Rebecca Wickens

Resources: Joan Kennedy (3.), Sue McGrath, Kenton Needham, Allan Shapira, Alfrieda Swainston (3.)

Organization of Meeting: Bill Watson, chair of the committee, took the chair, and Rebecca Wickens, secretary

of the committee, acted as secretary. The secretary advised that a quorum was present. The agenda was approved

without formal motion.

OPEN SESSION

1. APPROVAL OF THE MINUTES AND BUSINESS ARISING

The committee heard a motion to approve the minutes. Hardy and Wagner. Carried.

Update re: Benefits Review. Bothwell updated the committee on the meeting between Thompson and the

members of the Benefits Review Working Group: working group members updated Thompson on their work,

constraints on their mandate, analysis performed by Aon Hewitt, recommendations made to the committee,

and understanding re: next steps by Human Resources (HR); Thompson spoke to the work of the robust

employer-employee relationship strategic plan theme group and HR with respect to benefits, indicating that

the theme group is not working on operational matters and HR is currently focussing on benefits enshrined in

policy. Members expressed interest in re-opening the broader benefits plan review. The secretary was asked to

follow-up with Thompson to get a sense of timing and direction. [Note: Thompson has agreed to speak to this

issue at the February 2015 meeting.]

2. EXECUTION AGAINST THE WORK PLAN

The report was accepted for information.

3. INDEXING OF HEALTH AND DENTAL PLAN MAXIMA

Needham presented the report, including the additional information requested at the November meeting.

Members were reminded that decisions are required on whether and by how much to index the benefits plan

maxima; whether to increase coverage for prescription dispensing fees; the dental fee guide will move to the

2013 fee guide as a function of plan design.

Members discussed: the number of years since the last increase in benefits plan maxima; reasons behind not

indexing in those years (compensation restraint legislation, benefits plan review); cost of indexing for 1, 2 and

3 years; impact of indexation decisions on the University’s budget; current competitiveness of the benefits

plan maxima; cost to the University of increasing coverage for dispensing fees from $7.00 to $8.00 ($150,000

per year); the need to discuss the dispensing fee with the provost since this represents a change to the benefits

plan and a significant cost; issues with the preferred provider network (local only, most dispensing fees

exceed our coverage). Members agreed to defer a decision on the dispensing fee and to include the issue in

the broader review of the benefits plan.

Pension & Benefits Committee

19 December 2014 page 2

The committee heard a motion to index the benefits plan maxima based on 3 years of inflation (2012-2015).

Bothwell and Wagner. Carried.

4. COST OF LIVING ADJUSTMENT TO PENSION PLAN CAPS

McGrath reported that maximum member contributions for the registered pension plan and caps for the

registered and payroll pension plans will be adjusted for 2015 by 1.765% (the increase in the average

industrial wage), resulting in the following changes:

- from $2,770 to $2,819 per year of service for the registered pension plan;

- from $3,172 to $3,228 per year of service for the payroll pension plan; and

- from $18,031 to $18,339 for the maximum member contributions.

Members heard that, assuming the average industrial wage increases by 2.5% per year, the payroll pension

plan cap will not reach the $3,400 overall pension plan cap before 2018.

5. REPORT FROM RPPI

Wagner and Forsyth spoke to the report, highlighting: the fund’s total assets ($1.27B); year-to-date

performance as at 30 September 2014 (6%); meeting with the global investment managers; discussion at RPPI

re: value investing and active versus passive investment management; next steps regarding passive investment

management.

Members discussed: concerns re: managers not meeting the objective; whether the objective is realistic;

challenges comparing performance with other university pension funds, given different asset mixes and

appetites for risk; whether the University’s interests are appropriately aligned with those of the investment

managers given our compensation structure.

6. UPDATE ON GOVERNMENT PENSION PLAN INITIATIVES

Shapira updated members on new regulations: as of 1 January 2016, statements of investment policies and

procedures must be filed with the Financial Services Commission of Ontario and provide information as to

whether environmental, social and governance factors have been incorporated into the pension fund’s

investment strategy; plan administrators will now be required to provide written pension statements, including

certain prescribed information, to deferred vested members and retired members every two years.

7. OTHER BUSINESS

The secretary passed on thanks from a recent retiree who plans to live out of province for the recently

approved removal of the lifetime maxima on out-of-province health care coverage.

There was no other business.

8. NEXT MEETING

The next meeting will be held Friday, 23 January 2015, 9:30 a.m. – 12:00 noon in NH 3001.

The committee convened in confidential session.

19 January 2015 Rebecca Wickens

Associate University Secretary & Legal Counsel

Pension & Benefits Committee, Board of Governors, University of Waterloo

Execution against Work Plan

The below represents the annual responsibilities of the P&B Committee and has been prepared as an aid to planning only. The committee’s activities are much broader,

however, and include: legislative changes, plan changes and improvements; selection of managers and service providers; and requests from the UW community regarding

pension and benefits plans.

1 The 2014 version of the SIPP was approved by the Board of Governors at its 28 October 2014 meeting, so Finance & Investment Committee (F+I) agreed to defer its annual review until March

2015. After review by F+I and Registered Pension Plan Investments Subcommittee (RPPI), the SIPP, together with any recommended changes from F+I and RPPI, will be brought to P+B for review. 2 1 January 2014 Actuarial Valuation Report was filed in July 2014

Task Frequency 28 Feb

2014

4 Apr

2014

9 May

2014

20 Jun

2014

19 Sep

2014

24 Oct

2014

21 Nov

2014

19 Dec

2014

23 Jan

2015

Approval of Actuarial Valuation Assumptions Annual

Approval of the Statement of Investment

Policies and Procedures (SIPP)

Annual 1

Preliminary Valuation Results (RPP and PPP) Annual

Actuarial Valuations (RPP and PPP) Annual

Actuarial Filing2 Minimum

every three

years

Cost-of-living adjustment to payroll pension

plan limit

Annual

Cost-of-living Increase for Pensioners Annual

Pensions for Deferred Members Annual

Salaries for Pension Purposes for Individuals

on Long-term Disability

Annual

Benefits Plan Premium Renewals Annual

Indexing of Long-term Disability Plan

Benefits and Maxima

Annual

Investment Status of PPP Annual

Pension & Benefits Committee – Execution Against Work Plan

3 Distributed 18 July 2014

4 Conducted online in May (new procedure implemented for all Board committees starting spring 2014)

Review of Contribution and Protocol Caps

(RPP and PPP)

Annual

Budget Overview Annual

Benefits/Financial Analysis Report Annual

Life-time Maximum on Out-Of-Province

Health Care Coverage for Retirees

Annual

Investment Manager Review Twice

Total Fund Overview Quarterly

Flexible Pension Plan Annual

Previous Years’ Fees and Expenses Annual

Annual Audit of the Pension Plan Fund

Financial Statements

Annual

Annual Report to the Community3 Annual

Indexing of Health and Dental Plan Maxima Annual

Committee Evaluation4 Annual

Presentation to University of Waterloo

Prepared by Aon Hewitt

Actuarial AssumptionsUniversity of WaterlooPension & Benefits Committee Meeting

January 23, 2015

Proprietary & Confidential | January 23, 201510769 P&B Committee - Actuarial Assumptions - January 23, 2015.pptx/LMB/kn 01/2015

2Aon Hewitt

About This Material

Review of actuarial assumptions for purposes of setting the actuarial assumptions to use for the January 1, 2015 actuarial valuation of the Registered Pension Plan (RPP) and Payroll Pension Plan (PPP)

The January 1, 2015 actuarial valuation of the RPP is not required or intended to be filed with the pension regulators

The next required valuation for regulators must have an effective date no later than January 1, 2017


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Actuarial Assumptions For Going Concern Valuation

Assumptions to Estimate:When Pension Benefits

Are PayableAmount of Pension Benefits

PayableHow Long Pension Benefits

Are PayableHow Much Money to

Set Aside Termination Rates Disability Rates Preretirement Mortality Rates Retirement Ages

Increases in CPP Wage Base Increases in ITA Maximum

Pension Increases in Salaries Inflation

Postretirement Mortality Rates Investment Return on Pension Fund

Demographic Assumptions

Economic Assumptions

Demographic Assumptions

Economic Assumptions


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Real Growth

Benefits

Pension Benefits Before Retirement CPP Wage Base increases ITA maximum pension increases Salary increases

Pension Benefits After Retirement Indexation

Assets

Investment Return on Various Assets Classes

Inflation

Since inflation drives both the pension benefits paid out and the funding made from investment return, it is the excess of

interest rates and investment return over inflation, or “real return” and the excess of salary and government benefit

increases over inflation that are the key factors.


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Actuarial Assumptions for Going Concern Valuation—Economic Assumptions

Economic Assumptions For January 1, 2014 Valuation Filed With Regulators

Increase in Consumer Price Index (CPI) 2.25% per year

Increase in Year’s Maximum Pensionable Earnings UnderCanada Pension Plan

3.00% per year (CPI + 0.75%)

Increase in Income Tax Act Maximum Pension $2,770.00 in 2014;increased after 2014 at 3.00% per year up to $3,200.00

Increase in Salaries 5.00% for 1 year;4.25% per year thereafter (CPI + 2.0%1)

Increase in Salaries (Disabled) 2.25% per year (CPI + 0%)

Interest Rate Used to Discount Liabilities 6.00% per year (CPI + 3.75%)

Interest Rate Used to Discount Cash Flow From Real Return Bonds 3.75% per year

Interest Rate Used to Calculate 50% Rule 1.70% per year for 10 years;2.30% per year thereafter

Interest Rate for Crediting on Required Member Contributions 3.00% per year

Loading For Administrative Expenses Reflected in Discount Rate

1 Reflects PTR/grid steps/merit


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Actuarial Assumptions for Going Concern Valuation—Demographic Assumptions

Demographic Assumptions For January 1, 2014 Valuation Filed With Regulators

Retirement Age Age 64, but no earlier than one year after valuation date

Mortality Rates 2014 Canadian Pensioners Combined Table (“CPM2014 Combined”) With Improvements Under Scale CPM–B

Termination Rates Age Rates Per 100

20 10.0

25 10.0

30 5.6

35 3.2

40 2.2

45 1.7

50 1.2

55 0.7


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Increase in Consumer Price Index (CPI)

As of December 31, 2014, underlying inflation rate implicit in the market yield of Government of Canada real return bonds (0.62%) and nominal bonds (2.33%) is 1.71%

Bank of Canada target range for inflation extends from 1% to 3%; monetary policy aimed at the 2% target midpoint

Assumption for increase in CPI was 2.25% per year for the January 1, 2014 actuarial valuation (although consideration was given to lowering assumption to 2.00%) other economic assumptions build off of the inflation rate


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Increase in Pensionable Earnings

Increase in pensionable earnings of 4.25% per year based on:– Assumed across-the-board increase of 2.25% per year– Assumed 2.00% increment representing PTR/grid steps/merit across

Faculty and Staff groups


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Discount Rate

Based on expected investment return of UW pension fund reflecting long-term asset mix

For purposes of calculating expected investment return, the following long-term asset mix has been used:– Canadian Equities: 15.0%– Non-Canadian Equities: 40.0%– Nominal Fixed Income: 33.0%– Real Estate: 5.0%– Infrastructure: 5.0%– Cash: 2.0%

Above asset mix reflects expected investment policy excluding real return bonds, which are now sold


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Discount Rate (continued)

For 2014 filed actuarial valuation, the asset mix generated expected real return of 4.25% per annum:– Assumption for real rate of return of 3.75% reflected a provision for adverse

deviation of 0.40% and administrative expenses of 0.10% For the 2015 actuarial valuation, the asset mix generates expected real return

of 3.85% per annum before expenses:– At current point in time, assumption for real rate of return of 3.75% no

longer includes any provision for adverse deviation


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Expected Investment Returns on Various Asset Classes

Asset Class30-Year Annualized Mean1

(Nominal Return) Annual Standard Deviation

Inflation 2.0% 1.4%

Cash (91-Day Bills) 2.1% 1.7%

Universe Bonds 3.3% 5.9%

Canadian Equities 6.7% 17.7%

U.S. Equities 6.4% 16.6%

International Equities 6.8% 17.4%

Listed Infrastructure 7.0% 16.7%

Global Listed Real Estate 5.5% 14.5%

1 Net of passive fees; takes into effect the compounding for each underlying asset class

Note: Above returns determined at September 30, 2014


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Expected Investment Returns For UW Pension Fund

Expected real rate of return as of September 30, 2014 calculated based on the following asset mix:

Asset Class

Canadian Equities 15.0%

Non-Canadian Equities 40.0%

Fixed Income 33.0%

Cash 2.0%

Infrastructure 5.0%

Real Estate 5.0%

100.0%

Annual Expected Rate of Return

Expected Real Return 3.85%

Administrative Expenses (0.10%)

Provision For Adverse Deviation 0%

Net Real Rate of Return 3.75%

Annual Standard Deviation (Asset Only) 9.00%

Annual Drawdown Risk 95% (Asset Only) -14.99%


13Aon Hewitt

Expected Investment Returns For UW Pension Fund (continued)

The chart below provides the range of outcomes for 30-year real rate of return based on the current asset mix of the University of Waterloo pension fund:

Annualized Real Rate of Return Over a 30-Year Period (September 30, 2014)

95th percentile 6.40%






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Retirement Age Experience

The following table shows the ages at retirement for retirements during 2006 through 2014 inclusive:

Faculty Staff Total

< Age 60 8 50 58

Age 60 but less than Age 61 6 42 48


Age 62 but less than Age 62.25 12 64 76

Age 62.25 but less than Age 63 13 42 55



Age 65 but less than Age 65.25 24 157 181

Age 65.25 but less than Age 66 26 17 43





Age 70+ 10 2 12

Total 171 487 658


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Mortality Rates

Current mortality table being used is CPM 2014 Combined With Generational Projection Under CPM–B

Following table shows actual versus expected deaths for members of the RPP for 2010 through 2014:

Actual deaths over 5-year period (2010–2014) is 102% of expected deaths Actual deaths over 4-year period (2011–2014) is 97% of expected deaths

2010 2011 2012 2013 2014 Total

Actual Deaths 58 45 54 53 55 265

Expected Deaths (CPM 2014 Combined Generational Under Scale CPM–B)

48.0 48.4 51.4 55.5 57.7 260.7


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Actuarial Assumptions For Solvency and Wind-Up Valuations

AssumptionsJanuary 1, 2014

(Last Filed Valuation) January 1, 2015

Retirement Ages Age between 55 and 65 that produces highest value

No change

Mortality Rates 1994 Uninsured Pensioner Mortality Table With Generational Mortality Improvements

Under Scale AA

No change

Interest Rates—Solvency Valuation (Per Year)

Active Members Age 55 and Over, Pensioners and Deferred Pensioners1

3.83% 2.54%3

Active Members Under Age 552 3.10% for 10 years; 4.60% thereafter 2.40% for 10 years; 3.70% thereafter

Interest Rates—Wind-Up Valuation (Per Year)

Active Members Age 55 and Over, Pensioners and Deferred Pensioners1

0.15% - 0.58%3

Active Members Under Age 552 1.70% for 10 years; 2.30% thereafter 1.30% for 10 years; 1.60% thereafter

1 Settled through annuity purchase2 Settled through commuted value3 Depends on release of final guidance from Canadian Institute of Actuaries for January 1, 2015 actuarial valuations


17Aon Hewitt

Legal Disclaimer

© 2014 Aon Hewitt Inc. All Rights Reserved.

This document contains confidential information and trade secrets protected by copyrights owned by Aon Hewitt. The document is intended to remain strictly confidential and to be used only for your internal needs and only for the purpose for which it was initially created by Aon Hewitt. No part of this document may be disclosed to any third party or reproduced by any means without the prior written consent of Aon Hewitt.

A pension plan in the makingPensions are complex and can be an emotional issue. After all, we’re talking about retirement – and our reward for a lifetime of hard work and dedication. For that reason, we all have an interest in secure, high-quality pensions.

A lot of things going on in the Ontario university pension sector right now could have a direct and tangible impact on our constituents, both individually and collectively. In particular, interested stakeholders from across the province have come together to explore the feasibility of creating a new pension option for our membership. This collaborative process is founded on open, honest communication and information sharing—and it will succeed only to the extent that we are able to engage you, our members, and get your input on key issues that affect you.

To that end, this bulletin has been designed to offer some insight into the key issues driving the discussion, as well as an explanation of the jointly sponsored pension plan (JSPP) option being explored.

The Ontario Confederation of University Faculty Associations (OCUFA) has created a special website for its members at www.ocufapensionreview.ca. This project hub is your go-to resource for everything pension-related, and offers you a way to interact with OCUFA on this issue. Here, you’ll find all of the project reports and related background material, as well as bulletins like this one. We’ll use the hub to keep you posted on important dates and deadlines. Finally, the hub’s Q&A facility allows you to submit any questions you might have on the project and process—and we’ll post answers to those questions for the benefit of everyone interested in the pension project.

OCUFA Pension BulletinFor members and friends of the Ontario

Confederation of University Faculty Associations

Feedback needed

The first three project reports have been distributed to the Plenary Body (see “How we got here” on page 2) and are available from your association or union pension rep. While we understand that you may prefer to leave the technical matters to the experts, we need your feedback on the issues raised in these reports. These key points, and our constituents’ feedback, will help set the direction for the rest of the project.

What’s inside:• How we got here

• How JSPPs work

• Three preliminary JSPP models

• Plan funding

• What you can do

• Who’s who

1

Stay up-to-date on the latest developments

ocufapensionreview.ca

http://www.ocufapensionreview.ca


How we got here OCUFA has been active on university pensions since 2006 when the Arthurs Commission was announced. In 2008, Dr. Arthurs submitted his Report of the Expert Commission on Pensions. Since then, we have been advocating actively for solvency relief and generating meaningful pension solutions for our members.

Early in 2014, as funding shortfalls posed real financial risks to our universities, with the approval of its Board, OCUFA reached an agreement with the Council of Ontario Universities (COU) to collaborate with all university sector stakeholders to explore the feasibility of building a multi-employer, multi-employee-stakeholder, JSPP framework. The goal of this model would be to provide a meaningful, equitable and secure pension option—comparable to existing defined benefit (DB) plans—for those groups interested in participating. A joint Project Oversight Committee was created, and funding was sought from the Ministry of Training, Colleges and Universities (MTCU) to retain the experts needed to move the project forward.

On October 17, 2014, the Oversight Committee hosted the first meeting of the University JSPP Plenary Body, composed of interested faculty associations, university administrations, and unions representing university staff. The Plenary Body was introduced to the Oversight

Committee, and presentations were made by the experts (two lawyers and two actuaries) selected to represent labour and administration.

Plenary participants were invited to join several sub-committees, each with a mandate to explore a piece of the pension puzzle: plan design, funding, and governance (including sponsorship and fiduciary administration).

The legal and actuarial teams were asked to work together to produce preliminary reports identifying key issues in each of these areas. The reports will be presented and discussed at the next Plenary Body meeting on January 13, 2015. In the meantime, questions can be posted on the pension project web hub.

Five things to know:1. Any pension benefit you have already earned is fully protected under current provincial pension legislation.

This applies whether you are an active, retired or deferred (meaning you have left the university but haven’t transferred your benefits out of the plan) plan member.

2. The JSPP project is not about creating an option that works for government; it’s about providing a high quality, secure pension option for interested employees and employers.

3. An approved JSPP would offer a DB pension (a pension based on a formula known by plan members), and participation in the JSPP would apply to future years of employment only.

4. Participation in the JSPP under construction would be voluntary, and open to all pension plan types and all employee groups in the university sector. It would be negotiated at the institutional level through normal processes, including collective bargaining.

5. The university JSPP initiative is separate from the recommendations in the 2012 report commissioned by the Ontario government on pooling asset management for all of the province’s public-sector institutions—although assets would be pooled for those groups choosing to join the plan.

2

Ask questions or view a list of the most common Q&As

ocufapensionreview.ca

http://www.fin.gov.on.ca/en/consultations/pension/report/Pensions_Report_Eng_web.pdf

http://www.fin.gov.on.ca/en/consultations/pension/report/Pensions_Report_Eng_web.pdf


How JSPPs work At a basic level, all pension plans work very much the same way. Money in, money invested, money out.

The jointly sponsored pension model differs from others in that both employers and employees share contributions (often, but not always, 50/50) and governance. They also share in both funding deficits and funding surpluses (see “Plan funding” on page 4).

It is assumed that a university JSPP—like other public sector JSPPs in Ontario—would involve a number of employers and a number of unions or employee groups. Existing JSPPs include the Ontario Teachers’ Pension Plan (OTPP), the Colleges of Applied Arts and Technology (CAAT) Pension Plan, and the Ontario Municipal Employees Retirement System (OMERS)—to name just a few.

Three preliminary JSPP modelsThe actuarial team’s preliminary report considers three JSPP models as a starting point for discussion purposes. These models would apply to pensions earned after a university decides to participate in the JSPP. The more generous the benefits, the higher the cost. From highest cost to lowest, they are:

Ontario’s university pension plan landscape23 institutions sponsor a variety of plans and in some cases, multiple plans within the same institution, including:

• Defined benefit (DB) plans, in which pensions are calculated using a formula, usually involving salary and years of service. Pension amounts are guaranteed and the employer is responsible for pension deficits.

• Defined contribution (DC) plans, in which contributions are made to a personal pension account and the balance of the account is used to provide an income at retirement. Employers are responsible for making fixed contributions (typically a percentage of salary).

• Hybrid plans, in which employees receive the better of the DB pension provided by the plan formula and the retirement income provided by their DC account balance.

STEP 1

Regular contributions flow into a pension fund – basically a pot of money that is held in trust for plan members.

The contributions are invested in stocks, bonds and other securities.

At retirement, the funds in the pot are used to provide a retirement income (or pension) for plan members.

STEP 3STEP 2

3

Reflects the best of all plan provisions currently available

in the university sector.

The Colleges of Applied Arts and Technology

Pension Plan.

Illustrates the plan design that could be provided

for a total combined employer and member contribution

rate of approximately 18 per cent of salary.

4

LIABILITIESthe cost of providing pensions

ASSETScontributions and investment earnings

Plan fundingThere are two sides to any defined benefit pension plan balance sheet (including JSPPs): assets and liabilities.

Actuaries conduct regular pension plan valuations to monitor the ratio of assets to liabilities. The methodology for these valuations is governed by provincial pension regulation and professional standards. For typical single-employer DB plans, three types of valuation are required:

Type of valuation What it’s for

Going concern Measures the plan’s health assuming that the future unfolds as expected in terms of contribution levels, investment returns and pension costs.

Wind-up Compares the market value of the plan’s assets on the date of the valuation to the total current value of all pensions earned to that date (to test the health of the plan in the event of plan termination). Wind-up valuation results are highly sensitive to current interest rates, because benefits are settled based on current annuity rates, which in turn are tied directly to interest rates. The lower the interest rate, the more expensive the annuity (the higher the current value of the pension).

Solvency Like a wind-up valuation, except that certain benefits (such as pension indexing) can be excluded from the valuation.

Unlike single-employer DB plans, existing multi-employer JSPPs are not required to meet solvency funding requirements—largely because of the very low likelihood of all participating employers leaving the plan and forcing it to terminate. If a JSPP valuation shows a going-concern deficit, adjustments must to be made to future contributions rates or benefit provisions to bring assets and liabilities back into line. If the valuation shows a going-concern surplus, the excess funds may be used to improve benefits, reduce contributions, or provide a financial cushion in case of future adverse experience. For more details on how these decisions would be made, please ask your association or union pension rep for a copy of the legal team’s preliminary report.

Pension cost drivers• Pension formula (e.g., annual pension = 2 per cent x average best five years earnings x years of service)

• “Normal” retirement age (e.g., age 65)

• Early retirement subsidies (e.g., unreduced early retirement at age 62)

• Post-retirement death benefits (e.g., 60 per cent surviving spouse’s pension)

Due to its shared risk structure, JSPPs are typically not subject to the same solvency funding requirements as a single-employer pension plan.

How costs are measured in a going-concern valuation

Key demographic assumptions

• Age and life expectancy• Gender• Marital status• Termination, disability, and retirement rates

Key economic assumptions

• Interest (bond) rates• Investment returns• Salary growth• Inflation

Why are so many DB plans facing funding deficits? Volatile investment returns (including the crashes of 2002 and 2008 which reduced their asset base), lower expectations for future investment returns, improvements in life expectancy, and tax law that prohibits “excess” surplus (leading to contribution holidays) are largely to blame.

A one per cent increase/decrease in investment return assumptions can increase/decrease contributions by four per cent of salary, or more.

Growing pension costs If you were saving for your pension on your own and you retired in 2014, you’d need to have saved about $1,200,000 to collect an annual pension of $70,000 at age 65 ($2,500 a month, with $1,500 a month continuing to your spouse after your death). Ten years ago, you’d need to have saved about $850,000 to collect that same pension.

Role of investment income in paying pension costs

$1,200,000 $850,000SAVINGS TODAY SAVINGS IN 2004

vs

Traditionally, about two-thirds of pension cost is paid from investment income

Investment income is more likely to cover only 50 per cent of pension costs due to lower investment returns

5

50% 50%33% 67%

Contributions Investment earnings

6

The Final Word

This bulletin is intended to provide a summary of certain pension concepts in simple terms. It is not intended to give advice or guidance. Every effort has been made to provide accurate information. Any errors should be reported to Cheryl Athersych at [email protected] or 647-898-7445.

What you can doCollaboration is a key part of this project. We encourage you to follow the discussion, and to lend your voice. Here’s how you can do just that:

• Understand the issues: Visit the pension project hub we’ve set up at www.ocufapensionreview.ca for background material and previous reports.

• Lend your voice: Your feedback on the issues will play an important part in how future discussions unfold. Use our online hub’s Q&A facility to submit your questions about the project and process—and we’ll answer them as best we can.

• Stay up-to-date: Below is a timeline of the next steps in our process. We’ll keep you informed along the way, and will use the pension hub to present new information for your review.

January – prepare second drafts of reports (actuarial and legal teams)

February – review second drafts (Plenary Body)

March – prepare first draft of consolidated report (actuarial and legal teams)

April – review consolidated report (Plenary Body)

May – review draft Memorandum of Agreement; review revised consolidated report

June/August – review and consideration by stakeholders; draft transition plans; communications plans

September – finalize transition plans; communications plan

October – final report to MTCU

Who’s who

Oversight Committee

• Jim Butler (Wilfrid Laurier University, COU)

• Lisa Krawiec (COU)

• Cathy Riggall (COU)

• Mark Rosenfeld (OCUFA)

• Sue Wurtele (Trent University, OCUFA)

Project Coordinator

• Cheryl Athersych

Actuarial Team

• Cameron Hunter, Eckler Ltd. (labour)

• Alan Shapira, Aon Hewitt (management)

Legal Team

• Elizabeth M. Brown, Hicks Morley Hamilton Stewart Storie LLP (management)

• Murray Gold, Koskie Minsky LLP (labour)


University of Waterloo

REGISTERED PENSION PLAN INVESTMENTS SUBCOMMITTEE

Report to Pension & Benefits Committee

23 January 2015

FOR DECISION

__________________________

Amendment to the Sell Order for the 30-Year U.S. Treasuries

Motion: Subject to concurrent approval by Finance & Investment Committee (“F+I”), that Pension & Benefits Committee

approve that the sell order for the 30-year U.S. treasuries held by the registered pension plan fund (T-Bond 3.625% 15-

Feb-2044) (the “Bonds”) be amended to direct TD Asset Management to sell the Bonds automatically when the yield on

the Bonds (the “Yield”) reaches 1.5%, unless directed by the University to sell at a higher yield.

Background:

At its 3 March 2014 meeting, the Finance & Investment Committee approved the investment of CDN$85 million in Bonds

on behalf of the registered pension plan fund with a stipulation that a sell order be put in place directing TD Asset

Management to sell the Bonds when the Yield reaches 2.0%. The committee and University agreed to monitor the Yield

and revisit the decision, as necessary.

Given the continued low interest rate and low inflation environment, coupled with the strong U.S. dollar, it is expected

that the Yield could fall below 2.0%. If the sell order remains at 2.0%, TD Asset Management would sell the Bonds

automatically when the Yield reaches 2.0% and the registered pension plan fund would lose the opportunity to realize

even greater capital gains from a further drop in the Yield. The amended sell order would allow the registered pension

plan fund to realize additional capital gains, if the opportunity arises, while providing the flexibility to sell earlier if the

economic environment warrants.

The Yield and economic environment will continue to be monitored on a regular basis. Over the past 12 months, 30-year

U.S. treasury yields peaked on 3 January 2014 at 3.93%; the low was 2.40% on 15 January 2015.

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