University of Saskatchewan 1999
Academic Pension Plan
Lump Sum Transfer Option on Retirement
October 2014
November
Prepared by 8,
Aon2013
Hewitt
Aon Hewitt | © 2014 Aon Hewitt. All Rights Reserved
1999 Academic Pension Plan
 Academic DB Plan split into two plans on January 1,1999
– 1999 Academic Pension Plan
– Retirees Pension Plan
 1999 Academic Pension Plan is a defined benefit pension plan that
provides members at retirement with a:
– Monthly Pension; or
– Lump sum (LS) transfer equal to greater of:
1. Commuted value of pension
2. Member and University contributions with interest
 149 actives, 146 pensioners and 37 inactives at Dec 31, 2013
1
Monthly Pension
(2% x Service x BAE4) – (0.4% x Post-2005 Service x FAYMPE3)
where:




Service = pensionable service earned while a member of the Plan
BAE4 = Best Average Earnings, based on average of highest 48
continuous months of earnings
Post-2005 Service = pensionable service earned after 2005
FAYMPE3 = Average of the final 3 years of the Year’s Maximum
Pensionable Earnings
2
Lump Sum Transfer Option
•
Commuted Value
– Value of a member's accrued pension at a given date
– Assumption basis used to determine CV prescribed by legislation
– Assumption basis sensitive to Government of Canada bond yields
•
1% increase/decrease in yields results in a 10% decrease/increase in
commuted value
• Member and University Contributions with interest
– Interest credited equal to greater of prescribed rate and fund rate less 1%
– Average credited rate over past 30 years = 10%
3
Retirement Option History
Year
# electing a
pension from the
Plan
# electing a lump
sum transfer from
the Plan
7
Total lump sum
payments out of the
Plan during year
$4,315,000
Average lump sum
payment out of the
Plan in year
$616,000
2013
12
2012
13
7
$3,192,000
$456,000
2011
9
7
$5,066,000
$724,000
2010
9
4
$4,804,000
$1,201,000
2009
1
9
$5,685,000
$632,000
2008
2
6
$3,923,000
$654,000
2007
7
17
$11,007,000
$647,000
2006
12
6
$4,961,000
$827,000
2005
9
14
$8,604,000
$615,000
2004
6
11
$6,899,000
$627,000
2003
8
9
$6,405,000
$712,000
Total
88 (48%)
97 (52%)
– The Total lump sum payments out of the Plan during the year do not include the
portion held back due to the solvency deficiency
4
Retirement Calculation Example #1


Age: 68
Retirement Date: June 30, 2014



Service: 39 years
Best Average Earnings: $140,000
Retirement Options:
1. Monthly Pension: $8,955 payable for life
2. Lump sum transfer option:
• Commuted Value: $1,635,000
• Member plus University contributions with interest: $1,815,000
5
Retirement Calculation Example #1

If member chooses to transfer out LS of $1,815,000 at retirement to a PRIF
and takes monthly withdrawals, when will money run out under various rates
of return (ROR) earned on LS payout and monthly withdrawal amounts
Average Annualized ROR Earned on LS Payout
Monthly Withdrawals
First 10 yrs / thereafter
3%
4%
5%
6%
$8,000 / $8,000
95
102
120
120
$8,955 / $8,955
91
95
103
120
$10,000 / $10,000
88
90
95
104
$10,000 / $8,955
89
92
98
114
$11,000 / $8,955
87
90
95
104
$12,000 / $8,955
85
88
92
98
6
Retirement Calculation Example #2


Age: 60
Retirement Date: June 30, 2014



Service: 30 years
Best Average Earnings: $100,000
Retirement Options:
1. Monthly Pension: $4,855 payable for life
2. Lump sum transfer option:
• Commuted Value: $1,070,000
• Member plus University contributions with interest: $740,000
7
Retirement Calculation Example #2

If member chooses to transfer out LS of $1,070,000 at retirement to a PRIF
and takes monthly withdrawals, when will money run out under various rates
of return (ROR) earned on LS payout and monthly withdrawal amounts
Average Annualized ROR Earned on LS Payout
Monthly Withdrawals
First 10 yrs / thereafter
3%
4%
5%
6%
$4,000 / $4,000
96
112
120
120
$4,855 / $4,855
86
92
106
120
$6,000 / $6,000
79
82
86
94
$6,000 / $4,855
82
86
93
117
$7,000 / $4,855
79
81
86
95
$8,000 / $4,855
76
78
81
86
8
Putting a Value on Retirement Options
 Legislative requirement to assess financial health of plan at least
every 3 years (i.e. actuarial valuation)
 Among other things, must determine the appropriate “Value” of the
retirement options available to Plan members
 “Value” depends on:
– Assumed rate of return that will be earned on the assets that back the
obligation
– Expected timeframe over which such assets are liquidated to pay out the
obligation
– Proportion of members choosing the lump sum transfer option over the
monthly pension option
9
Putting a Value on Retirement Options
1. Monthly Pension
– Assets are paid out over a member’s life expectancy and/or surviving spouse or
named beneficiary
– As a result, investment time horizon is considered “longer-term” resulting in less
concern over short-term volatility
– Value of the monthly pension is much more stable and certain
2. LS transfer option
– Assets are paid out all at once on a member’s assumed date of retirement
– As a result, investment time horizon is considerably shorter which increases
concern over short-term volatility
– Leads to greater “margins” being added to the LS transfer option’s value
– Furthermore, value has become less certain due to commuted values often being
larger than the contribution balance
• Historically, contribution balance normally higher than commuted value
• In last 4 to 5 years, commuted values have become greater due to lower
interest rates (commuted value changes monthly)
• Rising interest rates will reverse this trend
10
Funded Status at December 31, 2013
Going-Concern
Dec 31, 2013
$ 169,671,000
Total Assets
Total Actuarial Liabilities
174,814,000
Surplus / (Unfunded Liability)
$(5,143,000)
97%
Funded ratio
22.8%
Current service cost
• All going-concern positions are based on 5% margin
11
Value of Retirement Options at December 31, 2013
Going-Concern
Dec 31, 2013
Total Actuarial Liabilities
165,556,000
-
Value of Monthly Pension
-
Additional reserve for LS Transfer Option
-
Total Actuarial Liabilities
9,258,000
174,814,000
Current service cost (CSC)
20.9%
-
CSC for Monthly Pension
-
Additional CSC for LS Transfer Option
-
Total CSC
1.9%
22.8%
12
Considerations with Retirement Options
Monthly Pension
Transfer of Commuted Value

 Benefit likely subject to the ITA
Transfer Limit
 Member can determine the income
stream (within limits)
 Member is responsible for the
investment of the benefit
 Investment is subject to market
conditions, thus income stream is not
guaranteed
 Member is dependent on the advice
of a financial advisor
 Investment subject to fees, which
may be hidden




Fixed lifetime stream of income,
regardless of plan returns
Possibility of annual increases
Based on specific plan formula
No opportunity to change income
once pension has commenced
Optional forms of pension available
to a member with a spouse
Aon Hewitt | © Aon Hewitt Inc. 2014 – All Rights Reserved13
Conclusions
 Additional reserves must be set aside to reflect the greater uncertainty
currently embedded in the LS transfer option
 End result is:
– additional employee and/or University contributions that may or may not
prove to be necessary over the long term
– potential premium being paid to transferees that would otherwise be
available to pensioners to better secure pensions
 Threatens the long-term sustainability and security of the plan for
members choosing monthly pensions
 LS option forces investment mix to remain significantly exposed to
riskier types of investments (i.e. equities) while the plan matures
14
Conclusions
 In light of trying to preserve the initial intent of the Plan (i.e. provide a
monthly pension to members), the ADBPC passed a motion
recommending to the parties that consideration be given to removing
the LS option for members eligible to retire
– Legislation still requires the LS option be provided on termination
15
Considerations in Removing LS Transfer Option
 Initial intent of Plan was to provide a monthly pension
– 1999 Academic Pension Plan is a DB plan not a DC Plan
– A greater proportion of the Plan’s assets are needed to back the LS
transfer option in current low interest rate environment
– Consequence is a less secure monthly pension option
 LS Transfer Option becoming uncommon in DB industry
– Where LS Transfer Option existed, it has been removed in many cases
 Removing LS Transfer Option would have no impact on your past or
future accrued pension
– Still eligible for guarantee period for monthly pension
 Time is of the essence
– Longer you wait, the less impact this will have and the more money that
will leave the Plan
– YTD LS Transfers = $6M
16
MOA
Effective July 1, 2015, the lump sum option in the Plan shall
be removed for all members who qualify for an immediate
pension after that date. For greater clarity, members who
qualify for an immediate pension on or after July 1, 2015 will
only be given the option to take a pension from the Plan.
17
Questions
18