Atlantic Connection Conference
New Brunswick’s Shared Risk Plan
July 9, 2014
Health * Benefits * Employee Assistance * Retirement
Business. Needs. People.
Challenges facing traditional pension plans
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DB plans are proving to be costly
Falling interest rates
Increasing life expectancy
Investment losses and volatility
Earlier retirements
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NB asked: are DB benefits secure?
Most believe DB plans are guarantees
The DB promise is only as good as the sponsor’s willingness and
ability to pay
When there is no longer an ability to pay, plans close and
benefits are cut (Fraser Papers, Nackawick, etc.)
When there is no longer a willingness to pay, benefits are
curtailed or changed
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DB plans create inequity across generations
Current DB legislation does not allow for reductions in accrued
benefits
Only corrective pension actions are
Increasing active member contributions
Reducing future active member benefit accruals
Increasing employer contribution
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DB plans create inequity across generations
Increasing employer contributions
Revenue base relatively fixed
If more of this money is diverted to the pension plan then
Maybe wage freezes
Maybe fewer jobs
Maybe reductions in other employee benefits
Maybe new equipment desperately needed isn’t purchased
The net impact of all of these actions is felt by active members only
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The New Brunswick Journey
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How NB approached these problems
Appointed an independent Task Force
The mandate of the Task Force was to achieve
Security
Sustainability
Affordability
Transparency
Equity
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How NB approached these problems
Public consultation
Conducted research on best pension systems in the world
Process was consultative among the Province, Unions and the
Task Force
Unions played a large part in the final design
New Brunswick Nurses Union
CUPE
New Brunswick Union of Public and Private Employees
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The Shared Risk Plan is created
Process resulted in the creation of the Shared Risk Plan (SRP)
Draws inspiration from both DB and DC designs
On a high level
Introduces benefit flexibility
Introduces strong stable funding requirements
Introduces rigorous risk management requirements
Introduces independent governance
Legislation introduced on July 1, 2012 allowing any plan
sponsor in the Province to adopt an SRP
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SRP has high security but no guarantees
Two levels of
benefits are defined:
Base benefits and
Benefit Intention
BENEFITS
INTENTION
Contribution rates set to provide
very high security for base benefits
and reasonable probability of
achieving the benefit intention
However, accrued base benefits can
be reduced in very
poor economic scenarios
There are no absolute guarantees
BASE
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SRP benefits absorb volatility
Benefits fluctuate
based on plan
performance
BENEFITS
Typically conditional pre and post
retirement indexing varies and
absorbs a lot of the plan volatility
Surpluses to be used on member
benefits
Sponsor has no right to surplus
Sponsor has minimal opportunity
for contribution holidays
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SRP has strong legislated governance
Funding policy
Gives Trustees a set of benefit and contribution instructions
agreeable to both parties under which they are to operate
Investment policy
Sets out target asset mix and investment goals
Rigorous risk management
Annual monitoring and compliance
At least 1,000 20-year scenarios tested each year
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SRP governance requirements work together
All aspects of these
requirements work
together
FUNDING POLICY
Together they must satisfy benefit
security tests set out in the
Regulations
97.5% probability of not reducing
base benefits over a 20 year period
At least a 75% probability of
providing benefit intention
INVESTMENT POLICY
RISK MANAGEMENT
ANNUAL MONITORING
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Typical best estimate DB
contributions have about a 50%
chance of providing fixed DB
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SRP has certain employer advantages
Employer commitment is only the
contributions in the funding policy
++
+
Employer has no responsibility to
backstop deficits if they arise
Cost stability
Essentially works like DC (with a
narrow range of contribution levels)
for the employer
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SRP has employer trade-offs
Contribution holidays are not
permitted unless required by the
Income Tax Act
Such holidays are expected to be very
rare
Large majority of generated surplus
spent on member benefits
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++
+ +
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SRP has certain advantages for the member
Employer can’t take contribution holiday
Large majority of generated excess funding
spent on member benefits
Governed by Arm’s length Trust
Upside potential to participate in plan gains
for both active members and retirees
Stable contributions within a narrow range
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+
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SRP has certain advantages for the member
Very high benefit security
Intergenerational equity
All members participate in surpluses and
deficits, not just active members
++
+
Still providing DB-like benefit to members
Still pooling longevity risk
Base benefit based on salary / service
history
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SRP has member trade-offs
Base benefit likely less than current DB
“promises” to meet security targets
++
++
+ +
Base benefit not guaranteed
Ultimate benefit difficult to predict
Contributions may be higher than current
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Why consider SRP?
Cost stability for sponsors and members
High benefit security
Rigorous governance and risk management
Investment and longevity risk pooling
Benefit aligns with what the plan can afford to pay
Contributions + Investment income = ultimate level of
benefits
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What lessons did we learn
Be collaborative and transparent
Be realistic about the problems
State outcome goals up front
Take a long term approach
Think differently!
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Appendix: Progress made
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What’s happened since SRPs were introduced
SRP legislation was effective July 1, 2012
We know of at least 10 plans that have converted or have
announced their intent to convert including:
Certain Bargaining Employees of NB Hospitals
City of Fredericton
City of Saint John
Public Service Superannuation Act (Province of NB)
University of New Brunswick
Saint John Energy
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What’s happened since SRPs were introduced
On April 24, 2014 Canada’s Federal Department of Finance issued
a consultation on target benefit plans
Many proposed concepts similar to NB SRP
Would allow SRP-like plan design for federally regulated pension
plans such as
Airlines
Telecommunications
Railways
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What’s happened since SRPs were introduced
Province of Prince Edward Island recently made similar changes
Flexible benefits pre and post retirement to reduce cost volatility
Expropriation of vested indexing rights to improve
intergenerational inequity
Stochastic measurement and communication of risks
Funding policy to manage contributions and benefits
These changes were made to their two largest public sector
pension plans
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What’s happened since SRPs were introduced
Government of NB successfully negotiated a pension deal with
Teachers’ union
In the fall, op-ed in the paper from three union presidents
supporting the design
National and international attention
An entire chapter in Jim Leech’s book “The Third Rail”
A large Ontario plan worked with us to explore SRP
Multiple industry speaking engagements all over Canada and the
US
Multiple articles in Benefits Canada
We’re here talking to you today!
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Thank You
Paul T. Lai Fatt, FSA, FCIA
Partner
plaifatt@morneaushepell.com
(902) 474-3236
Visit us: morneaushepell.com
Follow us: @Morneau_Shepell
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