PENSION PLAN FOR CUPE EMPLOYEES OF NEW BRUNSWICK HOSPITALS

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1 PENSION PLAN FOR CUPE EMPLOYEES OF NEW BRUNSWICK HOSPITALS ADMINISTRATOR S REPORT 31 December 2009 Prepared by: Pensions and Employee Benefits Office of Human Resources ISBN:

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3 MESSAGE FROM PENSIONS AND EMPLOYEE BENEFITS Pensions and Employee Benefits (PEB) is pleased to present the 2009 Plan Administrator s Report for the Pension Plan for CUPE Employees of New Brunswick Hospitals (CUPE 1252). This report reviews activities that took place during the 2009 calendar year. It includes the Financial Statements at 31 December 2009, as well as the Actuarial Opinion. As the Pension Plan Administrator, PEB, administers and assists in managing 11 separate legislated or negotiated pension plans; as well as numerous non pension benefit programs. Throughout the year, Plan Members requested a number of services; including, but not limited to, the calculation of future benefits, purchases of service, and reciprocal transfers. These requests were handled in person, by phone, or through application forms. In addition, governance standards on all Plans are becoming more stringent; and PEB is tasked with updating its standards and practices to meet the demands. The Regional Health Authorities (RHAs), Facilicorp NB, Fundy Linen Inc., and Ambulance New Brunswick have been instrumental in providing continuous support to the Plan Members. As such, PEB continues to improve the delivery of timely information to these employers through regular contact and collaboration with payroll and human resources personnel. We welcome all new members, and look forward to continuing to serve the Pension Plan for CUPE Employees of New Brunswick Hospitals. To communicate with us, please refer to the contact information on the following page. In closing, I would like to take this opportunity to acknowledge and thank all of the stakeholders with whom we work in ensuring the efficient delivery of this benefit program: the Board of Trustees for the Pension Plan for CUPE Employees of New Brunswick Hospitals, the Regional Health Authorities, Facilicorp NB, Fundy Linen Inc., Ambulance New Brunswick, CUPE Local 1252, the Department of Health, the Department of Finance, the Board of Management, and the Office of Human Resources. The 2009 Plan Administrator s Report is a direct result of their continuous efforts and dedication to the Plan. Yours truly, Original copy signed by Kim Fraser Manager, Benefit Services Pensions and Employee Benefits Office of Human Resource

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5 TABLE OF CONTENTS Highlights of the 2009 Reporting Year 1 About the Pension Plan 2 Governance of the Plan 3 Plan Membership 4 Member Services and Communications 6 Financial Management of the Plan 6 Financial Statements Appendix A Actuarial Opinion Appendix B Prepared by: Pensions and Employee Benefits Office of Human Resources P.O. Box 6000 Fredericton, N.B. E3B 5H1 Tel: Toll Free: Fax: Website:

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7 HIGHLIGHTS OF THE 2009 REPORTING YEAR Plan Administrator PEB has been a participating organization, along with eight other pension plan administrators across Canada, in the national benchmarking association Quantitative Service Measurement (QSM) Surveys. Survey results provide a clear understanding of the factors that can affect pension plan costs and service standards. The New Brunswick public pension administration cost per client was the fourth lowest of the organizations surveyed, at $92 per client. The range of administration cost within the group was from $68 to $227 per client. Other QSM participants include: Alberta Pensions Administration, Alberta Teachers Retirement Fund Board, British Columbia Pension Corporation, Commission administrative des régimes de retraite et d assurances, OPSEU Pension Trust, and the Federal Public Service Superannuation Account. This chart illustrates the QSM averages from 2005 to 2009 compared to the total New Brunswick pension administration cost per client: Total NB Pension Administration Cost per Client QSM Average Board of Trustees At the 3 & 4 June 2009 meeting of the Board of Trustees, Douglas Kingston was elected Chairperson, and Renée Laforest was elected Vice Chairperson. The Chairperson and Vice Chairperson can remain in those positions for a maximum of four years. At the 23 July 2009 meeting, the Board of Trustees approved that Morneau Sobeco prepare the Actuarial Valuation as at 1 January 2010 At the 1 & 2 October 2009 meeting, the Board of Trustees approved a transfer ratio of commuted values with the following criteria: Maximum five years to repay in full Value at 45.7% Pension Plan for CUPE Employees of NB Hospitals 2009 Plan Administrators Report 1

8 At the 3 & 4 December 2009 meeting, the Board of Trustees approved a motion to recommend that the Parties increase contributions to adequately fund the Plan; including the unfunded liability The Board of Trustees sent the Parties five letters concerning the Plan s funding shortfall and the need to address this shortfall through an increase in contributions and/or a decrease in benefits. Included with the 9 January 2009 letter was a Funding Policy Proposal recommending a 2% increase in employee/employer contributions. An agreement was not reached between the Parties on this issue The Board of Trustees requested, and received, a legal opinion on their fiduciary responsibilities concerning the Plan s funding shortfall On behalf of the Board of Trustees, Morneau Sobeco presented to the Parties information specific to the Plan s funding shortfall ABOUT THE PENSION PLAN Mission Statement Our mission is to, at all times, act in the best interest of the Plan Members and beneficiaries, ensuring the Plan and its assets are managed effectively and efficiently in order to provide the expected benefits, while at the same time: Conducting its business with trust and integrity; Being open, accessible, and accountable; Striving to be fully funded while maintaining stable contribution rates; Seeking superior long term investment performance within reasonable risk parameters; Maintaining open lines of communication; and Being visionary, proactive, and open to productive change. Plan Overview On 1 January 1975, the Pension Plan for CUPE Employees of New Brunswick Hospitals was established. In 1999, the Pension Plan for CUPE Employees of NB Hospitals became a jointly trusteed Pension Plan, governed by a Board of Trustees. The Board has a fiduciary responsibility to make decisions that are in the best interest of the Plan and Plan Members. As well, the Board is directly accountable to the Plan and its outcome; and, therefore, takes every precaution when making decisions, by acquiring the assistance and advice of service providers. Participation in the Plan is compulsory for full time employees (see Plan Membership). The Plan is a defined benefit plan with vesting options upon the attainment of five years of continuous employment. Employees are required, by payroll deduction, to contribute 6.17% of their regular earnings. Normal retirement age is 65. Members can retire as early as age 60 with an unreduced pension, or as early as age 55 with an actuarial reduction of 3% per year. Pension Plan for CUPE Employees of NB Hospitals 2009 Plan Administrators Report 2

9 Legislation The Pension Plan is administered in accordance with the Income Tax Act (ITA). The Plan is not subject to the New Brunswick Pension Benefits Act (PBA); however, the Board administers the Plan in the spirit of the PBA. Actuarial Valuation The Pension Plan s Actuary is required to perform an actuarial valuation, in which the financial health of the Pension Plan is measured, at a minimum of every three years. The Actuary reviews contribution rates, the cost of Plan benefits currently being accrued, and cost of living adjustments; and determines whether the Plan has sufficient funds to pay the promised benefits in the future (see Appendix B for the 2009 Actuarial Opinion). GOVERNANCE OF THE PLAN The Board of Trustees (the Board), formed on 15 March 1999, governs this Pension Plan. Effective governance is the primary focus of the Board, and this includes the continuous review of governance structures and processes to ensure effective and efficient delivery of services. The fiduciary responsibility of the Board is to oversee the operation of the Plan, maintain and administer the Fund on behalf of the Parties (CUPE Local 1252 and Board of Management), and ensure that the Fund is used for the purpose of delivering pension benefits to Plan Members. The Board of Trustees consists of eight Trustees, including four representatives appointed by CUPE Local 1252, and four representatives appointed by the Chair, of Board of Management (BOM). In 2009 the Trustees were: CUPE Local 1252 Douglas Kingston Chairperson Adrian Crossman Kevin Carter Peter Doiron BOM Renée Laforest Vice Chairperson Mark Gaudet Jean Claude Pelletier Aline Johanns Board of Trustees Meetings The Board of Trustees is required to meet at least three times per year, and then as frequently as deemed necessary. In 2009 the meeting dates were: February 26 & 27 June 4 & 5 July 23 October 1 & 2 December 3 & 4 Plan Agents The Board of Trustees has the authority to hire and monitor service providers to administer the Plan. In 2009, the service providers for the CUPE 1252 Pension Plan were: Pension Plan for CUPE Employees of NB Hospitals 2009 Plan Administrators Report 3

10 Auditor Grant Thornton LLP Custodian RBC Dexia Investor Services Plan Administrator Pensions and Employee Benefits Office of Human Resources Performance Measurement API Asset Performance Inc. Actuary/Consultant Morneau Sobeco Legal Council Pink Larkin Performance Reporting Treasury Division Department of Finance Investment Managers McLean Budden Ltd. Bissett Investment Management Leith Wheeler Investment Counsel Ltd. UBS Global Asset Management (Canada) Co. PLAN MEMBERSHIP Plan membership consists of full time employees of the New Brunswick Regional Health Authorities, Facilicorp NB, Fundy Linen Inc., and Ambulance New Brunswick, who are members of the CUPE Local 1252 bargaining units (Institutional Services; Patient Services; and Clerical, Stenographic & Office Equipment Operation). These charts illustrate the Plan membership and the membership profile of the Plan for a five year period. In 2009, Plan membership increased from 8,234 to 8,601. As of 31 December 2009, the average age of an active Plan Member is 44.9 years, and the average number of years of pensionable service is 9.1 years. Plan Membership Membership 9,000 8,500 8,000 7,500 7,000 6,500 6,000 6,859 7,080 7,438 8,234 8, Active 4,571 4,675 4,940 5,643 5,896 Deferred Retired 2,209 2,297 2,414 2,509 2,604 Pension Plan for CUPE Employees of NB Hospitals 2009 Plan Administrators Report 4

11 2009 Membership Profile 30.3% Active = 5,896 Deferred = % 68.6% Retired = 2,604 Plan Statistics In 2009, there were 5,896 active contributors; 2,604 pensioners; and 50 refunds, by either commuted value (vested) or contributions with interest (non vested). The following table reflects these statistics, along with the different pensioner options as at 31 December 2009 and 31 December December Active Contributors 5,896 5,643 Pensioners (by option): Life Pension with no Guarantee Life Pension with 5 Year Guarantee 1,216 1,249 Life Pension with 10 Year Guarantee Joint Life and Last Survivor (50%) Joint Life and Last Survivor (66 2/3%) Joint Life and Last Survivor (100%) Total Pensioners 2,604 2,509 Deferred Pensioners New Pensioners Pensioner Deaths Refunds (by type): Commuted Value 8 35 Contributions Plus Interest Total Refunds Pension Plan for CUPE Employees of NB Hospitals 2009 Plan Administrators Report 5

12 MEMBER SERVICES AND COMMUNICATIONS Pensions and Employee Benefits (PEB) has a strong team of professionals devoted to providing quality and cost effective services to Plan Members. Among the many services offered, PEB processed the following requests in 2009: Requests processed for the CUPE Hospitals Pension Plan Pension Estimates Division of Assets Upon Marriage Breakdown 3 1 Purchase of Service Estimates Benefit Options Plan Members are encouraged to view the GNB website ( where pension planrelated links (such as online pension calculator tools) are located. In 2009, PEB published and distributed a newsletter to Plan Members and retirees. This highlighted the 2008 CUPE Hospitals Pension Plan Administrator s Report and unaudited financial activity that occurred in Employee Statement of Benefits Plan Members who contributed to the Pension Plan in 2008 received their Employee Statement of Benefits in the spring of A total of 5,813 statements were produced for distribution. Plan Members were provided with information specific to their pensionable service, their accumulated contributions with interest and estimates of their future pension benefits. The estimates were based on service (service to date and projected), earnings and retirement age. FINANCIAL MANAGEMENT OF THE PLAN Funding Status At 1 January 2010, the Plan s assets were approximately $422.6 million, and the unfunded liability was $192.9 million. While the economic recovery in 2009 helped increase the funding percentage of the Plan, it was not enough to decrease the unfunded liability to a tolerable level. This chart illustrates the funding percentages at valuation dates since 2000, including 2010: % History of Funding Percentages Pension Plan for CUPE Employees of NB Hospitals 2009 Plan Administrators Report 6

13 Since 2003, the Board of Trustees has been actively submitting possible solutions for the Plan s funding shortfall to the Parties. At 1 January 2003, an unfunded liability of $17.7 million was noted by the Plan Actuary, therefore he recommended contributions be increased to match normal cost until the unfunded liability was eliminated. Also, he suggested that special payments be made to pay down the unfunded liability. By 2005, the unfunded liability had increased to $53.0 million. The Plan Actuary began work on a Funding Policy Proposal that would set parameters for contributions based on the Plan s funding percentage. In 2006, the Parties agreed to increase contributions to 6.17%, and to suspend the contribution holiday; yet additional funding was required to increase the funding percentage. The actuarial valuation at 1 January 2007 identified an unfunded liability of $70.6 million; and, once again, the Board informed the Parties that, in the absence of increased funding, the 90 Day Notice Letter would need to be issued, as per Section of the Trust Agreement. The Parties requested that the 90 Day Notice Letter be deferred pending the completion of the Funding Policy Proposal. The unfunded liability at 1 January 2009 was $202.9 million. The actuarial report strongly recommended an increase in contributions, a decrease in benefits or a combination of the two. Further to the Actuary s report, the Trustees took the following steps: implemented a transfer ratio of commuted values informed the Parties of the funding situation presented the Parties with the Funding Policy Proposal urged the Parties to meet requested the Actuary meet with the Parties Subsequent Events 2011 The Trustees remain diligent in finding a solution to the funding shortfall; and issued, to the Parties, a 90 Day Notice Letter of the recommended actions. Fund Assets It is important to note that high investment returns alone will not resolve the funding challenge in the event that the Funding Policy Proposal is not approved. The Board is committed to ensuring that the performance of the Plan s four investment managers is consistent and steady over the longer term, based on a disciplined approach and prudent decision making. The long term financing and investment objectives for the Board are established through the Statement of Investment Policy and Goals (SIP&G). The Board oversees the management of those assets in conjunction with the Treasury Division of the Department of Finance. Investment risk is managed by diversifying the portfolio among asset classes, industry sectors, geographic locations and individual securities. This table shows the SIP&G asset allocation for the Fund: Asset Classes Policy Asset Allocation Market Indices Cash and Short Term 5% SCM 91 Day T Bill Fixed Income 42% SCM Universe Bond Index Canadian Equities 25% S&P/TSE300 Capped Return Index US Equities 18% S&P 500 Total Return Index International Equities 10% MSCI EAFE Total Return Pension Plan for CUPE Employees of NB Hospitals 2009 Plan Administrators Report 7

14 In 2008, the market value of investments was $374 million. In 2009, the Fund increased in value. This graph illustrates the value of the Fund over a five year period: 600 Fund Size 500 Assets (in $ million) Fund Size Value of Accrued Benefits Annual Rate of Return The Plan s investment managers invest the Fund s monies in publicly traded domestic and foreign securities. In addition, some securities are held in foreign currency, fluctuating in relation to the foreign exchange rates. The SIP&G guidelines specify that only securities with credit ratings of BBB, or higher, are acquired. Returns on these investments are important to the long term financial health of the Pension Plan. Thus, investment managers and the Plan service providers must be very prudent to ensure that compliance and disclosure standards are met. During the 2009 reporting period, the investment rate of return was lower than the benchmark set by the Board; however, it was higher than the average Canadian pension fund return. The Pension Fund s annual rates of return over a five year period are: Annual Rate of Return Return (%) Rate of Return CUPE Benchmark *The benchmark is a weighted average of the asset allocation (previous page), multiplied by the rate of return of the applicable benchmark. Pension Plan for CUPE Employees of NB Hospitals 2009 Plan Administrators Report 8

15 The Plan s investment returns are measured by, and compared to, several other Canadian Pension Plans in API s Universe. The one year returns at 31 December 2009 met API s median benchmark. In 2009, the consolidated Fund s rate of return of 16.2% was higher than the Board s projected benchmark of 14.0%. Investment Managers There are four Pension Fund Investment Managers: Managers Inception Dates Leith Wheeler Investment Counsel Ltd UBS Global Asset Management (Canada) Co McLean Budden Ltd Bissett Investment Management 2005 This chart shows the portion of the Fund managed by each Investment Manager, as at 31 December 2009: Manager Allocation Leith Wheeler = 32.1% McLean Budden = 25.7% UBS = 21.6% Bissett = 20.6% Asset Allocation The Investment Managers use asset allocation (within a defined range) and security selection techniques in order to achieve higher rates of return than those that might be obtained through passive management. This is a breakdown of the Pension Fund investments by asset class, as at 31 December 2009: Asset Allocation Cash & Short Term = 1.8% Bonds = 41.7% Canadian Equities = 25.7% United States = 20.0% International Equities = 10.8% Pension Plan for CUPE Employees of NB Hospitals 2009 Plan Administrators Report 9

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17 APPENDIX A FINANCIAL STATEMENTS

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19 Financial Statements Pension Plan For CUPE Employees of New Brunswick Hospitals 31 December 2009

20 Pension Plan For CUPE Employees of New Brunswick Hospitals

21 Auditors report Grant Thornton LLP 4th Floor 570 Queen Street, PO Box 1054 Fredericton, NB E3B 5C2 T (506) F (506) To the Board of Trustees We have audited the statement of accrued pension benefits and net assets available for benefits of the Pension Plan For CUPE Employees of New Brunswick Hospitals as at December 31, 2009 and the statement of changes in net assets available for benefits for the year then ended. These financial statements are the responsibility of the Plan s Administrator. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Plan s Administrator, as well as evaluating the overall financial statement presentation. In our opinion, these financial statements present fairly, in all material respects, the accrued pension benefits and net assets available for benefits as at December 31, 2009 and the changes in net assets available for benefits for the year then ended in accordance with Canadian generally accepted accounting principles. Fredericton, NB May 31, 2010 Chartered Accountants Audit Tax Advisory Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd

22 Audit Tax Advisory Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd

23 Pension Plan For CUPE Employees Of New Brunswick Hospitals Statement of Accrued Pension Benefits and Net Assets Available for Benefits December 31, Accrued Pension Benefits Actuarial value of accrued pension benefits (Note 8) $ 615,509,000 $ 576,676,000 Assets Investments Short market instruments 7,696,301 9,339,788 Fixed income 174,349, ,084,916 Canadian equities 107,943,602 86,841,240 Foreign equities 128,807, ,738, ,796, ,004,367 Receivables Employee contributions 1,719,145 2,203,176 Employer contributions 1,650,050 2,119,320 Accrued interest and dividends 1,031,088 1,108,614 4,400,283 5,431,110 Prepaids Cash 374, ,165 Total assets 423,572, ,713,487 Liabilities Accounts payable 458, ,237 Pension refunds payable 505, , , ,226 Net assets available for benefits 422,608, ,720,261 Deficiency of net assets available for benefits over actuarial value of accrued pension benefits $ (192,900,586) $ (202,955,739) Subsequent event (Note 10) ON BEHALF OF THE BOARD OF TRUSTEES Original copy signed by Douglas Kingston Chairperson Renée Laforest Vice-Chairperson See accompanying notes to the financial statements.

24 Pension Plan For CUPE Employees Of New Brunswick Hospitals Statement of Changes in Net Assets Available for Benefits Year Ended December 31, Increase in assets Contributions Employee $ 12,409,039. $ 11,384,966. Employer 12,056, ,215,467. Reciprocal transfers 1,535, , ,001, ,123,003. Investment income Fixed income and short term 8,343,785. 9,763,055. Equities 5,017,893. 9,015, ,361, ,778,676. Securities lending 28, ,290. Realized loss gain on sale of investments (4,564,660) (1,950,320) Unrealized current period change in market value of investments 49,945,812. (76,517,872) Total (decrease) increase in assets 84,772,168. (36,526,223) Decrease in assets Benefit payments Pensions 25,846, ,180,910. Refunds 3,932,911. 8,723,733. Reciprocal transfers 3,770, ,191. Marriage breakdown 183, , ,732, ,990,200. Fees and expenses Investment management fees 1,027,424. 1,051,397. Administrative expenses 936, ,774. Custodial fees 26, ,852. Performance measurement fees 59, ,923. Transaction costs 73, ,820. Compliance reporting fees 28, ,000. 2,151,150. 2,018,766. Total decrease in assets 35,884, ,008,966. Increase (decrease) in net assets 48,888,153. (72,535,189) Net assets available for benefits, beginning of year 373,720, ,255,450. Net assets available for benefits, end of year $ 422,608,414. $ 373,720,261. See accompanying notes to the financial statements.

25 Pension Plan For CUPE Employees Of New Brunswick Hospitals Notes to the Financial Statements December 31, Description of Plan The following description of the Pension Plan for CUPE Employees of New Brunswick Hospitals is a summary only. For more information, reference should be made to the Plan Document. (a) General The Plan is a defined benefit pension plan covering full-time CUPE Employees of the New Brunswick Hospital sector. The benefits as defined in the pension plan may be modified from time to time by the Board of Trustees upon advice from the Plan s actuary. (b) Funding Policy Contributions are made by the Plan members and the Plan sponsor to fund the benefits determined under the Plan. The determination of the value of benefits is made on the basis of an actuarial valuation (see note 5). (c) Service pensions A member who retires at age 60 is entitled to an annual pension at retirement equal to the product of: I. the number of years of the member s pensionable service prior to January 1997, and II. the difference between: (a) (b) 2% of the annual average of the member s earnings in the period of five consecutive years during which such earnings are highest, and 0.25% of the annual average of his basic earnings (i.e., average earnings up to the YMPE) during the period referred to in (a) above; plus the product of: III. the number of years of the member s pensionable service after December 31, 1996 and the difference between: (a) 2% of the annual average of the members earnings in the period of five consecutive years during which such earnings are highest, and (b) 0.6% of the annual average of his basic earnings (i.e., average earnings up to the YMPE) during the period referred to in (a) above; Pension benefits are indexed at a flat 2% per year. A member may elect a basic pension, providing a life pension with a guarantee period of 5 years, or one of five optional forms of pensions being: 1) life pension with no guarantee period; 2) life pension with guarantee period of 10 years; 3) joint life and last survivor pension at 50%; 4) joint life and last survivor pension at 66 2/3%; 5) joint life and last survivor at 100%. Normal retirement age is 65. Unreduced pension benefits are available at age 60 with 5 years of continuous employment. Reduced benefits are available at age 55 with 5 years of continuous employment. A member who elects to take an early retirement will also receive a temporary bridging benefit payable to age 65 equal to $18 per month per year of pensionable service.

26 Pension Plan For CUPE Employees Of New Brunswick Hospitals Notes to the Financial Statements December 31, Description of Plan (Continued) (d) Disability pensions A disability pension is not provided for under the terms of the Plan Agreement. (e) Death benefits If a member dies prior to retirement and before completing 5 years continuous employment, the benefit payable to his beneficiary or estate is a refund of all contributions made by the member with accumulated interest. If a member dies prior to retirement and has completed 5 or more years of continuous employment, the beneficiary or estate shall be paid the Commuted Value. The Commuted Value is, as at the date of the member s death, the deferred pension to which the member would have been entitled had the member s continuous employment terminated just prior to their death. In addition, excess contributions (if applicable) to which the member would have been entitled would be refunded to the designated beneficiary or estate. If a member dies after retirement, the death benefit payable is determined in accordance with the provisions of the form of pension selected by the member. (f) Benefits on termination A member who has less than five years of continuous employment and is terminated is entitled to a refund of contributions made to the Plan with accumulated interest. Currently, a member with more than 5 years continuous employment who is terminated may elect to receive a deferred pension commencing as early as age 55 or an amount equal to the Commuted Value of the pension benefit as at the date of the member s termination. In addition, excess contributions (if applicable) to which the member is entitled shall be refunded to the member in cash or transferred to a non-locked in RRSP should sufficient RRSP room be available. The Commuted Value of the pension benefit is to be transferred on a locked-in basis to any registered retirement savings arrangement where the transfer is allowed under the Pension Benefits Act. Effective January 1, 2009, members who terminate their employment and are immediately eligible to receive a monthly pension benefit will no longer have the option of receiving a transfer of the commuted value of their pension. (g) Income taxes The Plan is a Registered Pension Plan as defined in the Income Tax Act and is not subject to taxes on income.

27 Pension Plan For CUPE Employees Of New Brunswick Hospitals Notes to the Financial Statements December 31, Summary of significant accounting policies (a) Basis of presentation These financial statements are prepared on the basis of accounting principles applicable to a going concern and present the aggregate financial position of the Plan as a financial reporting entity independent of the plan sponsors and plan members. The application of the going concern concept is dependent upon the Plan s continued ability to receive sufficient pension contributions and obtain sufficient investment returns to cover the Plan s unfunded liability. If the pension contributions and investment returns are not sufficient to cover the Plan s unfunded liability, management may need to recommend either an increase in contributions or a reduction in benefits sufficient to allow the Plan to operate on a sound financial basis with the funds available. These financial statements are prepared to assist plan members and others in reviewing the activities of the Plan for the fiscal period but they do not portray the funding requirements of the Plan or the benefit security of individual plan members. (b) Investments All investments are recorded as of settlement date. Investments are carried at fair value. The fair value of instruments is based on closing market quotations as of December 31. (c) Foreign currency translation Investments in equities denominated in foreign currencies are translated to Canadian dollars at the rate of exchange in effect at the date of the statement of net assets available for benefits. (d) Pension Contributions Contributions from Members and the Hospitals are recorded in the period that payroll deductions are made; and accrued up to year-end for payroll periods that extend to the subsequent fiscal year. (e) Use of estimates In preparing the Plan s financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the period. Significant estimates in these financial statements include accrued pension benefits liability and certain disclosures respecting fair value of investments, investment risk and related sensitivity analysis. Actual results could differ from these estimates.

28 Pension Plan For CUPE Employees Of New Brunswick Hospitals Notes to the Financial Statements December 31, Change in accounting policies Current year changes Financial instruments presentation and disclosure On January 1, 2008, the Plan adopted the provisions of CICA Handbook Section 3862, Financial Instruments Disclosures. In 2009, the Plan adopted the amendments to this section which require the classification of financial assets and financial liabilities into one of three levels using a fair value hierarchy based on the methods and inputs used to measure the fair value. These disclosures are included in Note Investments Investments are classified in a hierarchy of three levels depending on the inputs used to determine fair value. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs used in determining the fair value. If different levels of inputs are used to measure the fair value of an investment, the classification is based on the lowest level input used. The three levels of the fair value hierarchy are as follows: Level 1 quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs other than quoted prices included in Level 1 that are observable for the assets or liabilities, either directly or indirectly; and Level 3 inputs for the assets or liabilities that are not based on observable market data. The following fair value hierarchy table presents the Plan s assets, excluding short term investments, measured at fair value on a recurring basis as of December 31, 2009: Total ($ millions) Level 1 Level 2 Level 3 Fair value Fixed income $ 65.0 $ $ - $ Canadian equities Foreign equities Total $ $ $ - $ Funding policy In October 1999 the payment of $58.5 million was made by the Province of New Brunswick to the Pension Plan for CUPE Employees of New Brunswick Hospitals. $48.5 million of the total was considered a deemed contribution by the Province. The balance will accrue interest at the rate of return of the Fund and be reduced by amounts deemed to have been contributed by the Province as employer contributions. Effective January 1, 2005, the employer contribution rate used in the calculation is 4.79% of the earnings of plan members. This deemed remittance shall continue until the Actuary determines that the current value of the $48.5 million has been exhausted by the deemed contributions from the Province. Until that time, the Province will be considered on a contribution holiday. Note the exception below.

29 Pension Plan For CUPE Employees Of New Brunswick Hospitals Notes to the Financial Statements December 31, Funding policy (continued) In accordance with the agreement entered into on September 23, 1999, the Board must account separately for all monies deemed to be received by the Fund from the Province for the contribution holiday Balance, beginning of year $ 24,830,532. $ 28,885,814. Allocation of investment income 4,006,620. (3,982,184) Deemed employer contributions paid (71,134) (73,098) Balance, end of year $ 28,766,018 $ 24,830,532. As a result of the January 1, 2005 actuarial valuation for funding purposes, which disclosed an unfunded liability of $52,988,600, an agreement was reached between CUPE, represented by the Council of Hospital Unions and CUPE Local 1252 and the Province of New Brunswick represented by Board of Management ( the Parties ) to amend the funding provision until the signing of the next collective agreement (the collective agreement at the time expired on June 30, 2007). Until that time, the employers contribution holiday was suspended. However, earnings equivalent to the rate of the investment gain or loss on fund assets continued to accrue on the balance. In addition, the employer began making cash contributions into the fund on the first full pay period on or after April 1, 2006 equal to 6.17% of employee earnings. A new collective agreement was signed on September 24, 2008, and the Parties further agreed to continue with the amendments until the signing of the next collective agreement (current collective agreement to expire on June 30, 2011). The most recent actuarial valuation for funding purposes was prepared by Morneau Sobeco as of January 1, This valuation disclosed an unfunded liability of $213,325, Risk management In the normal course of business, the Plan is exposed to a variety of financial risks: credit risk, interest rate risk, currency risk, liquidity risk, and other price risk. The value of investments within the Plan s portfolio can fluctuate on a daily basis as a result of changes in interest rates, economic conditions and market news related to specific securities within the Plan. The level of risk depends on the Plan s investment objectives and the type of securities it invests in. For all of the risks noted below, there has been no change in how the Plan manages those risks from the previous year. Credit risk Credit risk is the risk that the counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with a Plan. Where the Plan invests in debt instruments, this represents the main concentration of credit risk. The market value of debt instruments includes consideration of the credit worthiness of the issuer, and accordingly, represents the maximum credit risk exposure of the Plan. All transactions executed by a Plan in listed securities are settled/paid for upon delivery using approved brokers.

30 Pension Plan For CUPE Employees Of New Brunswick Hospitals Notes to the Financial Statements December 31, Risk management (continued) The risk of default is considered minimal, as delivery of securities sold is only made once the broker has received payment. Payment is made on a purchase once the securities have been received by the broker. The trade will fail if either party fails to meet its obligation. As at December 31, 2008, the Plan invested in debt instruments with the following credit ratings: Debt instrument by credit rating Percentage of total debt instruments AAA 40.09% 44.98% AA 19.97% 19.45% A 29.49% 28.63% BBB 8.91% 6.67% BB 0.19% 0.27% Less than BB and non-rated 1.35% - Credit ratings are obtained from Standard & Poor s, Moody s, Fitch or Dominion Bond Rating Services. Where one or more rating is obtained for a security, the lowest rating has been used. Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or fair values of financial instruments. Interest rate risk arises when the Plan invests in interest-bearing financial instruments. The Plan is exposed to the risk that the value of such financial instruments will fluctuate due to changes in the prevailing levels of market interest rates. As at December 31, 2009, the Plan s exposure to debt instruments by maturity and the impact on net assets had the yield curve shifted in parallel by 25 basis points with all other variables held constant ( sensitivity analysis ), is as follows: Debt instrument by maturity date Less than 1 year $ 13,745,453 $ 13,506, years 37,923,325 58,970,687 Greater than 5 years 132,128,462 96,770,361 $ 183,797,240 $ 169,247,240 Sensitivity $ 2,776,677 $ 2,484,885 In practice actual trading results may differ from the above sensitivity analysis and the difference could be material.

31 Pension Plan For CUPE Employees Of New Brunswick Hospitals Notes to the Financial Statements December 31, Risk management (continued) Currency risk Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. Currency risk arises from financial instruments (including cash and cash equivalents) that are denominated in a currency other than Canadian dollars, which represents the functional currency of the Plan. The Plan is exposed to the following currencies: Currency Exposure ($) Percentage of Net Assets (%) Currency Exposure ($) Percentage of Net Assets (%) US Dollar 90,658, ,162, Euro 16,219, ,095, Pounds Sterling 9,047, ,029, Japanese Yen 7,147, ,200, Swiss Franc 7,094, ,410, Other 10,624, ,632, This amount is based on the market value of the Plan s financial instruments. Other financial assets and financial liabilities that are denominated in foreign currencies do not expose the Plan to significant currency risk. As at December 31, 2009, if the Canadian dollar strengthened or weakened by 1% in relation to the respective exchange rates, with all other variables held constant, net assets would have an increase or decrease, respectively, of approximately $1,407,913 ( $1,145,304). In practice actual trading results may differ from the above sensitivity analysis and the difference could be material. Liquidity risk Liquidity risk is the risk that the plan does not have adequate liquid resources to meet its present payment demands and to purchase investments in a timely and cost-efficient manner. Liquidity risk is a normal part of Plan operations but can be heightened by market events or investment specific circumstances. The liquidity position of the Plan is monitored on an ongoing basis. Other price risk Other price risk is the risk that the market value or future cash flows of financial instruments will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk). All investments represent a risk of loss of capital. The portfolio manager of the portfolio moderates this risk through a careful selection and diversification of securities and other financial instruments within the limits of the Plan s investment objectives and strategy. The maximum risk resulting from financial instruments is determined by the market value of the financial instruments.

32 Pension Plan For CUPE Employees Of New Brunswick Hospitals Notes to the Financial Statements December 31, Risk management (continued) The Plan s overall market positions are monitored on a daily basis by the portfolio manager. Financial instruments held by the Plan are susceptible to market price risk arising from uncertainties about future prices of the instruments. The statement of accrued pension benefits and net asset available for benefits classifies securities by market segment. The impact on net assets of the Plan due to a 1 percent change in the benchmark, with all other variables held constant as at December 31, 2009 is estimated to be 0.9% $3.8 million ( % or $3.0 million). For the purpose of this calculation, historical portfolio returns were compared to the historical index return of an average asset mix commitment. The historical results may not be representative of the future results, and accordingly the impact on net assets could be materially different. 7. Capital management The Plan employs a capital management plan, a Statement of Investment Policies and Goals ( SIP&G ) that is reviewed annually by the Board of Trustees. The SIP&G formulates investment principles and guidelines which are appropriate to the needs and objectives of the pension plan. The overall objectives in investing the assets of the Plan are to preserve and enhance the value of capital through adequate diversification in high quality investments and achieve the highest investment return that can be obtained with the assumption of an acceptable degree of risk. The SIP&G s investment guidelines outline that the Plan s assets shall be invested in fixed income and equity securities in such proportions as may be established from time to time by the Trustees. The Plan s investment in equities, bonds and short term securities shall be diversified by industry group and by individual companies. The Plan s investment in income or unit trusts and similar investment instruments is limited to those securities that are listed on a recognizable stock exchange and are resident in jurisdictions that provide limited liability to unit holders. The fund manager shall have complete freedom in determining the asset mix of the fund, subject to 17% - 40% investment in Canadian equities, 11% - 25% in US equities, 6% - 14% in International equities, 32% - 52% in bonds, and 1% - 9% in cash and short term limitation guidelines. There has been no significant change to the SIP&G during the year ended December 31, Obligation for Pension Benefit The present value of accrued pension benefits was determined using the projected unit credit method prorated on services and actuarial assumptions which reflect management s best estimate for the future. An actuarial valuation was made as of January 1, 2009 by Morneau Sobeco, a firm of consulting actuaries, and was then extrapolated to December 31, 2009.

33 Pension Plan For CUPE Employees Of New Brunswick Hospitals Notes to the Financial Statements December 31, Obligation for Pension Benefit (continued) Significant long-term assumptions used in the valuation are: Long-term Assumptions Interest 6.60% Salary increases Pre % % Post % Inflation 2.50% Pensioner cost of living increases 2.00% The actuarial present value of benefits as at December 31, 2009 and the principal components of changes in actuarial present values during the year are presented below: Actuarial present value of accrued pension benefit at beginning of year $ 576,676,000. $ 552,143,000. Experience loss due to change in assumptions and membership demographics 10,370, Contributions.23,779, ,462,000. Net interest accrued on benefits 38,417, ,061,000. Benefits paid (33,733,000) (33,990,000) Actuarial present value of accrued pension benefit at end of year $ 615,509,000. $ 576,676, Investment in Plan Sponsor As at December 31, 2009, $1,986,739 ( $1,673,548) of the Plan s assets consisted of Province of New Brunswick securities. 10. Subsequent event Subsequent to year end, the Parties (note 5) have been advised by the actuary that current Plan benefits are not sustainable in the long term at the current contribution level. Discussions between the Parties on possible solutions are ongoing. Revised arrangements are forecasted to be finalized in

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35 APPENDIX B ACTUARIAL OPINION

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37 Actuarial Opinion This actuarial opinion is in respect of the Pension Plan for CUPE Employees of New Brunswick Hospitals (the Plan ). The valuation thereof was performed as at January 1, 2009, based on the Plan provisions and data as at that date. We have confirmed with the Employer that after January 1, 2009 and before the date of this report, there were no modifications nor any extraordinary changes to the membership which would materially affect the results of this actuarial valuation. In my opinion, as at January 1, 2009: a. The Plan has a funding deficiency on a going-concern basis. The actuarial liabilities exceed the actuarial value of assets by $213,325,500 on a going-concern basis before considering the effect of the contribution holiday reserve. b. According to a solvency test, the Plan has a solvency deficiency of $443,232,500; that is, the value of Plan assets would be less than the actuarial liability by that amount if the Plan had been wound up on the valuation date and benefits paid out in accordance with the Canadian Institute of Actuaries prescribed solvency basis. c. The annual cost of benefits accruing in respect of service for the year ending December 31, 2009 is estimated to be $24,600,300 or 11.62% of covered payroll. Employee contributions which average 6.17% of earnings are estimated to be $13,064,600 and are currently matched by the employer leaving an excess of $1,528,900 or (0.72%) of covered payroll over the required contributions to cover normal cost. These contributions are compatible with the requirements of the Income Tax Act (Canada) for the deductibility of contributions. d. The cost of benefits accruing in respect of service in the years ending December 31, 2010 and December 31, 2011 is estimated to be 11.62% of covered payroll, in the absence of any Plan changes. e. In the absence of benefit changes and/or changes in the funding arrangement, additional special past service funding payments should be made to address the Plan s unfunded liability over a reasonable period. Special payments of 8.75% of payroll in addition to the regular employer and employee contributions would be required to amortize the going-concern unfunded liability over a period of 15 years. In my opinion: a) The data on which the valuation is based are sufficient and reliable for the purposes of the valuation. b) The assumptions used are, in aggregate, appropriate for the purposes of the valuation. c) The methods employed in the valuation are appropriate for the purposes of the valuation This report has been prepared, and my opinion given, in accordance with accepted actuarial practice. The assumptions that form each actuarial basis used in the report were reasonable at the time this actuarial valuation report was prepared and contributions were determined. The calculations in the actuarial valuation report have been prepared in accordance with Subparagraphs 147.2(2) (a) of the Income Tax Act.

38 Actuarial Opinion The recommendations and opinions are given exclusively from a financial viewpoint. This valuation report does not constitute a legal opinion on the rights or duties of the Plan administrator, the Employer or the members over the pension funds. Actuarial valuations are performed based on assumptions and methods that are in accordance with sound actuarial principles. Emerging experience differing from these assumptions may result in gains or losses, which may affect future contribution levels. These will be revealed in future actuarial valuations. The next actuarial valuation must be performed no later than January 1, Conrad Ferguson, F.C.I.A Plan Actuary Morneau Sobeco