Report of the Pension Committee. Summary. Review and Study of the Two Options

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1 January 16, 2013 Report of the Pension Committee Summary Following the Executive Committee meeting of September 13, 2012, the pension committee undertook a review of the Academic Employees Pension Plan (AEPP) in its current framework and a study of the effects and implications of converting the AEPP to the recently legislated Shared Risk Pension Plan (SRPP) framework. The review and study are joint projects with UNB, in accordance with the Improvement Program. By mid-december the committee had sufficient information to compare the advantages and disadvantages of the two options. The comparison was made in meetings on December 17 and 19 and the committee reached a consensus as to the better option from the perspectives of: the balance between benefits and costs, generational equity, and prospects for long-term sustainability. The better option is conversion of the AEPP to the SRPP framework, subject to negotiation of terms of conversion acceptable to AUNBT. Review and Study of the Two Options Among the documents considered by the committee were: the AEPP valuations for July 2011 and July 2012 performed by the plan actuary Towers Watson; costing of each component of the current benefit in terms of per cent of salary (for each of AUNBT and UNB) based on the July 2011 valuation performed by Towers Watson; costing of corresponding benefits in the event of conversion to the SSRP framework and related calculations performed by actuaries at Morneau Shepell, with supplementary calculations performed by actuaries at Towers Watson; and a legal opinion by AUNBT counsel Pink Larkin on the SRPP sections of the Pension Benefits Act (the provisions of Bill 63, in force from July 1, 2012) and the accompanying Regulations (published August 22, 2012). The joint (AUNBT-UNB) working group met with the Towers Watson and Morneau Shepell actuaries on three occasions to specify calculations to be performed and to discuss the results. 1 The pension committee had several meetings with actuary Robert Blais (retired from Towers Watson) who is being retained jointly by AUNBT and UNB. In addition, there were extensive consultations by Jula Hughes and Jon Thompson with AUNBT legal counsel for pension matters Ron Pink of Pink Larkin. Both Ron Pink and Robert Blais had discussions and exchanged correspondence with the Superintendent of Pensions on legal and actuarial matters. The AUNBT and UNB pension committees and the Co-Chairs of the AEPP Board of Trustees met with Susan Rowland, Chair of the New Brunswick Task Force of Pensions on November 2. (The SRPP framework was designed by the Task Force, and the SRPP legislation followed its recommendations). Dorothy Duplessis and Jon Thompson met with the Superintendent of Pensions and 1 The AUNBT members of the working group are Gopalan Srinivasan and Jon Thompson 1

2 the Executive Assistant to the Minister of Justice on December 11 to discuss the SSRP framework (meeting arranged by Elisabeth Hans of FNBFA). The Issue of Legal Liability in the Event of Conversion to SRPP In October, after the working group had assigned a series of SRPP calculation tasks to Morneau Shepell and while these calculations were being performed, AUNBT requested a legal opinion from Ron Pink on the degree of exposure to law suits by a member or members of AEPP (retired or active) dissatisfied in the event of conversion. The issue is that the sections of the Pension Benefits Act (PBA) governing the current AEPP do not allow reduction of vested pension benefits (those accrued by retirees or members eligible to retire), while the new SRPP sections of the act do allow such reductions under certain specifications and conditions. Ron Pink s opinion identified significant legal liability for AUNBT and the Board of Trustees. Copies of his opinion were shared with UNB and the Board of Trustees. In the meeting on November 2, Susan Rowland was provided with a copy of the legal opinion. She acknowledged that the legislation had been inadequately drafted in regard to this liability concern and indicated the government would consider amendments. On AUNBT instructions, Mr. Pink forwarded a copy of his opinion to the Superintendent and also provided her with specific wording for our requested amendments. Subsequently, UNB pension counsel provided an opinion consistent with Mr. Pink s, and adding that UNB was similarly exposed. The AUNBT and UNB counsel also were in agreement on the wording for needed amendments and so advised the Superintendent. Amendments to the PBA were introduced in the Legislature as Bill 20 on December 11, and the wording provided comprehensive legal immunity to employers, unions, and plan trustees in the event of plan conversions to SRPP, with wording both similar and equivalent to that requested by AUNBT and UNB counsel. Counsel for AUNBT and for UNB reviewed the provisions of Bill 20 and consider them to be satisfactory. The amendments we sought were subsequently enacted and proclaimed. This does not mean that individual or groups cannot initiate a law suit in the event of plan conversion instead it diminishes, to the extent feasible, their prospects of successfully pursuing their litigation. Comparison of the Two Options The committee s report at the Fall General Meeting (FGM) on November 30 noted that international financial conditions of the past 12 years have resulted in progressive lowering of the discount rate, that is, the assumed annual earnings rate for defined benefit pension plans. 2 This results in progressive annual increases in the contribution rate for plan members and employers. It also weakens the guarantee that the full plan benefit can be provided to retirees, and it also increases the risk that a plan cannot be sustained in the longer term and so ultimately would be wound up in a seriously underfunded condition (a circumstance disadvantageous to all members, whether active or retired). 2 The committee s FGM report and other relevant documents are posted at 2

3 The committee s view is that the July 2012 valuation means that a substantial reduction in the current AEPP benefit is required in the immediate future (the Improvement Program expires on June 30, 2013). The question is this: is it better to implement a benefit reduction within in the current AEPP framework, or to convert the AEPP to SRPP, which entails a reduction because of the SRPP legislative structure? The current AEPP. The July 2012 valuation specifies a contribution rate of 13.15% of salary (for each member, matched by UNB) and estimates this will increase to 13.75% when new mortality tables are adopted by the actuarial profession and provincial superintendents of pensions. There is a strong prospect that in the next AEPP valuation (July 2013) the discount rate will again be lowered, and a reduction of 0.25% in the discount rate will result in an increase in the contribution rate of approximately 0.7%. Thus by next year, if no changes are made to the AEPP benefit, the contribution rate could rise to approximately 14.5% of salary (for each party). The actuaries (both Towers Watson and Morneau Shepell) expect that the discount rate may fall to 4.5% (it is 5.75% in the 2012 valuation) relatively soon. This could mean that within another couple of years or so, the contribution rate for the current AEPP benefit could rise by an additional 3% (approximately) and if so, it would be in the 17% to 18% range (approximately), unless some or all of the major benefit reductions outlined below were implemented. These contribution rate figures would have to be increased by an additional 1.5% (approximately) if the annual benefit accrual rate is restored to 2.0% from the current 1.7% as will occur automatically on July 1, 2013 with the expiry of the Improvement Program, unless AUNBT and UNB decide otherwise. The contribution rate is now well above the 9% limit of the Canada Revenue Agency (CRA), and special exemptions from the limit must be sought with each valuation. In current economic circumstances the CRA has been tolerant, but it may not be so indefinitely. In order to lower the contribution rate for 2013 to a range that members and UNB both might tolerate, restoration of the 2% accrual rate would have to be abandoned and in addition the cost of the current benefit would have to be lowered from 2% to 4% approximately. Moreover, these measures might provide at best only a short-term solution to a still-growing problem additional benefit reductions might be required in 2014, or 015, or both. The extent of reductions to the current AEPP benefit required to effect such cost savings can be seen from the following calculation results provided by Towers Watson: elimination of all pension indexing for active members (except those eligible to retire now) would save 3.3% of salary (approximately, for each party); elimination of the spousal benefit would save 1.0% of salary (approximately, for each party); elimination of the 85-factor early retirement benefit would save 0.8% of salary (approximately, for each party); reduction of the annual benefit accrual rate from 1.7% to 1.4% would save 1.5% of salary (approximately, for each party). Under the sections of the PBA governing the current AEPP,retirees benefits cannot be reduced and therefore the entire burden for any such reductions would be borne by active members of the plan. 3

4 Conversion to SRPP. The New Brunswick Government has designed the SRPP framework so as to provide a substantial prospect for long-term financial stability and sustainability even in difficult economic circumstances such as those of the past decade or so. As outlined in the FGM report of November 30, the framework is complex and requires each plan to include a long-term funding policy that includes specified risk management goals and risk management procedures. 3 It replaces the guarantee of standard defined benefit plans with probabilistically defined objectives. The primary goal is a 97.5% probability that base benefits will not be reduced. A secondary goal is that (on average over a 20-year period) inflation protection will be at least 75% of the Consumer Price Index (CPI). Another important difference from standard defined benefit plans is that retired and active members are treated on the same basis in the event of benefit reductions or a plan wind-up. Actuarial liability in SRPPs is reduced principally by two measures: 1) replacing guaranteed inflation protection by conditional inflation protection, targeting probabilistically so as to provide at least 75% of CPI both for retirees and for the future pensions of currently active members, as noted above; and 2) replacing a final average salary formula (best five years formula in the case of the current AEPP) by a career salary formula in which the benefit accrued by a plan member through each year of pensionable service is computed from the individual s salary level of that year ( year-by-year benefit accrual). These two measures both of them benefit reductions in relation to the current AEPP have the very substantial positive effect of bringing actuarial assets back into balance with actuarial liabilities. The year-by-year benefit accrual means that an SRPP will not capture the Progress-Through-the-Ranks (PTR) component of salary to the same extent as the current AEPP. This is of concern both to the joint AUNBT-UNB working group and the AUNBT pension committee. It was discussed with the actuaries who performed calculations to estimate the effect and to illustrate potential means of addressing it, and discussed also with legal counsel. It may be possible to partially address this issue by treating PTR as an ancillary benefit and targeting PTR inflation protection probabilistically. Actuary Robert Blais recently submitted a written proposal to the Superintendent to this effect, accompanied by a supporting legal opinion by Ron Pink. Long-term financial stability and sustainability prospects are improved also by the requirement that the funding policy be conservative in its discount rate assumptions. In addition, the framework allows both for reductions and for improvements in the base benefit dependent on funding status in annual valuations. The guiding SRPP philosophy is not to save money on pension benefit costs. It is, instead, to provide long-term financial stability and sustainability to the extent feasible. Therefore, contribution rates would be high in the event of conversion of the AEPP to SRPP, but in the estimation of the committee the high rates would be in a tolerable range for both parties. On the basis of the foregoing analysis the AUNBT pension committee recommends unanimously that: 3 Terms displayed as quotations are defined in the legislation and regulations. 4

5 1. AUNBT enter into negotiations with UNB with the objective of converting the AEPP into SRPP form of pension benefit and achieving a result in terms of benefits and costs that the AUNBT pension committee and the AUNBT Executive Committee will be prepared to recommend to the AUNBT membership for ratification 2. The AUNBT negotiating team be comprised of the membership of the pension committee (in practice this means members currently in Canada, with the three members currently outside Canada for extended periods being in regular communication with the committee), reporting to the Executive regularly on the progress of negotiations The pension committee requests motions by the Executive Committee authorizing the recommended actions 1) and 2) above. AUNBT Pension Committee Members: David Bell, Vaughn Dickson, Dorothy Duplessis, Jula Hughes, Miriam Jones, Rick McGaw, Alyssa Sankey, Gopalan Srinivasan, Jon Thompson (Chair), Barbara Trenholm 5

6 Motions Approved by the Executive Committee on January 16, 2013 In its meeting held on January 16, 2013 the AUNBT Executive Committee considered the report of the AUNBT Pension Committee, and heard a presentation by consulting actuary Robert Blais on the Shared Risk Pension Plan framework enacted in 2013 through amendments to the Pension Benefits Act. Following discussion with actuary Blais and members of the Pension Committee, the Executive Committee considered two motions for which the Pension Committee had given notice. Motion 1 (Moved by Dorothy Duplessis, seconded by David Bell): That AUNBT enter into negotiations with UNB with the objective of converting the AEPP into SRPP form of pension benefit and achieving a result in terms of benefits and costs that the AUNBT pension committee and the AUNBT Executive Committee will be prepared to recommend to the AUNBT membership for ratification. Motion 2 (Moved by David Bell, seconded by Dorothy Duplessis): That the AUNBT negotiating team for the purpose stated in Motion 1 be comprised of the membership of the pension committee, reporting to the Executive regularly on the progress of negotiations. Note re: Motion 2. The intention is that direct negotiations will be conducted by the six members of the pension committee currently in Canada except for the President, namely, Bell, Dickson, Duplessis, McGaw, Srinivasan and Thompson. The other members of the committee will participate in the work of the committee by electronic or other means of communication. Motion 1 and Motion 2 were voted on and each was approved by the Executive Committee. 6