NEWFOUNDLAND AND LABRADOR TEACHERS ASSOCIATION

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2 2 THANK Main Types YOU of Workplace Pension Plans Defined THANK Contribution YOU (DC) Similar to an RRSP Defined Contribution (DC) Employee and employer contributions plus investment earnings accumulate to provide pension income upon retirement. Defined Benefit (DB) Employer incurs no liabilities except the level of the defined contribution. Investment risk is borne by employees. 1 2 Defined THANK Contribution YOU (DC) Defined THANK Benefit YOU (DB) Future pension benefit is unknown and based on whatever dollar amount is accumulated at retirement. Typically, a DB plan is employer sponsored and promises a specified guaranteed monthly benefit on retirement that is predetermined by a formula. Often an individual will obtain retirement income by using the funds to purchase an annuity from an insurance company either at retirement or thereafter. Example GMPP (substitute teacher plan) The formula is usually based on the employee s earnings history, tenure of service and age, regardless of individual investment returns. Defined in the sense that the benefit formula is defined and known in advance. Plan sponsor assumes the risk. 3 4 Current THANK Teachers YOU Pension Plan (TPP) Major Features of Current TPP Is a defined benefit (DB) pension plan. A statutory plan established by legislation. Changes are made through legislation. Government is the sole sponsor and trustee. Under the collective agreement Government has agreed not to change any benefit provisions without NLTA consent. Accrual of 2% per year of service Benefit defined is based on total accrual (%) times the average annual five-year salary at the time of retirement Example: teacher with 30 years of pension service with $80,000 5 year average annual salary Annual Defined Benefit: (30 years x 2%) x ($80,000) = $48,000 Paid by Government regardless of funding level 5 6 1

3 Major Features of Current TPP Major Features of Current TPP Integrated with CPP, with bridge benefit paid by TPP from retirement to age 65 TPP is reduced at age 65 Partially indexed at age 65 max 1.2% per year Survivor benefit of 60% Eligible to receive pension: After 30 years of worked pension service OR At age 55 with at least 25 years of pension service OR At age 60 with at least 5 years pension service 7 8 How are DB Plans Funded How are DB Plans Funded Contributions + + FUND Investment returns Pensions Expenses DEFINITIONS Assets The total value of all monies in the Fund at the valuation date. Liabilities The present value (i.e. in today s dollars) of all pensions owing to all active and inactive (retired or deferred pensioners) plan members. Based on a number of assumptions re future experience of the plan. Funded ratio Assets divided by Liabilities THANK Current YOU TPP TPP - THANK as of June YOU 30, 2014 CONTRIBUTIONS INVESTMENT RETURNS Employee 9.35% of salary 1 yr 5 yr 10 yr 20 yr 23.69% 11.65% 7.99% 8.97% Employer 9.35% of salary

4 Every 3 years an Actuarial Valuation is undertaken to determine the funded ratio and if there are sufficient projected assets to meet the projected liabilities. Valuation is based on assumptions: Return on investments Mortality (i.e. longevity) Retirement Age Salary increases Inflation TPP Funding Rate of indexing Family composition Disability TPP Valuation Results August 31, 2012 Market Value of Assets $2,286,180,000 Actuarial Liability $4,354,640,000 Funding excess (unfunded liability) ($2,068,460,000) Funded Ratio 52.5% The most recent valuation was at August 31, Teachers Pension Plan Funded Status TPP Projected Unfunded Liability (based on August 31, 2012 Actuarial ValuaIon) Funded Status ( ) % 100 8,000 60% $ Billions % $2.4B $3.1B % Funded Ratio Unfunded Liability Net Assets Funded Ratio 7,000 6,000 5,000 4,000 3,000 50% 40% 30% 20% Assets UFL Funded Ratio Vola%le investment performance over the past 5 years, par%cularly in 2008, has significantly impacted asset growth 2,000 1,000 10% Source: Audited Financial Statements of the NL Pooled Pension Fund for years ending December % 15 TPP THANK Funding YOU Estimate June 2014 Demographics of the TPP August 31, 2012 Market Value TPP Assets Projected Liabilities $2.96B $4.85B Membership: Actives Deferred Pensioners Total 6, ,365 15,017 Funded ratio approximately 61% % Average Age Annual Average Active 41% 41.8 $78,123 Retired 59% 66.1 $27, retired teachers over 80 years old 17 $227 Million paid in teacher pensions in

5 Government s THANK Perspective YOU Why pension reform is necessary? To ensure all pension plans are sustainable for employees, retirees and all taxpayers To address significant growing unfunded liability in pensions and other post-employment benefits : estimated 74% of total net debt : estimated 85% of total net debt $373M pension interest expense ( ) Special Payments Years PSPP TPP Total ,397 2,290 3,687 Total 1,622 2,850 4,472 Despite nearly $4.5B dollars of special payments to the Plans over the last 15 years ($800M to 2003 and $3.7B since 2004), the outstanding unfunded liability remains significant at an estimated $5.0B (as of December 31, 2012) Government s THANK Perspective YOU Since , the unfunded liability has increased, such that, at March 31, 2013, the total unfunded liability is now greater than it was at March 31, 2005, despite in excess of $3.6 billion in special payments over that period. This reflects the inherent volatility related to this unfunded liability and the risks borne by the taxpayers of the Province for the retirement benefits of public employees. Auditor General s 2013 Report on the Audit of the Financial Statements of the Province Pension Reform Across Canada Every teacher pension plan in Canada excluding Quebec and NL has undergone some measure of pension reform Legislation anticipated in Quebec Reforms have ranged from joint trusteeship to shared risk and target benefit plans Examples of Recent Reform in Atlantic Canada Examples of Recent Reform in Atlantic Canada PEITF Legislation January 2014 DB plan became a target benefit plan Eligibility to retire increased by 2 years Career Averaging (enhanced) replaced best 5 year average Premium rates increased Conditional indexing introduced for both actives and retireds Special payments made by Government NBTPP Legislation July 1, 2014 DB plan became a target benefit plan Eligibility to retire increased by 2 years for new members, but current members get less if they retire under old rules Career Averaging (enhanced) replaced best 5 year average Premium rates increased Indexing reduced both actives and retireds Plan was over 90% funded at time of reform. Greater detail found in June 2014 Pension Issue of The Bulletin 23 Greater detail found in June 2014 Pension Issue of The Bulletin 24 4

6 Government Perspective on Reform Process Dec 2012 Compromise and cooperation will be required to create sustainable pension plans and other post retirement benefits. The Premier and the current Minister are willing to engage at this time to attempt to make these plans sustainable. Government has legal avenues to act unilaterally to reduce benefits and/or remove the Government guarantee but would much prefer not to. Government making significant additional special contributions will require compromise. NLTA THANK Obligation YOU The NLTA Collective Agreement (since 1991) states: Government and teachers acknowledge that there remains an unfunded liability in the Pension Plan after implementation of these measures. Government agrees to accept full responsibility for the unfunded liability of the TPP incurred up to 31 August 1990, including all carrying costs related to that liability. All new unfunded liabilities incurred after that date, including that related to the early retirement provision under TAPP, shall be shared equally between Government and teachers THANK NLTA Steps YOU Reform THANK Process YOU To Date Agreement to participate in discussions Hired an independent actuarial consultant (Robert Blais) Utilizing legal expertise (O Dea/Earle) Contracted with Eckler to run scenarios on a confidential basis independent of government modeling 27 Reviewed financial status of the TPP and PSPP (Dec 2012) Mercer, an actuarial consulting firm, prepared and provided a historical report on the NL Unfunded Pension Liability (Sept 2013) Reviewed best practices for pension governance (Sept 2013) Reviewed other plan pension governance and investment structures including joint trusteeship - OTPP and NS Pension Corp (Sept 2013) - NB Investment Management Corp (Nov 2013) Reviewed actions in other jurisdictions to address pension funding issues (Nov 2013) 28 Reform THANK Process YOU To Date Alternative Options to THANK Current YOU Plans Eckler Limited, an actuarial consulting firm, has been engaged to facilitate real-time modeling and scenario analyses of pension plan changes including changes to: - Benefit formulas: accrual rates, average earnings and indexing - Pension eligibility; - Contribution rates; and - Discount rate and asset mix. Modeling will illustrate the magnitude of the effect of any changes to the plans on funding levels. External legal counsel with expertise in pensions and labour relations has been engaged 29 Defined Contribution Plan Shared Risk Model Target Benefit Jointly Sponsored Pension Plans (See glossary at back of handout) 30 5

7 Separate Talks Required for TPP and PSPP TPP THANK Discussions YOU Discussions with Government turn to features and funding of individual plans separate discussions for TPP and PSPP NLTA and Government establish basic principles for discussions to continue Both parties commit to sustainable DB plan Government principles for talks: - reduction of Government pension debt - joint trusteeship to share risk TPP THANK Discussions YOU Status THANK - TPP Discussions YOU NLTA principles for talks to continue: Government take sole responsibility for current unfunded liability of retirees Joint trusteeship contingent on expectation of being fully funded Future risk must be at acceptable level Career averaging not part of deal No requirement of any deal with PSPP to be the deal for the TPP NLTA requires further information and detail from Eckler Agreement that NLTA s actuary will meet with Eckler to validate model and review scenarios Review being completed, but no firm dates for future talks established PSPP Agreement PSPP THANK Agreement YOU GNL Commitments: Government provides the PSPP with a promissory note of $2.685 billion Current retirees pensions not impacted Defined benefit plan maintained A transition period provided Accrued pension benefits protected Government agreed to pay 100% of the current unfunded liability for the retireds, and 50% of the unfunded liability associated with the actives ($2.685 B). The active public sector plan members were required to take responsibility for 50% of the current unfunded liability of the active members ($1.128 B)

8 PSPP THANK Agreement YOU PSPP THANK Agreement YOU Contribution Rates Increase Range of 2.15% % according to income level Unreduced Early Retirement From: Age 55 with minimum 30 years service To: Age 58 with minimum 30 years service From: Age 60 with minimum 5 years service To: Age 60 with minimum 10 years service 5 year transition Reduced Early Retirement From: Age (minimum 55) + Years of Service equal 85 or Age 50 with 30 years service or Age 55 with 5 years service To: Age 53 with 30 years service or Age 59 with 29 years service or Age 55 with 5 years service 5 year transition PSPP Agreement PSPP Agreement Pension Calculation Formula Best Average Earnings (BAE) 5 years to Best Average Earnings 6 years Plan governed by Joint Trustee - Jointly sponsored - Expert Board of Directors Indexing Indexing on future service suspended (no impact on current retirees) - Actuarial surpluses and deficits equally shared PSPP Agreement Funded THANK Ratio YOU (median) Creation of an independent corporation to oversee and manage the Fund Legislative Act to establish Sponsors to be responsible for future plan design changes Framework and Funding Policy TBD Current PSPP Reformed PSPP 5 years 61% 5 years 69% 15 years 57% 15 years 99% 30 years 53% 30 years 163% Current PSPP probability of being fully funded in 30 years 24% Reformed PSPP probability of being fully funded in 30 years 84%

9 43 44 Hurdles THANK for YOU TPP Talks Hurdles THANK for YOU TPP Talks Demographics Retiree life expectancy has been rising at about 1 year per decade. Mortality improvements are projected to increase liabilities by $500M Maturity of plan with 1.6 retireds minor changes for actives don t have big impact on whole plan Investment assumptions Pension plan heavily invested in equities which creates high risk and unacceptable volatility. Changing asset mix to lower risk means lowering the return assumption, called the Discount Rate. Lower discount rates increasing pension liabilities. 1.0% decrease in discount rate increases liabilities by about $500M Hurdles THANK for YOU TPP Talks Hurdles THANK for YOU TPP Talks Final average earnings Premiums paid on salary during career but pension paid on final average earnings (best 5 year average). Unfunded liability occurs when significant increase in income occurs later in career such as certificate upgrades or administrative positions. Future risk If we are to make the TPP sustainable for future generations, then we must minimize the risk that further deficits will occur

10 THANK Conclusions YOU THANK Conclusions YOU Either this Government or the next Government will reform the TPP. Better to participate in the discussion. To achieve long term sustainability, a major infusion of money by Government is necessary, but unlikely to occur without contribution from teachers. Teacher contribution is limited to increases in premium and changes to benefits and/or plan design paying more, working longer, getting less Future THANK Negotiations YOU Future THANK Negotiations YOU What must be determined through negotiations: How much does Government pay? How much more do we pay? How much longer do we work? How much less do we get? WHO is paying more, working longer, and receiving less? How do we handle future risk of things going bad? Goal: To ensure the sustainability of a defined benefit pension plan for current teachers and future generations of teachers

11 Relevant Pension Terminology Discount rate the rate used to discount future liabilities of a defined benefit pension plan in order to calculate the present value of the liabilities. The discount rate in the TPP is intended to be correlated with the rate of return on investments expected on the actual assets of the plan. Governance When referring to a pension plan, governance describes who is responsible for the operation and sound management of a pension plan, including administration and funding, as well as the management of plan assets. Fiduciary An individual or group with the legal authority and duty to make prudent decisions regarding financial matters on behalf of another party. Sponsors The sponsors are those that establish the terms of a pension plan, arrange for its administration, and bear the costs and the risks. Trustee The individual or group that is ultimately responsible for administration of the pension plan and investment management of plan assets. Types of Pension Plans Defined Benefit Plans (DB) Example The NL Teachers Pension Plan (TPP) Typical Features: Employer sponsored and promises a specified guaranteed monthly benefit on retirement that is predetermined by a formula based on the employee s earnings history, tenure of service and age, regardless of individual investment returns. Defined in the sense that the benefit formula is defined and known in advance. The pension benefit is independent of contributions or investment returns. Employer and employee contributions are placed in a fund and invested. Designed such that the fund is sufficient to pay the pension promise. Typical expectation is that 70% of pension payout comes from investment with 30% from contributions. Pension sponsor responsible for shortfall referred to as unfunded liability. Pension payout begins at a point triggered by age or service or some combination. Defined Contribution Plans Example RRSP Employee and employer contributions plus earnings accumulate to provide pension income upon retirement. Employer incurs no liabilities except the level of contributions negotiated with the employee. Cost of pension is known; ultimate pension is unknown. Investment risk is borne by employees. Often an individual will obtain retirement income by using the funds to purchase an annuity from an insurance company either at retirement or thereafter. Recent Hybrid Plans a) Shared Risk Plans (SRP) Example: New Brunswick Model in place for NB Nurses SRP is a jointly sponsored structure where all stakeholders share in risks and rewards. Future benefits not guaranteed; potential for benefits to increase and decrease based on funded status. Heavily focused on security and risk management. Adequate contributions and firm rules to guide management of surpluses and deficits. Future benefits based on career average earnings. Pre and post retirement indexing contingent on funded status. b) Target Benefit Plans Example: New Brunswick Teachers Plan General concept is that employer has fixed contribution with the expectation that the benefits will be sufficiently funded. Flexibility is built in as benefits can be adjusted in accordance with funding levels. Seen as a hybrid between traditional defined benefit and defined contribution plans. Sole Sponsorship One party sponsors the plan and is the sole trustee with legal responsibility for the plan under the applicable legislation. In the case of the TPP, Government is currently the sole sponsor.