University of Saskatchewan and
Federated Colleges Non-Academic
Pension Plan
November 10, 2011
Agenda
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Pension Committee Governance Structure
What is an Actuary?
The Non-Academic Plan
Valuation Basics
Going-Concern Position
Solvency Position
Current Contribution Schedule
Solvency “Extras”
Plan Membership
Current Pension Landscape
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Pension Committee Governance Structure
Board of Governors
Pension Committee
Investment
Benefit, Financial,
Accounting and Controls
- Investment Policy
- Investment
Monitoring
- Plan Design
- Funding Policy
- Communication/
Education
- Expense Controls
- Financial Statement
Accounting
Administration and
Compliance
- Daily Administration
- Plan Documentation
- Regulatory Filings and
Compliance
What is an Actuary?
 ac-tu-ar-y
“An actuary is a professional business person who is skilled in the
application of mathematics to financial problems. Actuaries employ
their specialized knowledge of the mathematics of finance, statistics
and risk theory on problems faced by the following:
– Insurance companies (both Life and Property/Casualty)
– Pension plans
– Government regulators
– Social programs
– Individuals ”
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Role of the actuary
 Assists pension committee with administration of pension
plan
 Tasks include:
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Actuarial valuations
Education
Cost analyses
Plan amendments
Plan design
Funding policies
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The Non-Academic Plan Basics
 What type of Plan do I have?
– The Non-Academic Pension Plan is a defined benefit pension plan
– Provides a monthly pension at retirement
– Based on service and best average earnings at retirement
 How is my pension calculated at retirement?
2% x Service x BAE4
where:
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Service = pensionable service earned while a member of the Plan
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BAE4 = Best Average Earnings, based on average of highest 48 continuous
months of earnings
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The Non-Academic Plan Basics - continued
 What do I contribute to the Plan?
– Current member contribution rates are:
• 2010: 7.50% of earnings
• 2011: 8.25% of earnings
• Thereafter: 8.50% of earnings
 What does the University contribute to the Plan?
– The University matches your contributions plus pays for any
additional amounts required to meet minimum funding standards
(deficit funding)
– Current University contribution rates are:
• 2010: 12.06% of earnings
• 2011: 11.31% of earnings
• Thereafter: 11.06% of earnings
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The Non-Academic Plan Basics - continued
 When can I retire?
Normal
Retirement
• 1st of the month immediately
following age 65
Postponed
Retirement
• 1st day of the month following a
member’s normal retirement
• No later than age 71
Early
Retirement
• 1st of the month following age 55
(subject to early retirement
reductions)
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The Non-Academic Plan Basics – continued
 Is my pension reduced at retirement?
– Depending on when you retire, your pension might be reduced at
retirement
– Amount of reduction for early retirement is equal to 0.25% for each
month between your early retirement date (ERD) and the earlier
of:
• Age 60; or
• Rule of 80
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The Non-Academic Plan Basics – continued
 How will my pension be payable?
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Pension is payable at the end of each month for your lifetime
Normal Form = Single Life, 10 year guarantee
Pension on annual statement always calculated in normal form
Optional forms available:
• With Spouse:
 Joint & Survivor, reducing to 60%, 75% or paying full 100%
 A guarantee period of 5, 10 or 15 years can be attached
 Integrated options (i.e. level income option)
• Without Spouse
 Single Life, guaranteed for 15 years
 Integrated options (i.e. level income option)
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Normal form pension actuarially reduced based on which
optional form chosen
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The Non-Academic Plan Basics – Example
 Member Information:
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Member is age 55
21 years of service
76 points towards rule of 80
Earnings for the last 10 years are as follows:
Year
Annual Pensionable Earnings
2011
$50,000
2010
$45,000
2009
$42,000
2008
$40,000
2007
$35,000
2006
$34,000
2005
$32,000
2004
$30,000
2003
$26,000
2002
$25,000
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The Non-Academic Plan Basics – Example
 Calculation of BAE4:
– Based on average of highest 48 continuous months of earnings
Year
Annual Pensionable Earnings
2011
$50,000
2010
$45,000
BAE4
2009
$42,000
=(50,000 + 45,000 + 42,000 + 40,000) / 4
2008
$40,000
= $44,250
2007
$35,000
2006
$34,000
2005
$32,000
2004
$30,000
2003
$26,000
2002
$25,000
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The Non-Academic Plan Basics – Example
 Calculation of pension:
– Unreduced Lifetime Pension
= 2% x 21 x $44,250
= $18,585 per year
2% x Service x BAE4
 Will the pension be reduced?
– Yes, because member is not age 60, does not have 30 years
of service, and does not meet rule of 80
– Reduction: 0.25% per month to earlier of age 60 or rule of 80
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The Non-Academic Plan Basics – Example
 Calculation of early retirement reduction:
a) Months until age 60 = (60 – 55) x 12 = 60
b) Months until rule of 80 = (80 – 76) x 12 = 48
Early retirement reduction = 0.25% x 48 = 12%
Unreduced Pension = $18,585 per year
Reduced Pension = $18,585 x (1 – 0.12) = $16,355 per year
 Member will receive $16,355 per year payable in the normal
form.
– Reduction in pension would apply if optional form of pension chosen
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Valuation Basics
 Both employees and the University contribute to a
separate trust to fund benefits
 Intent is that contributions relating to an employee
together with investment returns on those contributions
will fully fund the employees pension
 Question: how much needs to be contributed?
– Assess through an Actuarial Valuation
– Actuarial valuations must be prepared and filed with regulators at
least once every three years
– Last filed valuation prepared as at December 31, 2009
– Next required valuation is December 31, 2012
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Valuation Basics - continued
 Purpose of the actuarial valuation is to assess
– the plan’s financial health
– future contribution requirements
 Two perspectives:
– Going-concern
• longer-term view
• compares current assets plus future contributions to the value of
benefits for past and future service
– Solvency (required by regulators)
• shorter-term view
• compares current assets to the settlement value of benefits for past
service (e.g. annuity purchase)
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Going-Concern Position
Total Assets
Total Actuarial Liabilities
Surplus / (Unfunded Liability)
Interim
Dec 31, 2008
Filed
Dec 31, 2009
Interim
Dec 31, 2010
$ 270,410,500
$ 296,814,400
$ 305,667,300
305,058,600
319,045,900
325,008,900
$ (34,648,100)
$ (22,231,500)
$ (19,341,600)
0.89
0.93
0.94
Funded ratio
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Current service cost at Dec 31, 2010: 18.47% of pensionable earnings
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Current Contribution Schedule
 University is currently matching employee contributions per
plan requirements and contributes an additional amount
based on most recent valuation results and legislation:
2010
2011
2012
Member
7.50%
8.25%
8.50%
University – matching
7.50%
8.25%
8.50%
University – additional
4.56%
3.06%
2.56%
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Solvency Position
Total Assets
Total Actuarial Liabilities
Surplus / (Solvency Deficiency)
Interim
Dec 31, 2008
Filed
Dec 31, 2009
Interim
Dec 31, 2010
$ 194,463,500
$ 215,930,600
$222,300,100
262,383,400
283,627,000
304,420,400
$ (67,919,900)
$ (67,696,400)
$ (82,120,300)
Current solvency ratio that is applicable: 76%
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Solvency “Extras”
 Solvency relief
– University elected 3 year temporary solvency relief for the
December 31, 2009 valuation
– Solvency funding rules uncertain at end of relief period
– Question: Should the University and other public sector pension
plans in Saskatchewan be subject to solvency funding?
– Transfer deficiencies still apply during relief period
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Solvency “Extras” - continued
 Transfer Deficiency
– Applies to individuals who terminate employment prior to age 55 and elect
to transfer the lump sum value of their entitlement out of the Plan
– When a Plan has a solvency deficiency, legislation requires that a portion
of every lump sum (LS) payment be held back
– Transfer Deficiency = Portion of LS held back
= (1- solvency ratio) x total lump sum entitlement
– Transfer Deficiency paid out, with interest, at end of five year period
following the date of payout
– No impact on members retiring and commencing a pension from the Plan
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Solvency “Extras” - continued
 Example – Transfer Deficiency
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Date of termination = Jan 1, 2011
Total lump sum entitlement = $100,000
Solvency ratio = 0.76
LS payment on Jan 1, 2011 = 0.76 x $100,000 = $76,000
Transfer Deficiency payment on Jan. 1, 2016
= (1–0.76) x $100,000 = $24,000 (with interest)
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Plan Membership
Active Members
Dec 31, 2009
Dec 31, 2010
1,399
1,399
Average age
48.0 years
47.7 years
Average years of service
12.6 years
12.2 years
$ 45,200
$ 46,900
$ 42,637,300
$ 42,698,800
Dec 31, 2009
Dec 31, 2010
616
638
74.7 years
74.1 years
$ 12,900
$ 13,400
Number
Average annual salary
Accumulated employee
contributions with interest
Pensioners and Survivors
Number
Average age
Average annual pension
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Plan Membership - continued
Deferred Members
Dec 31, 2009
Dec 31, 2010
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30
49.3 years
49.1 years
$ 3,300
$ 3,700
$ 338,900
$ 336,400
Number
Average age
Average annual pension
Accumulated employee
contributions with interest
Pending Settlement
Dec 31, 2009
Dec 31, 2010
83
62
$ 865,800
$ 706,000
Number
Accumulated employee
contributions with interest
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Current Pension Landscape
 Challenges facing DB pension plans:
– Pensions being paid for longer
– Investment markets volatile and uncertain:
• Approximately 75% of a pension plan's funding comes from
investment returns
• Threatens benefit security
• Places additional funding strain on the current system
– Pension plans have grown to a size that is often a multiple of the
operating budget of the sponsoring organization
• Hiccup with the pension plan means significant burden for the
sponsor and its employees
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Current Pension Landscape – continued
 Concerns:
– The pension plan may result in serious funding challenges for
sponsors
– Safety margins in plans may not be adequate
• Requires increased funding relative to benefits provided
– Benefit promises may be set too high too far in advance
• Establish more modest promises with hope of future enhancements
 General consensus in the industry is that the way in which
benefits are funded and promised needs to be reviewed:
– Want to avoid future generations paying for the promises made to
past generations
– Want to deliver on promises that have been made
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Questions
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