OPEN SESSION ACTION - University of Waterloo€¦ · Board of Governors PENSION & BENEFITS...

Board of Governors PENSION & BENEFITS COMMITTEE

Friday 19 January 2018 9:30 a.m. to 12:00 noon

NH 3318

Note: lunch to follow meeting

OPEN SESSION ACTION

9:30

9:40

Decision Information

Information

Information

9:50

10:00

10:30

11:15

11:25

Information

Decision

Information

Decision

Information

Information

1. Approval of the 8 December 2017 Minutes (Open Session)* and Business Arisinga. Differences Between Investment Fund Performance Report and Quarterly

Performance on Risk Management Dashboard [Byron]

2. Execution Against the Work Plan* [Grivicic]

3. Update on Government Pension Plan Initiatives [Shapira]

4. Investment Status of the Payroll Pension Plan* [Sarah Hadley]

5. Approval of Actuarial Valuation Assumptions* [Shapira]

6. Impact of New Ontario Pension Funding Rules* [Shapira]

7. 2017 Report to the Community (Draft)* [Grivicic]

8. Update on Registered Pension Plan Investment Subcommittee

9. Update on Responsible Investing Working Group

10. Other Business

11. Proceed into Confidential Session

CONFIDENTIAL SESSION

12. Approval of the 8 December 2017 (Confidential)+ and Business ArisingDecision

Next Meeting: Friday 23 February 2018 from 9:30 a.m. – 12:00 noonin NH 3318

Note: the annual committee lunch will follow the January meeting. Please sendany dietary restrictions to Melissa Holst (as below) by Monday 15 January 2018.

*attached** to be distributed

+ distributed separately

15 January 2018 Mike Grivicic Associate University Secretary

Please convey regrets to Melissa Holst at 519-888-4567 x36125 or [email protected]

Future Agenda Items a. Pension Contribution for Members of LTDb. Level of LTD coverage vs. practical requirementsc. Discussion of $3,400 cap appropriateness, and potential RPP/PPP combination

PB 19 January 2019, page 1 of 51

mailto:[email protected]

University of Waterloo

Board of Governors PENSION & BENEFITS COMMITTEE Minutes of the 8 December 2017 Meeting

[in agenda order] Present: Kathy Bardswick, Ted Bleaney, Monika Bothwell, George Dixon, Stewart Forrest, Dennis Huber, Ranjini Jha, Alan Macnaughton, Marilyn Thompson (chair), Mary Thompson Regrets: Mary Hardy, David Kibble, Michael Steinmann Consultants: Linda Byron, Allan Shapira Administration: Lee Hornberger, Sue McGrath Organization of Meeting: Marilyn Thompson took the chair and Rebecca Wickens acted as secretary. The secretary advised that a quorum was present. The agenda was approved without a formal motion. 1. APPROVAL OF THE 10 NOVEMBER 2017 MINUTES (OPEN SESSION) AND BUSINESS

ARISING A motion was heard to approve the minutes as distributed. Bardwell and Bleaney. Carried. a. Communication to retirees re: Stage 2 solvency funding relief. Byron reported: there are requirements re: providing notice, including information which must be included in the notice; Aon Hewitt has draft language they can provide to clients; the university posted notice and will be including information in all pension statements distributed in the spring, which will satisfy the notice requirements. b. Update re: filing of the 1 January 2017 actuarial valuation. Byron indicated that the 1 January 2017 actuarial valuation will be filed next week and a copy will be provided to the university for posting. [Note: a copy was received on 12 December 2017 and has been posted on the Pension & Benefits Committee website.] 2. EXECUTION AGAINST THE WORK PLAN This item was received for information. 3. UPDATE ON GOVERNMENT PENSION PLAN INITIATIVES Members heard: details of the proposed amendments to the Pension Benefits Act regulations to implement the new funding rules are expected to be released next week; the university would have until the next required actuarial valuation filing to adjust to the new funding rules, which are expected to increase current service costs and require an increase in the university’s special payments; the actual financial impact will depend on a number of factors including the pension plan’s asset mix and level of discount rates; Aon Hewitt will project out to 2020 (the date of the next required actuarial valuation) to assess options for managing the transition. In response to a question re: advocacy, members heard that there was input to regulations during development, and the Council of Ontario Universities may provide a further response. 4. QUARTERLY RISK MANAGEMENT DASHBOARD Byron and Shapira took members through the quarterly report, noting potential impacts of the new funding rules, including the likelihood that the gains from the sale of the real return bonds will be brought into the calculation of the going concern deficit and a provision for adverse deviation will need to be included in the going concern calculation. In response to questions, members heard: the interest rate used to calculate the risk-free benchmark is the interest rate on long-term government bonds plus 40 basis points; Aon Hewitt will clarify the note on page 3 of the report re: the interaction between the liabilities and interest rates; there is annual reporting to the committee on the payroll pension plan in January (investments) and February/March (funded status). 5. INVESTMENT FUND PERFORMANCE REPORT Huber spoke to the excerpt from the registered pension fund investment report as at September 30, 2017, noting: the fund lagged expected results for the quarter, but is ahead for the one, five and ten year periods; the majority of investment managers outperformed the index, but, in some cases, not the objective (which includes a provision for fees); Oldfield’s performance continues to lag compared to the index; 2-year corporate bonds outperformed universe bonds. In response to a question, Aon Hewitt agreed to look at the reason for the difference between the


Pension & Benefits Committee 8 December 2017 page 2 of 3 quarterly performance in the risk management dashboard and the investment performance report, indicating that it is likely due to the currency overlay. 6. INDEXATION OF PENSION BENEFIT AND CONTRIBUTION LIMITS McGrath spoke to the report, noting that the indexed pension benefit limits will not exceed the caps in the registered or payroll pension plan this year, but the committee should discuss the future of the caps when they are reviewed in the spring. In response to questions, McGrath reminded members re: the most recent change to the caps, as well as the committee’s annual reporting protocols. There was a brief discussion re: the intention with respect to high income earners when the caps were established and the operation of the fairness protocol with respect to over-contributions. A discussion re: the future of the caps will be brought back to the April/May 2018 meeting. 7. RECOMMENDATION RE: COMPARATORS FOR BENEFITS INDEX ANALYSIS Following a review of the report and factors considered (the university recruits from or risks losing employees to an organization; Aon Hewitt has or can obtain data on benefits), members discussed: the rationale for inclusion/omission of organizations from each option presented; option 2 - the pros (more information, better comparators) and cons (more costly, will take longer time); replacing Grand River Hospital with Hamilton Health Sciences in Option 2. There was a motion to approve the Option 2 comparators. Jha and Forrest. Carried. Following further discussion re: the benefit of including Hamilton Health Sciences in the list of comparators, noting the benefits plan is separate from that of McMaster University, there was a motion to add Hamilton Health Sciences to the Option 2 comparators. Jha and Forrest. Carried. Hornberger will communicate the decision to Aon Hewitt. 8. 2015-2017 REPORT TO THE COMMUNITY (DRAFT) Members heard: this is presented as a first draft; members and resources are asked to send feedback directly to Mike Grivicic; as part of their review, members are asked to consider the time period covered by the report (calendar 2017 or the two year period ended Sept. 2017). Initial comments included: a question as to whether to remove the principles at the beginning of the report; Section 7 and 12 should be removed; a question as to whether there should be an update on efforts to rework the registered pension plan investments subcommittee. Members expressed an initial preference that the report be based on calendar 2017 and be updated to reflect actions taken since September (e.g. filing of the actuarial valuation, approval of the statement of investment policies and procedures). 9. OTHER BUSINESS There was no other business. 10. PROCEED INTO CONFIDENTIAL SESSION With no additional business in open session, the committee proceeded into confidential session. NEXT MEETING The next meeting is on Friday 19 January 2018 from 9:30 a.m. – 12:00 p.m. in Needles Hall Room 3318.

22 December 2017 Rebecca Wickens Associate University Secretary


D = deferred

Execution against Work Plan

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

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.

Task Frequency (Target month)

20 Jan 2017

24 Feb 2017

10 Mar 2017

19 May 2017

16 June 2017

8 Sept 2017

6 Oct 2017

10 Nov 2017

8 Dec 2017

19 Jan 2018

Approval of Actuarial Valuation Assumptions Annual (Jan)

Investment Status of PPP Annual (Jan)

Preliminary Valuation Results (RPP and PPP) Annual (Feb)

Cost-of-living Increase for Pensioners Annual (Feb)

Pensions for Deferred Members Annual (Feb)

Salaries for Pension Purposes for Individuals on Long-term Disability

Annual (Feb)

Actuarial Valuations (RPP and PPP) Annual (Mar)

Benefits Plan Premium Renewals Annual (Mar)

Indexing of Long-term Disability Plan Benefits and Maxima

Annual (Mar)

Review of Contribution and Protocol Caps (RPP and PPP)

Annual (Mar)

Annual Committee Self-Assessment Annual (Mar)

Budget Overview Annual (May) D

Previous Years’ Fees and Expenses Annual (May)

Annual Audit of the Pension Plan Fund Financial Statements

Annual (May)


Pension & Benefits Committee – Execution Against Work Plan

1 Most recent report was published in September 2015 for the 2014-15 year

Task Frequency 20 Jan 2016

24 Feb 2017

10 Mar 2017

19 May 2017

16 June 2017

8 Sept 2017

6 Oct 2017

10 Nov 2017

8 Dec 2017

Benefits/Financial Analysis Report Annual (June) D

Indexing of Health and Dental Plan Maxima Annual (Nov)

Cost-of-living adjustment to payroll pension plan limit

Annual (Dec)

Indexation of Retiree Life Insurance Annual (Dec)

Total Fund Overview (provided under reports from RPPI)

Quarterly

Investment Manager Review (provided under reports from RPPI)

Semi-annually

Approval of the Statement of Investment Policies and Procedures (SIPP)

Annual

Annual Report to the Community1 Annual

Actuarial Filing Minimum every three years Most recent filing in 2017


Portfolio Report

Account Name: The University of Waterloo Payroll Plan

Account Number: 45420

For the Month Ended: December 31, 2017

TD Asset Management


At a glance

Account - 45420

Month Ended: December 31, 2017

Summary Account inception date: July 31, 2000

Fund Name Inception Date Market Value

TD Emerald International Equity Index Fund Jul 31 2000 $2,087,046

TD Emerald U.S. Market Index Fund Jul 31 2000 $6,391,833

TD Emerald Canadian Bond Index Fund Jul 31 2000 $16,209,339

TD Emerald Canadian Equity Index Fund Jul 31 2000 $16,578,172

$41,266,391Total Market Value of Portfolio

Total Portfolio Performance

Income Summary - Year To Date

Description

Interest Income 669,248.03

Dividend Income 430,326.34

Capital Gains/(Losses) 604,300.86

3

9.0%

8 .0%

7.0%

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0% 0.01 %

TD Asset Management

-1 ,0%_.L--~--~---~--~---~--~--~--


Account - 45420


Q4/17 Quarterly Market Commentary

Each of the eleven sectors posted a positive return. The Health Care sector significantly ledmarket returns while the Energy sector lagged the group as it faced challenges includinghurricanes in the U.S., low cost shale producers and a large amount of one-off maintenanceshutdowns.Large-cap stocks outperformed small-cap and mid-cap Canadian equities, and Canadian valuestocks outperformed growth stocks during the quarter.

U.S. EquitiesU.S. equities delivered a positive return in Q4/17. The S&P 500 Index (S&P500) gained6.64% Q/Q, the Dow Jones Industrial Average Index (Dow) rose 10.96% Q/Q and theNASDAQ Composite Index (NASDAQ) returned 6.55% Q/Q.Each of the eleven sectors in the S&P 500 showed positive returns as President Trump's taxreform passes through Congress.Large-cap U.S. equities outperformed mid-cap stocks and small cap stocks, U.S. growth stocksoutperformed their value counterparts.

International EquitiesMost major developed international markets rose in Q4/17. The MSCI Emerging Markets Indexadvanced 5.74% Q/Q, outperforming most developed markets.

HighlightsCanadian & U.S. Fixed Income

The Canadian government bond index rose during Q4/17, outperforming the U.S.government bond index as the Canadian index increased 2.08% Q/Q, compared to a0.04% Q/Q advance for the U.S. index.Globally, interest rates in developed economies are historically low as central banks aretrying to apply sound judgement to complex trade-offs without inadvertently triggeringanother economic downturn.Canadian and U.S. investment grade corporate bond indices registered returns of positive1.87% Q/Q and positive 1.12% Q/Q, respectively in Q4/17. Credit markets continued to holdup very well, with investment grade (IG) credit spreads trending tighter during the quarter.U.S. high yield credit spreads remained narrow compared to historical levels, supporting again of 0.96% Q/Q for the sector.

Canadian EquitiesThe Canadian equity market gained in Q4/17 as the S&P/TSX Composite Index (S&P/TSX)returned 4.45% Q/Q.

TD Wealth Asset Allocation Committee Overview

Economic indicators continue to show strength as we move into 2018, with trade, purchasing managers’ indices, industrial production, job creation and construction activity all positive. This should support solideconomic growth in 2018; we anticipate it will be approximately 3.5% globally, which we refer to as Goldilocks growth — not too hot, but not too cold. Given this, we expect central banks to stay on the roadtoward policy normalization. However, inflation remains subdued, which should moderate the need for significantly higher rates.

Fixed Income

We expect bonds to generate coupon-like returns in 2018. With central banks raising key rates cautiously, yields on short-term bonds are likely to remain low, and subdued inflation is likely to moderate theimpact of positive economic growth on long-term bond yields, so we expect they will also remain low. Although yields and returns are likely to be modest, we still consider fixed income an important portfoliocomponent as it provides stability and modest income.

Equities

We anticipate that equities will deliver mid-single-digit returns, but are neutral as we do not believe investors will be appropriately rewarded for the risks associated with an overweight position at this time.Our current geographic preference is for international equities as their valuations are attractive relative to those in North America, and European companies stand to benefit from improving economic growth,which lagged meaningfully following the financial crisis.

During the quarter we upgraded emerging market equities to neutral as they are likely to benefit from global economic growth. In addition, political risks in key regions have diminished and commodity pricesappear to have stabilized. However, we are neutral as our optimism is tempered by concern over high debt levels and a potential reduction in liquidity. We are also neutral U.S. equities. Free cash flow isstrong and corporate tax cuts could add significantly to earnings; however, valuations are high.

We are underweight Canadian equities. Canadian economic growth was robust in 2017, but we believe the pace will slow in 2018 as we anticipate a slowdown in consumer spending and business investmentmay be restrained by uncertainty about the outcome of NAFTA negotiations.

The full Quarterly Market Commentary is available on tdaminstitutional.com.

4

TD Asset Management

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Annualized Compound ReturnInvestment Performance

Account - 45420


DescriptionLast

MonthLast 3

MonthsYear To

DateOneYear

TwoYears

ThreeYears

FourYears

FiveYears

SinceInception

InceptionDate

Canadian Equities 1.19% 4.44% 9.09% 9.09% 14.87% 6.58% 7.55% 8.62% 5.33% 07/31/00

S&P/TSX Composite Index CAD 1.20% 4.45% 9.10% 9.10% 14.91% 6.59% 7.56% 8.63% 5.19%

U.S. Equities -1.68% 6.76% 13.43% 13.43% 10.49% 13.95% 16.27% 20.80% 4.30% 07/31/00

S&P 500 Net TR Index - C$ -1.70% 6.68% 13.15% 13.15% 10.21% 13.64% 15.95% 20.47% 4.06%

International Equities -1.18% 4.42% 16.83% 16.83% 6.76% 10.71% 8.95% 13.06% 3.03% 07/31/00

MSCI EAFE Net TR - C$ -1.18% 4.42% 16.82% 16.82% 6.72% 10.65% 8.86% 12.97% 3.00%

Fixed Income -0.40% 2.02% 2.46% 2.46% 1.97% 2.49% 4.01% 2.92% 5.44% 07/31/00

FTSE TMX Canada Bond Universe Index~ CAD -0.41% 2.02% 2.52% 2.52% 2.09% 2.56% 4.08% 3.01% 5.51%

Total Portfolio -0.01% 3.82% 7.47% 7.47% 8.64% 6.37% 7.61% 8.42% 5.41% 07/31/00

45420 CUSTOM BENCHMARK -0.01% 3.81% 7.44% 7.44% 8.66% 6.34% 7.58% 8.41% 5.39%

For segregated assets total return is calculated using daily time-weighted rates of return which are linked geometrically over the period. The total return includes realized and unrealized gains and losses plus income. Returns are calculated aftertrading expenses but before management fees. Assets are valued using trade date accounting and accrual accounting for dividends as well as fixed income securities and all other assets that accrue interest.Fund returns are calculated as Ending Net Asset Value per unit (NAVpu) plus distribution per unit divided by beginning NAVpu. If the since inception period is less than one year, the since inception return represents the total return for the period.

5

TD Asset Management


Prepared by Aon Hewitt

Actuarial Assumptions University of Waterloo Pension and Benefits Committee Meeting January 19, 2018

TCOR

AON Empower Results®


Proprietary & Confidential | 2 Aon Hewitt

January 19, 2018

About This Material

Review of actuarial assumptions for purposes of setting the actuarial assumptions to use for the January 1, 2018 actuarial valuation of the Registered Pension Plan (RPP) and Payroll Pension Plan (PPP)

The January 1, 2018 actuarial valuation of the RPP is not required to be filed with the pension regulators (Financial Services Commission of Ontario and Canada Revenue Agency); it is prepared for Plan management purposes




January 19, 2018

Actuarial Assumptions For Going Concern Valuation

Assumptions to Estimate:

When Pension Benefits Are Payable

Amount of Pension Benefits Payable

How Long Pension Benefits Are Payable

How 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




January 19, 2018

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.

I ~-----, : .......................................................................................................................................................... . ...____________> I

1- - - - - - - - - - - - - - - - - - - ~--------' : .......................................................................................................................................................... ;

:...................................................................................................... .




January 19, 2018

Actuarial Assumptions For Going Concern Valuation— Economic Assumptions

Economic Assumptions January 1, 2017 Valuation1

Increase in Consumer Price Index (CPI) 2.00% per year

Increase in Year’s Maximum Pensionable Earnings

Under Canada Pension Plan 2.75% per year (CPI + 0.75%)

Increase in Income Tax Act Maximum Pension 2,914.44 in 2017; increased at 2.75% per year up to $3,200.00

Increase in Salaries 4.00% per year (CPI + 2.00%2)

Increase in Salaries (Disabled) 2.00% per year (CPI + 0%)

Interest Rate Used to Discount Liabilities 5.50% per year (CPI + 3.50%)

Interest Rate Used to Calculate 50% Rule 1.30% per year for 10 years3; 1.60% per year thereafter

Interest Rate for Crediting on Required Member Contributions

3.00% per year

Loading For Administrative Expenses Reflected in Discount Rate

1 Filed with regulators 2 Reflects PTR/grid steps/merit 3 1.50% per year for 10 years: 2.10% per year thereafter for 75% indexed benefits




January 19, 2018

Actuarial Assumptions For Going Concern Valuation— Demographic Assumptions

Demographic Assumptions January 1, 2017 Valuation

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




January 19, 2018

Increase in Consumer Price Index (CPI)

As of January 1, 2018, underlying inflation rate implicit in the market yield of Government of Canada real return bonds (0.62%) and nominal bonds (2.32%) is 1.69%

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 has been set at 2.00% per year since the January 1, 2015 actuarial valuation; other economic assumptions build off of the inflation rate




January 19, 2018

Increase in Pensionable Earnings

Increase in pensionable earnings of 4.00% per year based on: – Assumed across-the-board increase of 2.00% per year – Assumed 2.00% increment representing PTR/grid steps/merit across Faculty and

Staff groups




January 19, 2018

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 target

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%




January 19, 2018

Discount Rate (Con’t)

For 2017 filed actuarial valuation, the asset mix generated expected real return of 3.60% per annum before expenses: – Assumption for real rate of return of 3.50% reflected a provision for administrative

expenses of 0.10% and no additional provision for adverse deviation For the 2018 actuarial valuation, the asset mix generates expected best estimate

real return of 3.60% per annum before expenses: – Assumption of 3.50% reflects a provision for administrative expenses of 0.10% and no

additional provision for adverse deviation




January 19, 2018

Expected Investment Returns on Various Asset Classes

Asset Class

30-Year Annualized Mean1

(Nominal Return) Annual Standard Deviation

Inflation 2.0% 1.4%

Cash (91-Day Bills) 2.2% 1.8%

Universe Bonds 3.2% 5.8%

Canadian Equities 6.6% 16.5%

U.S. Equities 6.0% 15.6%

International Equities 6.6% 19.9%

Listed Infrastructure 5.5% 14.6%

Global Listed Real Estate 5.5% 18.5%

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

Note: Above returns determined at September 30, 2017 AON Empower Results®



January 19, 2018

Expected Investment Returns For UW Pension Fund

Expected real rate of return as of September 30, 2017 calculated based on the following target asset mix:

Asset Class

Canadian Equities 15.0%

Non-Canadian Equities 40.0%

Fixed Income 33.0%

Cash 2.0%

Infrastructure (Listed) 5.0%

Real Estate 5.0%

100.0%

Annual Expected Real Rate of Return

Expected Real Return 3.60%

Administrative Expenses (0.10%)

Provision For Adverse Deviation (0.00%)

Net Real Rate of Return 3.50%

Annual Standard Deviation (Asset Only) 9.08%

Annual Drawdown Risk 95% (Asset Only) -15.06%




January 19, 2018

Expected Investment Returns For UW Pension Fund (Con’t)

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

Annualized Real Rate of Return Over a 30-Year Period (September 30, 2017) 95th percentile 6.40%

75th percentile 4.60%







January 19, 2018

Retirement Age Experience

The following table shows the ages at retirement for retirements during 2006 through 2017 inclusive:

Faculty Staff Total

< Age 60 16 77 93 Age 60 but less than Age 61 8 51 59 Age 61 but less than Age 62 10 37 47 Age 62 but less than Age 62.25 14 90 104 Age 62.25 but less than Age 63 15 59 74 Age 63 but less than Age 64 14 55 69 Age 64 but less than Age 65 18 49 67 Age 65 but less than Age 65.25 30 209 239 Age 65.25 but less than Age 66 31 34 65 Age 66 but less than Age 67 29 28 57 Age 67 but less than Age 68 13 15 28 Age 68 but less than Age 69 10 9 19 Age 69 but less than Age 70 10 9 19 Age 70+ 21 12 33 Total 239 734 973




January 19, 2018

Retirement Age Assumption

The valuation uses a single point retirement age of 64 but no earlier than one year following the valuation date. This assumption generates a full year of current service cost for all active members including those already at assumed retirement age

We will review the impact on liability and normal cost of maintaining the age 64 retirement assumption but eliminating the assumption that anyone already eligible to retire will remain with the University for one year



Proprietary & Confidential | January 19, 2018 16 Aon Hewitt

Mortality Rates

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

Following table shows actual versus expected deaths for members of the RPP for 2011 through 2017:

Actual deaths over 7-year period (2011–2017) is 94% of expected deaths Actual deaths over 6-year period (2012–2017) is 94% of expected deaths Mortality losses may result if demographic profile of pensioner deaths is different from

expected

* as of September 30, 2017

2011 2012 2013 2014 2015 2016 2017* Total

Actual Deaths 45 54 53 57 51 57 40 357.0

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

48.4 51.4 55.3 57.7 59.3 60.6 48.6 381.3



Proprietary & Confidential | January 19, 2018 17 Aon Hewitt

New Mortality Improvement Scale

In September 2017 the Canadian Institute of Actuaries released a new mortality improvement scale “MI-2017”

There is no change to the underlying mortality table of CPM 2014 Calibration reflects more recent data (up to 2015 as opposed to 2007 for the scale

CPM-B which is currently used by many pension plans) Stronger improvement at higher ages (above age 90) is expected than indicated by

CPM-B For ages 55-85, short term improvement rates are generally slightly lower than CPM-B Ultimate rate (1%) is higher than current rate under CPM-B (0.8%) As part of the valuation we will determine the impact on pension liability and normal cost

if the Plan adopts the new mortality improvement scale at the next funding valuation




January 19, 2018

Actuarial Assumptions For Solvency and Wind-Up Valuations

Assumptions

January 1, 2017

(Last Filed Valuation) January 1, 2018

Retirement Ages Age between 55 and 65 that produces

highest value

No change

Mortality Rates CPM2014 Combined with Generational Improvements

Under Scale CPM-B

No change

Interest Rates— Solvency Valuation (Per Year)

Active Members Age 55 and Over, Pensioners and Deferred Pensioners1

3.12% 2.93%3

Active Members Under Age 552

2.30% for 10 years; 3.70% thereafter

2.80% for 10 years; 3.30% thereafter

Interest Rates— Wind-Up Valuation (Per Year)

Active Members Age 55 and Over, Pensioners and Deferred Pensioners1

-0.09% (100% indexed) 0.71% (75% indexed)

-0.13% (100% indexed)3 0.63% (75% indexed)3

Active Members Under Age 552

1.30% for 10 years; 1.60% thereafter (100% indexed) 1.50% for 10 years; 2.10% thereafter (75% indexed)

1.30% for 10 years; 1.50% thereafter (100% indexed) 1.70% for 10 years; 1.90% thereafter (75% indexed)

1 Settled through annuity purchase 2 Settled through commuted value 3 Depends on release of final guidance from Canadian Institute of Actuaries for January 1, 2018 actuarial valuations AON

Empower Results® PB 19 January 2019, page 27 of 51


January 19, 2018

Legal Disclaimer

© 2018 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.



Impact of New Ontario Pension Funding Rules On University of Waterloo Pension PlanUniversity of Waterloo Pension & Benefits Committee

January 19, 2018

Prepared by Aon Hewitt

TCOR



Proprietary & Confidential | January 2018 2Aon Hewitt

Table of Contents

Overview of New Funding Rules Application To Pension Plans Under Regulation 178/11 New Solvency Funding Requirements Enhanced Going Concern Funding Requirements – Provision For Adverse Deviations PfAD and BDR Under UW Pension Plan Enhanced Going Concern Funding Requirements – Amortization of Going Concern

Unfunded Liabilities Impact of New Going Concern Funding Requirements Under UW Pension Plan Projection of Impact To 2020 Contribution Holidays and Benefit Improvements Funding and Governance Policies




Overview of New Funding Rules

New funding framework announced in May 2017 for DB pension plans includes the following elements:– Shortening the amortization period from 15 years to 10 years for funding a going concern

shortfall– Consolidating going concern special payment requirements into a single schedule when a

new report is filed– Requiring the funding of a reserve within the plan, called a Provision for Adverse Deviations

(PfAD)– Requiring funding on a solvency basis if needed to improve the plan's funded status to 85%

on a solvency basis– Increasing the guarantee provided by the Pension Benefits Guarantee Fund from $1,000

per month to $1,500 per month– Providing funding rules for benefit improvements and restricting contribution holidays to

improve benefit security Posting on December 14, 2017 details proposed amendments to Regulations to implement

many of the above elements; these proposed amendments addressed in this document




Application To Pension Plans Under Regulation 178/11

For pension plans participating under Regulation 178/11 (Solvency Relief for CertainPublic Sector Pension Plans), proposals include the following rules to assist the transition of these plans to the proposed new funding framework: – Any valuation with a valuation date before the effective date of the proposed regulation may

be filed under Regulation 178/11– Any valuation with a valuation date on or after the effective date of the proposed new

solvency funding regulation must be filed under the new regulation– Conditions and restrictions on contribution holidays and benefit improvements under

Regulation 178/11 continue to apply until the applicable time periods are satisfied




New Solvency Funding Requirements

Special payments would be based not on a solvency deficiency but on a reduced solvency deficiency, equal to the solvency deficiency minus 15% of the sum of the solvency liabilities and the solvency liability adjustment

Reduced solvency deficiency would be funded over five years starting no later than one year after the valuation date

New solvency funding rules would eliminate solvency funding requirements under UW Pension Plan based on solvency ratio of 87% as of January 1, 2017 (90% as of September 30, 2017).




Enhanced Going Concern Funding Requirements –Provision For Adverse Deviations

PfAD would apply to the plan’s going concern liabilities and total current service cost calculated based on best-estimate discount rate excluding liabilities for future indexation

Plan’s PfAD would depend on proportion of assets that are not considered fixed income in the target asset mix that will be required to be set out in its Statement of Investment Policies and Procedures (SIP&P) effective on the valuation date

Non-fixed income assets would include all equities and employer-issued securities Fixed income assets would generally include bonds, cash, term deposits, short-term notes and

treasury bills, GICs, and insured contracts, including annuities held as plan assets 50% of specified investments that are alternative investments (e.g., real estate, resource

properties, income producing properties, infrastructure, mortgage loans) would be considered non-fixed income assets; acknowledges that these investments have both fixed income and non-fixed income characteristics




Enhanced Going Concern Funding Requirements –Provision For Adverse Deviations (Con’t)

PfAD would be the sum of three components:1. Fixed component of 5% for closed plans and 4% for open plans2. Component based on the plan’s target asset mix, as per the table below1:

Percent of Non-FixedIncome Assets

PfAD For

Closed Plans

PfAD For

Open Plans

0% 0% 0%20% 2% 1%40% 4% 2%50% 5% 3%60% 7% 4%70% 11% 6%80% 15% 8%

100% 23% 12%

1 Linearly interpolated within the table. AON Empower Results®



Enhanced Going Concern Funding Requirements –Provision For Adverse Deviations (Con’t)

3. Component based on the plan’s going concern discount rate, added only if the discount rate exceeds a Benchmark Discount Rate (BDR), calculated as follows:– Rate given by CANSIM V122544 (Government of Canada long bond yield) in the month

of the valuation date; plus– Proportion of plan’s target asset mix allocated to fixed income investments times 1.5%

(i.e., a risk premium of 1.5% on fixed income assets); plus– Proportion of plan’s target asset mix allocated to non-fixed income investments times

5.0% (i.e., a risk premium of 5.0% on non-fixed income assets); plus – 0.5% for diversification




PfAD and BDR Under UW Pension Plan

Target Asset Mix Under SIP&P For UW Pension Plan

Asset Mix for PfAD and BDR

Fixed Income: 35% + (0.5 x 10%) = 40% Non-Fixed Income: 55% + (0.5 x 10%) = 60%

PfAD and BDR as of January 1, 2017

PfAD = Base component of 4% plus asset-based component of 4% = 8% BDR = 2.34% + (0.40 x 1.50%) + (0.60% x 5.00%) + 0.5% = 6.44%

Asset Class Target Asset Mix

Canadian Equities 15%Global Equities 40%Fixed Income/Cash 35%Real Estate 5%Infrastructure 5%

100%




Enhanced Going Concern Funding Requirements –Amortization of Going Concern Unfunded Liabilities

Special payments for going concern unfunded liabilities would be consolidated into one 10-year schedule that begins one year after the plan’s valuation date (i.e., “fresh-start” approach each filed valuation)

Special payments set out in a report would apply to the period commencing one year after the effective date of the report until one year after the effective date of the subsequent report

Separate schedules would be maintained when needed to fund benefit improvements




Impact of New Going Concern Funding Requirements Under UW Pension Plan

Contribution requirements under filed January 1, 2017 actuarial valuation will continue to apply until one year after the next required actuarial valuation as of January 1, 2020 (i.e., until January 1, 2021)

Analysis on following pages shows the estimated impact of the PfAD requirements if applied to the January 1, 2017 actuarial valuation of the UW Pension Plan

For purposes of analysis, will use the market value of assets as of January 1, 2017(i.e., includes the asset gain on the sale of the real return bonds)

Best-estimate discount rate is 5.60% per year, net of investment fees; reflects target asset mix of pension fund:– Will be used to calculate going concern liabilities and total current service cost for purposes

of applying PfAD– Non-investment expenses will not be netted out of the discount rate, but will be added to the

total current service cost




Impact of New Going Concern Funding Requirements Under UW Pension Plan (Con’t)

Liabilities

Valuation Results as of January 1, 2017:

Liabilities Under Best Estimate Discount Rate of 5.60%:$1,563,111,380

Liabilities Under Best Estimate Discount Rate Excluding Future Indexation:0.88 x $1,563,111,380 = $1,375,538,014

PfAD to be Added to Liabilities:0.08 x $1,375,538,014 = $110,043,041

Liabilities Including PfAD:$1,563,111,380 + $110,043,041 = $1,673,154,421

Market Value of Assets $ 1,517,879,933Accrued Liabilities (1,585,567,596)Financial Position $ (67,687,663)





Financial Position as of January 1, 2017 Under New Rules:

Normal Cost

Valuation Results as of January 1, 2017:

Total Normal Cost Under Best Estimate Discount Rate of 5.60%:$65,809,539

Total Normal Cost Under Best Estimate Discount Rate Excluding Future Indexation:0.88 x $65,809,539 = $57,912,394

Market Value of Assets $ 1,517,879,933Accrued Liabilities (1,673,154,421)Financial Position $ (155,274,488)

Total Normal Cost $ 67,244,568Required Member Contributions (31,234,780)University Normal Cost $ 36,009,788

As a % of Pensionable Earnings 8.51%





PfAD to be Added to Total Normal Cost:0.08 x $57,912,394 = $4,632,992

Total Normal Cost Including PfAD:$65,809,539 + $4,632,992 = $70,442,531

Normal Cost as of January 1, 2017 Under New Rules:

Total Normal Cost $ 70,442,531Non-Investment Expenses 1,500,0001

Required Member Contributions (31,234,780)University Normal Cost $ 40,707,751

As a % of Pensionable Earnings 9.62%

1 Currently not clear whether PfAD would apply to the non-investment expenses.

PfAD approach is equivalent to using a discount rate of approximately 5.15% to 5.20% per year.




Projection of Impact to 2020

Projection of going concern valuation to January 1, 2020 based on following assumptions:– Expected investment return of 5.60% achieved over period from January 1, 2017 to

December 31, 2019– Non-investment expenses of $1.5 million per year– No liability experience gains or losses– Increase in total pensionable earnings of 4% per year– University contributions continue at 163% of member contributions– Same best-estimate discount rate and level of PfAD as of January 1, 2020




Projection of Impact to 2020 (Con’t)

Estimated financial position as of January 1, 2020:

“Fresh-start” amortization over 10 years: $17,583,000 per year (does not reflect one-year deferral)

Estimated Normal Cost as of January 1, 2020:

Includes PfAD of $132,434,000

Includes PfAD of $5,211,000

Market Value of Assets $ 1,878,355,000Accrued Liabilities 2,013,602,000Financial Position $ (135,247,000)

Total Normal Cost $ 79,238,000Non-Investment Expenses 1,500,000Required Member Contributions (35,135,000)University Normal Cost $ 45,603,000




Projection of Impact To 2020 (Con’t)

Estimated Minimum Required University Contributions (Special Payments Plus University Normal Cost):$17,583,000 + $45,603,000 = $63,186,000

Estimated Total University Contributions Under Current Contribution Structure:1.63 x $35,135,000 = $57,270,000

Estimated Minimum Required University Contributions under new rules represent1.80 x current Required Member Contributions

An increase in Required Member Contributions of approximately 0.6% of pensionable earnings would result in:– Approximate 50/50 sharing of Total Normal Cost without PfAD (but with non-investment

expenses)– Increase estimated Required Member Contributions by $2,628,000 to $37,763,000– Reduce estimated Minimum Required University Contributions to $60,558,000– Estimated Total University Contributions of $61,554,000 based on continuing University

Contributions at 1.63 x Required Member Contributions, generating $18,579,000 available for special payments in first year (present value of special payment stream over 10 years is approximately $170 million)




Contribution Holidays and Benefit Improvements

Contribution Holidays

Contribution holidays permitted under following rules:– Plan is fully funded on a going concern basis including the PfAD;– Plan’s transfer ratio (i.e., based on wind-up liabilities) remains at least 105%;– Cost certificate is filed each year a contribution holiday is taken; and– Notice is provided to plan participants and unions representing members

Further limitation of 20% of plan’s available surplus to be used in any year; available surplus defined as lesser of (i) the assets in excess of going concern liabilities plus PfAD, and (ii) the assets in excess of 105% of wind-up liabilities

Benefit Improvements

Benefit improvements only permitted if after the improvement, the solvency ratio is at least 85% and the going concern funded ratio is at least 90% (for this purpose, going concern liabilities would exclude the PfAD):– Lump-sum contribution could be made to satisfy these requirements

Under Regulation 178/11, similar but more stringent limitations apply for 19 years after Stage 1 valuation date.




Funding Governance Policies

Budget Bill 177 also requires pension plans to have governance policy and funding policy, to be filed with the regulator

Regulations to specify requirements for policies




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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.



UNIVERSITY OF WATERLOO

BOARD OF GOVERNORS

PENSION & BENEFITS COMMITTEE

2017 Report to the Community

This report provides an overview of issues addressed by the Pension & Benefits Committee for the calendar year.

Further information on any of these topics may be obtained by contacting the committee secretary Mike Grivicic

([email protected]) or by visiting the committee webpage.

A. The Committee and its Members

The Pension & Benefits Committee is a standing committee of the Board of Governors responsible for overseeing

the University’s employee pension plans, insured health care and dental plans, sick leave benefits, long-term

disability benefit, life insurance benefit, and the Employee and Family Assistance Plan (the “Plans”). The

committee consists of representatives from the University’s employee groups, administration, Board of

Governors, retirees, and affiliated and federated institutions of Waterloo. The committee meets on a monthly basis

(except April, July and August); meetings are open to the University community and agendas and minutes are

available on the committee webpage. The committee monitors the health and oversees the administration of the

Plans. Recommendations for changes and improvements to the Plans are developed, refined and approved by the

committee and forwarded to the Board of Governors for approval.

B. Committee Activities in 2017

1. Holistic Benefits Review. A plan was developed and work initiated to review the benefits offered to employees. This review would encompass plan benchmarking, potential options for plan redesign, and

marketing of benefits. The exact content of the plan is still to be determined at the upcoming committee

meetings, and it is anticipated that the entire process would run until 2019-20.

2. Employee and Family Assistance Program. The committee obtained updates on the request for proposals and ultimate adoption of a new Employee and Family Assistance Program, which was put into

place for active employees and their eligible dependent effective 1 September 2016. This included an

annual utilization report in November 2017.

3. Provincial Pharmacare. The committee observed that potential savings could be expected from newly-announced pharmacare program, and the committee has maintained a watching brief on this subject with

the view of developing an optimized plan.

4. Annual Work Plan Items. In accordance with the annual work plan for the committee, the committee:

Approved the benefits plans premium renewals negotiated by Human Resources in conjunction with our consultants. Based on claims experience, the long-term disability premium paid by employees

increased 7.5% on 1 May 2017. The committee directed that the insurer be notified that the University

will examine the plan design and vendor landscape, and in the meantime will accept the three year

proposal while not promising to continue with the insurer for that duration

Received reports on the benefits plan utilization rates and associated costs Provided oversight to a number of other items that occur automatically according to plan provisions,

e.g. movement in the dental fee guide used for calculating reimbursement and annual indexation of

long-term disability benefits in pay

C. Pension Plans

5. Stage 2 Solvency Relief. The University’s pension plan previously received Stage 1 approval for solvency funding relief as provided under Regulation 178/11 to the Pension Benefits Act and based on the

filed actuarial valuation report of 1 January 2014. This Stage 2 funding relief allows the University to

address the solvency deficit in the pension plan over a scheduled period of time by making additional

special payments and provides an intentional approach to addressing the deficit. At the committee’s June

2017 meeting, a motion was passed to file the application for solvency relief, and at the September

meeting the committee considered whether to elect for one of two potential options for amortizing the

solvency deficit: (1) to amortize the solvency deficit over ten (10) years starting 1 January 2018, or (2) to

defer amortization for a three-year period from 2018-2021 with minimum interest-only payments over


mailto:[email protected]://uwaterloo.ca/secretariat/committees-and-councils/pension-benefits-committeehttps://uwaterloo.ca/secretariat/committees-and-councils/pension-benefits-committee

Pension & Benefits Committee

2017 Report to the Community page 2 of 3

that period, then amortize the solvency deficit at 1 January 2021 over seven years. The committee elected

to proceed with the latter solvency option, while also passing a resolution that the plan shall maintain as a

minimum the additional voluntary special contribution to bring University contribution to 163% of

member contributions (~$2.2 million per year in 2017) over the applicable three year deferral period.

6. 1 January 2017 Actuarial Valuation. An actuarial valuation report is required to be filed at least every three years; notwithstanding this, a valuation is completed on an annual basis for the purposes of assisting

with planning and the University’s budgeting. In 2017, the committee filed an actuarial valuation, as the

previous valuation was filed in 2014. The Board of Governors approved filing of the actuarial valuation of

the plan as at 1 January 2017 at its June meeting.

The 1 January 2017 valuation was prepared using the same assumptions as the 1 January 2016, with the

exception of a lower discount rate (5.50% vs. 5.70% in 2016, or CPI + 3.50% vs CPI + 3.70% in 2016).

The registered pension plan (the “Registered Plan”) is in a deficit position; the going concern deficit

position has improved since the 1 January 2014 report, though the deficit increased somewhat since the

2016 valuation. The University continues to make additional contributions to meet the unfunded liability.

The payroll pension plan (the “Payroll Plan”), which provides pension benefits (subject to plan caps) that

cannot be paid from the Registered Plan because of the application of the Income Tax Act maximum

pension, has a surplus of $1.75 million.

The full actuarial report for the Registered Plan and Payroll Plan can be found on the committee’s

webpage: Actuarial Valuation Results as of 1 January 2017.

7. Review of and Amendments to the Statement of Investment Policies & Procedures (“SIPP”). Following its annual review to ensure compliance with legislative requirements and also soliciting in

parallel input from the Finance & Investment Committee, the committee recommended approval of the

revised SIPP to the Board of Governors. The SIPP has been updated to reflect changes required/

suggested by the regulator (Financial Services Commission of Ontario, or “FSCO”) in order to meet

current regulations and/or best practices. All changes made in the SIPP were as a result of meeting these

new regulations and best practices. Changes were also made to accommodate current objectives and

governance at the University of Waterloo. No changes were made that result in a change of pension plan

investment management or philosophy. The Board of Governors approved the amended SIPP at its

meeting in October 2017.

8. Asset-Liability Studies. Over several months, the committee commissioned research from the consultant Aon Hewitt of how the University’s management of assets and liabilities within the pension plan might be

optimized, including: liability awareness and matching in investing; impact of interest rates and inflation;

examining how current service costs of the plan change with market shifts. The committee directed the

consultant that abbreviated reports in the form of a Pension Risk Dashboard be brought forward quarterly.

9. Examination of Investment Governance. In early 2017, the Registered Pension Plan Investment Subcommittee was unable to retain members from the Finance & Investment Committee to serve, and

administration was tasked with examining options to effectively execute the governance function for the

pension plan assets. In the interim period, Finance staff will continue its regular due diligence of the

University’s investments, and appropriate action on the investments will be routed through the Board

governance structure where necessary. A subset of members from the Pension & Benefits Committee

agreed to form a working group to help generate proposals for the Board’s consideration, and that

subgroup was active through the end of 2017.

10. Responsible Investing. The committee has received periodic updates from the Responsible Investing Working Group, formed by the Board of Governors, and the committee was involved in the discussion

that brought about the formation of the group.


https://uwaterloo.ca/secretariat/sites/ca.secretariat/files/uploads/files/10769_2017_valuation_results_-_pb_meeting_-_march_02_2017_finala.030817_0.pdf

Pension & Benefits Committee

2017 Report to the Community page 3 of 3

11. Removal of Currency Overlay. The Finance & Investment Committee made the decision to remove the currency hedge for non-pension assets in October 2017, and at the same time also decided to remove the

currency hedge from pension assets subject to concurrence of the Pension & Benefits Committee. The

committee approved a motion in November 2017 to unwind the currency hedge on pension assets.

12. Education and Monitoring. The committee receives regular reports from the consulting actuary on legislative and policy changes anticipated and in force that impact public sector pensions, as well as

changes implemented by other public sector pension plans. The committee discusses implications for the

University’s pension plans and takes said information into account when making decisions on matters

including plan design, funding and administration. Initiatives the committee has been monitoring,

discussing and, where required, taking action include: discussions of a joint sector pension plan;

development and commentary on proposed new pension plan regulatory regime; enhancement of the

Canada Pension Plan and potential interplay of these changes with the University pension plan;

investment management offerings of the recently-formed Investment Management Corporation of

Ontario; philosophical considerations for managing the plan going forward; impact and timing of

prospective amendments to the Pension Benefits Act.

13. Annual Work Plan Items. In addition to the above, the committee:

Reviewed and approved the audited pension fund financial statements for filing with FSCO. The statements show, among other things, that there are significant assets in the fund, the change in assets

over the year and drivers for that change, amounts paid out of assets, and compliance with the SIPP

Reviewed and approved cost of living increases to earnings of individuals on long-term disability for the purpose of calculating pension contributions, and to eligible deferred pensions

Received the annual report from Aon Hewitt re: the contribution and protocol caps, including the impact of indexing or removing the caps on costs and liabilities, the number of individuals who would

be impacted if the caps were not indexed, and the projected date on which the cap under the Income

Tax Act will hit the hard cap in the pension plan, if the cap is not increased. The committee monitors

these numbers annually in order to make decisions about how and when to increase the caps

Provided oversight to a number of other items that occur automatically according to plan provisions, e.g. annual indexation of pensions and caps for the payroll pension plan

14 January 2018


^PB 2018-01-19 Agenda1 PB 2017-12-08 Minutes OPEN2 Execution Against Workplan4 Preliminary Statements 45420 for December 31, 20175 PB Committee _ Actuarial Assumptions - January 19 2018_P&B6 Impact of New Ontario Pension Funding Rules On University of Water...7 PB Report to the Community 2017, date 2018-01-14

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