Pension Information Sessions
University of Waterloo Pension & Benefits Committee
June 12/26, 2012
Agenda for Pension Information Sessions
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Welcome
Pension and Benefits Committee Membership and Role
Purpose of Pension Information Session
Presentation
Q&A
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Pension & Benefits Committee Membership
Role
Janet Passmore, Chair
Associate Provost, Human Resources
Rebecca Wickens, Secretary
Associate University Secretary
Members
Darren Becks
FUAC Representative
Monika Bothwell
UW Staff Association Representative
James Brox
Retiree Representative
Nelson Carrillos
UW Staff Association Representative
Lori Curtis
UW Faculty Association Representative
Stewart Forrest
CUPE Local 793 Representative
Dennis Huber
Vice-President, Administration & Finance
Ranjini Jha
UW Faculty Association Representative
Sallie Ann Keller
Vice-President, Academic & Provost
Cathy Newell Kelly
President's Appointee
Christiane Lemieux
UW Faculty Association Representative
Gerry Remers
Board of Governors Representative
Karen Wilkinson
Board of Governors Representative
Resources
Allan Shapira
Consulting Actuary, Aon Hewitt
Kenton Needham
Director, Human Resources
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Terms of Reference of Pension & Benefits Committee
 Pension & Benefits Committee is a Committee of the Board of Governors. The Committee is
accountable to the Board for the administration of employee pension and benefits plans
 Terms of Reference include “recommending changes in pension and benefits plans to keep them
current with respect to other universities and major employers, being mindful of the financial context
within which the University operates”
 The Pension & Benefits Committee plays a key role in the stewardship of the University of Waterloo
Pension Plan
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Purpose of Pension Information Session
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In the context of its stewardship role, the Pension & Benefits Committee will be recommending to
the Board of Governors changes to the University of Waterloo Pension Plan to maintain the
long-term health of the Plan
This session is designed to achieve 2 goals:
1) Describe the changes proposed by the Pension & Benefits Committee
2) Respond to your questions and hear your perspectives
Following the Pension Information Sessions
– Finalize the recommendations and take them to the next meeting of the Board of Governors in
October 2012
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Consulting Actuary to the Pension & Benefits Committee
 Introduction:
– Allan Shapira, Aon Hewitt, Consulting Actuary
 Today’s presentation will include:
– Description of the proposed changes
– Reasons for these changes; and
– Details of the proposed changes and transition
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The Key Questions We Are Going To Address
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What is the pension promise under the UW Pension Plan?
How is that pension promise funded?
Is there enough money to pay the pension promise?
What are we doing to manage the long-term health of the UW Pension Plan?
What is happening with other pension plans?
What changes are being proposed to the UW Pension Plan?
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The Big Picture Answers to These Questions
 What is the pension promise under the UW Pension Plan?
– A defined benefit with the pension based on years of membership in the Pension Plan and
salary near retirement, and with the pension benefit adjusted for inflation after retirement
 How is the pension promise funded?
– By contributions from members and the University and from investment return on
pension fund assets
 Is there enough money to pay the pension promise?
– Pension Plan has a significant funding shortfall as a result of unfavourable markets,
low interest rates and longer pension payment periods
 What are we doing to manage the long-term health of the UW Pension Plan?
– Pension and Benefits Committee is constantly monitoring the three levers that can be used to
maintain the long-term health of the Pension Plan—contributions, investment earnings and
benefit levels
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The Big Picture Answers to These Questions (continued)
 What is happening with other pension plans?
– Also facing significant funding shortfalls, resulting in increases in contributions and
decreases in benefits for plan sustainability
 What changes are being proposed to the UW Pension Plan?
– Adjustments to both contributions (members and University) and benefits to try to shorten the
timeframe over which the shortfall is funded
Details on the Responses to These Questions
Presented on the Following Pages
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What is the Pension Promise?
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Plan Structure
 Key Plan Provisions
Averaging Period for Earnings:
Highest 36 consecutive months in last 120 months
(subject to plan cap)
Benefit Rate for Each Year of Pensionable Service:
Below CPP Wage Base: 1.4%
Above CPP Wage Base: 2.0%
Cap on Pension Benefits:
$3,200 per year of pensionable service
Standard Form of Payment:
Lifetime pension with a 10-year guarantee
Earliest Age for Unreduced Early Retirement Pension:
Age 62
Automatic Indexation of Pension Benefits After Retirement:
100% of increase in CPI up to 5% (each May 1st);
P & B Committee decides above that
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How is the Pension Promise Funded?
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Funding the Pension Promise
Funding Sources
Cost of Pension Plan
Member Contributions
Benefits paid to members,
as determined by plan provisions
University Contributions
+
Costs to administer pension plan
Investment Earnings
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Funding Choices
Take Less Investment Risk
Target Lower Expected Returns
Target Higher Expected Contributions
Take More Investment Risk
Target Higher Expected Returns
Target Lower Expected Contributions
Cost of Pension Plan
Cost of Pension Plan
Portion Funded
From Contributions
Portion Funded
Benefits
to members,
Frompaid
Contributions
as determined by plan provisions
Benefits paid to members,
as determined by plan provisions
+
+
Costs to administer pension plan
Portion Funded
Costs
to administer
From
Investment pension
Earningsplan
Portion Funded
From Investment Earnings
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The Impact of Investment Return
 Chart on the following page shows for an individual hired at age 30 and retiring at age 65, the
breakdown between contributions and investment return based on different levels of investment
return above inflation (real investment return):
– 3.85% per year (current valuation assumption), 3.00% per year, and 2.00% per year
 Other assumptions are as per the actuarial valuation
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Portion Funded From Contributions
and Investments
The Impact of Investment Return (continued)
100%
90%
80%
57%
70%
72%
66%
60%
50%
Investment Return
40%
Contributions
30%
43%
20%
28%
34%
10%
0%
3.85%
3.00%
2.00%
Real Investment Return (per year)
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Is There Enough Money to
Pay the Pension Promise?
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Funded Status of Pension Plan
As of January 1 (in millions)
2007
2008
2009
2010
$
929
2012
Value of Assets (no smoothing)
$
890
$
917
$
755
$
Past Service Liabilities
$
846
$
901
$
948
$ 1,000
$ 1,042
$ 1,137
Funding Excess/(Shortfall)
$
44
$
16
$ (145)
$ (113)
$ (170)
$ (193)
855
2011
Deteriorating Funded Status Despite Increase In
Member and University Contributions
Past Service Liabilities as of January 1, 2012 reflect increase
from change in assumption for pensioner longevity and
change in assumption for salary increases to reflect next
three years of across-the-board increases under agreements
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$
967
Annual Cost of Benefits Being Earned
$ Amount
For 2012
(millions)
Total Current Service Cost
$
Less: Members’ Required Contributions
47.7
15.45%
(21.0)
(6.80%)
(26.7)
8.65%
University Current Service Cost
$
Pensionable Earnings
$ 308.5
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% of
Pensionable
Earnings
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Contributions
Member Contributions
University Contributions
Calendar Year
(millions)
(millions)
2011
$
19.6
$
31.8
2010
$
19.1
$
27.8
2009
$
17.9
$
26.1
2008
$
15.1
$
22.9
2007
$
12.8
$
21.1
2006
$
11.3
$
18.8
2005
$
10.5
$
17.4
2004
$
9.8
$
13.3
Increases in Member and University Contribution Rates Effective
July 1, 2007, July 1, 2008 and May 1, 2009
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5-Year Annualized Return
Investment Returns—Market Indices
8%
7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
-6%
-7%
-8%
-9%
-10%
6.40%
1.90%
1.30%
Canada
US (CDN $)
Europe and Far East (CDN $)
-2.90%
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Universe Bonds
Inflation
-7.20%
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What Are We Doing to Manage the
Long-Term Health of the
UW Pension Plan?
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Managing Long-Term Health of Pension Plan
Contributions
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Investment
Earnings
Benefits
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Managing Long-Term Health of Pension Plan (continued)
Contributions
 Member and University contributions have been increased
 Additional increases are necessary
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Managing Long-Term Health of Pension Plan (continued)
Investment
Earnings
 Investment returns have been lower than anticipated in setting contribution levels
 Continued uncertainty around future investment returns, particularly in short term
 UW pension fund has implemented currency hedging to reduce investment volatility and started
investing in infrastructure and looking at other asset classes such as real estate to try to generate
additional investment returns at a reasonable level of risk
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Managing Long-Term Health of Pension Plan (continued)
Benefits
Core Benefit Promise
 Pension formula
 Indexation after retirement
 Early retirement
 Survivor benefits
 Termination benefits
To ensure long-term sustainability of
UW Pension Plan, core benefit
provisions need to be addressed
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Other Benefits
 Indexation before pension start date for
terminated members with shorter service
 Interest credit on member contributions beyond
statutory requirement
 Excess refund under 50% cost-sharing rule
beyond statutory requirement
 Commuted value option after member eligible
for an immediate pension
Changes have already been made to
these provisions
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What Is Happening With
Other Pension Plans?
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Ontario University Pension Plans
 Significant funding shortfalls across the university sector in Ontario and across Canada
 Most of the Ontario University pension plans have increased member contribution rates:
– Increases have typically been in the range of 2.0% to 2.5% of salary
 Other changes to pension plans have included:
– Lowering early retirement subsidies
– Introducing different provisions for new hires
– Reducing guarantees/controlling risk under hybrid pension plans
– Changing non-core benefits
 Ontario Budget in March set expectation of 50/50 sharing of current service cost within next five years
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Other Large Ontario Public Sector Pension Plans
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Significant funding shortfalls in most of the pension plans
Significant increases in member and matching employer contribution rates
Lowering or eliminating guaranteed indexation
Changes to non-core benefits
Ontario Budget in March set expectation that any further increase in funding shortfalls should be
met by reducing future service benefits rather than increasing contributions
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What Changes Are Being Proposed
to the UW Pension Plan?
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Proposed Changes to Pension Plan
Contributions
 Increase University contributions by
approximately 0.7% of salary effective
May 1, 2012 (approved at June Board meeting)
 Increase member contribution rates by
approximately 0.5% of salary effective
November 2012
Benefits For Active Members
 Extend the averaging period for calculating
highest average earnings from three years to
five years, with a transition starting from
January 1, 2014
 Lower automatic indexation provision from
100% of CPI to 75% of CPI effective
January 1, 2014, subject to transition provisions
 Increase cap from $3,200 to $3,300 effective
January 1, 2014 and $3,400 effective
January 1, 2015
Details Provided on Following Pages
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Financial Impact of Proposed Changes to Pension Plan
 The following financial analysis is based on the January 1, 2012 actuarial valuation:
Members’ Required
University’s
Contributions
Current Service Cost
University’s Contributions
Contributions
Directed To
Annual
% of
1
% of
Years to
% of
Funding
Special
Pay Off
$ Amount
Pensionable
$ Amount
Pensionable
$ Amount
Pensionable
Shortfall
Payments1
Funding
(millions)
Earnings
(millions)
Earnings
(millions)
Earnings
(millions)
(millions)
Shortfall
Current Provisions
$21.0
6.8%
$26.7
8.7%
$32.8
10.6%
$170
$6.1
25+
Proposed Increase In
Member Contributions
and Increase In
University Contributions
$22.5
7.3%
$25.2
8.2%
$34.8
11.3%
$170
$9.6
22
Proposed Changes to
Benefit Provisions
$22.5
7.3%
$22.5
7.3%
$34.8
11.3%
$146
$12.3
14
Will increase each year by increase in salaries
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Details on Proposed Changes to Pension Plan
Member Contribution Rates
 Increase member contribution rates by approximately 0.5% of pensionable earnings:
Pensionable Earnings
Current Provision
Proposed Provision
Up to 1x YMPE1
5.80%
6.25%
Between 1x YMPE and 2x YMPE2
8.30%
8.95%
Over 2x YMPE
9.65%
9.95%
1
2
$50,100 in 2012
$100,200 in 2012
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Details on Proposed Changes to Pension Plan (continued)
Comparison of Member Contribution Rates
Current Provision
5.80% / 8.30% / 9.65%
Proposed Provision
6.25% / 8.95% / 9.95%
Increase in
Annual Contributions
$40,000
5.80%
6.25%
$180
$50,000
5.80%
6.25%
$225
$60,000
6.21%
6.70%
$290
$70,000
6.51%
7.02%
$355
$80,000
6.73%
7.26%
$420
$90,000
6.91%
7.45%
$485
$100,000
7.05%
7.60%
$550
$110,000
7.28%
7.81%
$581
$120,000
7.48%
7.99%
$611
$130,000
7.65%
8.14%
$641
$140,000
7.79%
8.27%
$671
$150,000
7.91%
8.38%
$701
$160,000
8.02%
8.48%
$731
Salary
Member contributions to Pension Plan are tax-deductible
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Details on Proposed Changes to Pension Plan (continued)
Final Average Earnings
 Starting January 1, 2014, final average earnings will be transitioned from a 3-year to a
5-year average
 Final average earnings will not decrease below the final 3-year average earnings as of
December 31, 2013
 Example of how transition would work:
– At December 31, 2013, final average earnings based on 2011, 2012, 2013
– At December 31, 2014, final average earnings based on 2011, 2012, 2013, and 2014
– At December 31, 2015, final average earnings based on 2011, 2012, 2013, 2014, and 2015
– At December 31, 2016, final average earnings based on 2012, 2013, 2014, 2015, and 2016
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Details on Proposed Changes to Pension Plan (continued)
Examples of Impact of Change to Final Average Earnings
Annual Pension Benefit Based on
30 Years of Pensionable Service
Final Average
Earnings Based on
3-Year Average
Salary Increase In
5 Years
Prior to Retirement
Final Average
Earnings Based on
5-Year Average
3-Year Average
5-Year Average
$
50,000
3% per year
$
48,570
$
21,480
$
20,620
$
50,000
4% per year
$
48,130
$
21,480
$
20,350
$ 100,000
3% per year
$
97,140
$
51,475
$
49,760
$ 100,000
4% per year
$
96,250
$
51,475
$
49,230
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Details on Proposed Changes to Pension Plan (continued)
Inflation Protection (Indexation of Pension Benefits)
 Maintain 100% of CPI indexation on pension benefit earned up to December 31, 2013, with
balance of pension benefit indexed at 75% of CPI
 Maximum increase in CPI covered under guaranteed indexation provision continues to be 5%
 Results in a transition from guaranteed indexation at 100% of CPI to guaranteed indexation at
75% of CPI (example of transition shown on following page)
 If pension plan funded status improves, P&B Committee would consider top-up of indexation to
100% of CPI as part of its annual review process
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Details on Proposed Changes to Pension Plan (continued)
Examples of Indexation Transition
Comparison of Proposed Pension to
2
Fully Indexed Pension At:
Pensionable Service at
December 31, 2013
Pensionable Service After
December 31, 2013
Indexation Rate on
1
Total Benefit
Retirement
Date
10 Years
20 Years
25 years
5 years
91.9% of CPI
100%
98%
96%
20 years
10 years
86.0% of CPI
100%
97%
94%
15 years
15 years
81.7% of CPI
100%
96%
92%
10 years
20 years
78.6% of CPI
100%
95%
91%
5 years
25 years
76.5% of CPI
100%
95%
90%
0 years
30 years
75.0% of CPI
100%
95%
89%
1
2
Based on assumed future salary increase of 4.25% per year
Based on increase in CPI of 2.25% per year
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Q&A
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