Simon Fraser University Pension Plan for Administrative/Union Staff

Transcription

1 Actuarial Report on the Simon Fraser University Pension Plan for Administrative/Union Staff as at 31 December 2010 Vancouver, B.C. September 13, 2011

2 Contents Highlights and Actuarial Opinion... 1 Appendix A Summary of Plan and Amendments... 6 Appendix B Membership Data Appendix C Operation of the Fund Appendix D Actuarial Basis and Assumptions Appendix E Going Concern Valuation Balance Sheet Appendix F Costs For Future Service Appendix G Hypothetical Wind-up/Solvency Valuation Balance Sheet Appendix H Recommended Contributions Appendix I B. C. Cost Certificate... 39

3 1 The Trustees, Simon Fraser University Pension Plan for Administrative/Union Staff Highlights and Actuarial Opinion We have completed an actuarial valuation of the Simon Fraser University Pension Plan for Administrative/Union Staff (the Plan ) as at 31 December 2010 for the following purposes: 1. To report on the financial position of the Simon Fraser University Pension Plan for Administrative/Union Staff ( the Plan ) as at 31 December 2010; 2. To determine the contribution requirements for the period from 1 January 2011 until the results of the next valuation are available, for which the effective date must be no later than 31 December 2013; 3. To provide the actuarial certifications required under the B.C. Pension Benefits Standards Act and the federal Income Tax Act; 4. To determine the excess surplus, if any, to be allocated to plan members. The intended users of this report are the Trustees, Simon Fraser University, the Financial Institutions Commission of British Columbia (FICOM) and Canada Revenue Agency. This report is not intended or necessarily suitable for purposes other than those listed above. Changes in Benefits and Assumptions since the Last Valuation The last valuation was prepared by us as at 31 December The Plan benefits are unchanged from the previous valuation. The going concern actuarial assumptions were reviewed, and in light of the current long-term expectation of salary increases and inflation, the inflation assumption was increased to 2.5% per annum from 2.25% per annum used in the previous valuation, and the rate of increase to salaries for seniority was decreased to 0.5% per annum from 1.0% per annum used in the previous valuation. As a result of these changes, the salary increase assumption was decreased to 3.5% per annum from 3.75% used in the previous valuation (reflecting inflation plus seniority), the assumed increase to the Year s Maximum Pensionable Earnings ( YMPE ) was increased to 3.0% per annum from 2.5% per annum used in the previous valuation and the assumed increase to the maximum Income Tax Act pension was increased to 3.0% per annum from 2.75% per annum used in the previous valuation.

4 valuation 2007 valuation 1. Investment return 6.0% 6.00% 2. General salary increase rate 3.0% 2.75% 3. Seniority salary increase 0.5% 1.00% 4. Underlying CPI 2.5% 2.25% 5. Post-retirement indexing 2.5% 2.25% 6. Implied real investment return = % 3.75% 7. Implied real salary increase = % 0.50% In addition, an allowance was added to the going concern normal cost to allow for an estimate of the impact of retirees who elect a commuted value instead of a pension. See Appendix D for details on these and other assumptions used in this valuation and Appendix E for the impact of the changes in assumptions on the valuation results. The solvency assumptions were changed to reflect changes in the prescribed solvency basis since the last valuation, as well as to reflect market conditions as at the valuation date. These are summarized in Appendix D, and the solvency valuation results are set out in Appendix G. Summary of Results The 2007 valuation showed a going concern surplus of $104,000 using the smoothed value of assets. The current results indicate that the going concern surplus has become a deficit of $16,352,000 on a smoothed value basis. The change from a surplus position to a deficit position in the three year period is the net result of a number of items, the major ones being investment earnings below the rates assumed in the last valuation, changes in the economic assumptions, and losses on commuted value payouts offset by gains from salary increases below the rate assumed in the last valuation. More detail is given in Appendix E. The $16,352,000 deficit increases to a deficit of $21,504,000 if assets are taken at market value rather than at their smoothed value. The University and the Employee Organizations have agreed that surplus, as disclosed by an actuarial valuation, that is in excess of 15% of the liabilities be distributed to members. For this purpose the determination of surplus is to be based on asset market values. It does not necessarily follow that the liabilities calculated for surplus distribution purposes need to be the same as those used for the regular going concern valuation; nevertheless, for previous valuations the Trustees have agreed that the same liabilities should be used for determining the surplus allocations; the same approach has been continued in this valuation. The defined-benefit liabilities (i.e. excluding the money-purchase liabilities) calculated for this valuation are $217,505,000 (see Appendix E); 15% of this amount is $32,626,000. The revised deficit

5 3 calculated using the market value of assets is $21,504,000 and there is therefore no surplus, no surplus in excess of the 15% liability threshold and thus no excess surplus is available to be distributed to the members pursuant to the agreement between the parties and in accordance with Section 21 of the plan text. The valuation also indicates that the benefits expected to be earned for service in 2011 and subsequent years require employer contributions of 14.21% of active payroll or 13.9% of active payroll plus disabled payroll. This compares with a current service cost rate of 12.93% (or 12.69% if disabled payroll is included) determined at the previous valuation. The increase is primarily due to the addition of an allowance for commuted value losses. Changes in assumptions and membership profile have also increased the service cost. Further detail is given in Appendix F. In addition to the contribution required to finance currently accruing benefits, the going concern deficiency at 31 December 2010 requires annual payments of $1,635,041 over fifteen years beginning in The payments toward the going concern deficiency are to be made no less frequently than quarterly. The 2010 solvency valuation showed an excess of solvency liabilities over solvency assets of $64,023,000, compared to a solvency deficiency of $21,722,000 at the 2007 valuation. The change in the solvency position is due primarily to investment earnings below the rates assumed in the last valuation, the change in the prescribed discount rate and a net contribution loss. More detail is given in Appendix G. In the absence of other arrangements (described below), the solvency deficiency requires annual payments of $10,357,618 over five years beginning in 2011, which is in addition to the annual payments of $4,855,429 for a further two years to the end of 2012 that resulted from the 2007 solvency deficiency. These payments are also to be made no less frequently than quarterly. Instead of making the solvency payments described in the preceding paragraph, the employer could utilize a provision under the British Columbia Pension Benefits Standards Act (the PBSA ) that allows the use of letters of credit to fund solvency deficiencies. Under this provision, an employer may, instead of making some or all of the required solvency deficiency payments, use or continue to use a Letter of Credit to secure those solvency deficiency payments for a particular year. The Letter of Credit must satisfy certain requirements set out in the PBSA. Under the PBSA, if a plan has a solvency deficiency, there are limits on the amounts that may be transferred out of the Plan; these are described in Appendix G. Unusual Features of the Plan There are a number of unusual features of the Plan and the agreement between the parties, and their impact on the actuarial assumptions and valuation results, that warrant further discussion. Based on discussions

6 4 with the Trustees, we understand the intention is that, to the extent this is compatible with requirements under the Income Tax Act ( ITA ): employer contributions are to be made at an annual rate which is not less than that being made for the SFU Pension Plan for Members of the Academic Staff - currently at about 10.0% of payroll for 2011; surplus within the Plan may not be used to reduce the employer current service contribution requirements, even to the desired minimum level, and even if contributions have previously been made at a higher level; and as noted earlier, surplus in excess of a contingency reserve equal to 15% of the liabilities is to be distributed to members; the 15% margin is to protect the Plan against adverse experience; to this end, the actuarial valuation basis should avoid excessive margins of conservatism so as not to understate the true surplus. Unfortunately, many of these are competing objectives and may be difficult to reconcile. Under the ITA, contribution amounts to a defined-benefit plan cannot solely be subject to determinations by either the employer or the employees; they must be pursuant to an actuarial determination, though some leeway is permitted in that determination, i.e. the parties can exercise discretion but only within a minimum and maximum range as determined by the actuary. Section 147.2(2) of the ITA also limits the contributions that may be made to a plan if surplus exceeds a certain amount - the plan becomes revocable if contributions are made when such excess surplus exists. Since the Plan has a deficit on a going concern basis as of this valuation, the employer can continue to make contributions to the Plan without regard to the ITA surplus limit. In the discussion of actuarial assumptions (in Appendix D), we comment in particular on the investment return assumption, its relationship to the salary and inflation assumptions, on asset smoothing, and the sensitivity of the emerging financial experience to commutation policies (i.e. lump-sum payouts) on early retirement and to variations in the commuted-value basis. As noted, the going concern assumptions for economic variables have been changed from the previous valuation. The sensitivity of changes in them has been examined with the Trustees and the assumptions for this valuation have been chosen in consultation with the Trustees, and reflect the considerations and objectives outlined earlier. Overall, even though the assumptions for this valuation are more conservative than those used for the previous valuation (i.e. producing "higher" liabilities and costs), we believe the assumptions remain towards the aggressive end of an acceptable range (i.e. producing "lower" liabilities and costs).

7 5 Reliance We have relied on the asset information as provided by Ernst & Young in the audited financial statements of the Plan as of December 31, 2008, 2009 and We have also relied on the administrator to provide all relevant data, additional asset information and to confirm the pertinent Plan terms. Further detail with respect to both the results of the valuation and the information and methods used for the valuation is set out in the attached appendices. Opinion In my opinion, (a) (b) (c) the data on which the valuation is based are sufficient and reliable for purposes of the valuation, the assumptions used are, in aggregate, appropriate for purposes of the valuation, and the methods employed are consistent with sound actuarial principles and are appropriate for the purposes of the valuation. To the best of my knowledge, there have been no material subsequent events that would affect the results and recommendations of this report. This report has been prepared, and my opinions given, in accordance with accepted actuarial practice in Canada. For regulatory purposes, the next valuation should be completed no later than as of 31 December I would be pleased to discuss our report with you at your convenience. Respectfully submitted, Wendy F. Harrison Fellow of the Canadian Institute of Actuaries Fellow of the Society of Actuaries September 13, 2011

8 6 Appendix A Summary of Plan and Amendments The following summary is based on the plan text dated May 24, 2000 that was approved by the Board of Governors of SFU on July 27, There have been no amendments since then. The Plan is subject to the Income Tax Act ( ITA ) and the British Columbia Pension Benefits Standards Act ( PBSA ). Effective Date The Plan became effective July 1, Eligibility Full-time employees join the Plan at the date of hire (if then under age 65), as a condition of employment. Part-time employees join after completing two years of service provided they are employed at least 28 hours bi-weekly, or if employed less than 28 hours bi-weekly after earning at least 35% of the Year s Maximum Pensionable Earnings under the Canada Pension Plan (YMPE) in each of the two immediate preceding consecutive calendar years. Contributions Members are not required to make contributions. They may, however, make voluntary contributions, as permitted under the ITA. These amounts are accumulated separately with the actual investment earnings of the fund, less expenses, and are available for transfer or to purchase additional pensions at retirement, death or termination of employment. The University contributes such amounts as are required to provide the benefits. Pursuant to a sideagreement between the parties, and provided this is not in conflict with the ITA rules, the University is obliged to contribute at a rate not less than its rate of contribution to the Academic pension plan - currently at about 10.0% of payroll during Section 6(a)(iv) of the plan text indicates that surplus within the fund may not be used to reduce University contributions. We have been advised by the Trustees that it would be appropriate for us to assume, for purposes of our valuation, that surplus may not be used to reduce the actuarially determined current service contribution requirements (provided, of course, that this does not contravene the ITA limitations). Appendix A

9 7 Service Service is credited while the employee is a member of the Plan. For purposes of calculating benefit amounts, part-time service is converted to its equivalent full-time amount. Retirement Age and Early Retirement Reductions Normal retirement is at age 65. With the consent of the University, members may continue beyond age 65, but may not defer their pension beyond the end of the calendar year in which age 69 1 is attained. Early retirement is permitted at or after age 55 (provided the member is vested), as follows: if employment terminates at ages 55 to 59 and the member s age plus credited service total 80 or more, or if employment terminates after age 60 and the member has 10 or more years of credited service, the pension is payable on an unreduced basis; if employment terminates at ages 55 to 59, with 10 or more years of service and with age plus service totalling less than 80, the pension is reduced by 5% per year for each year below the earlier of age 60 and until the rule-of-80 is reached; grow-in of both age and service is assumed, e.g. on termination at age 56 with 20 years, age + service = 76, and the rule-of-80 will be reached in 2 years, when age + service would have been = = 80, i.e. the reduction is 5% x 2 years = 10%; if employment terminates at ages 55 to 59 with less than 10 years of service, the pension is reduced by 5% for each year below age 65; if employment terminates at ages 60 to 64 with less than 10 years of service, the pension is reduced by 5% for each year below age 65 or below 10 years of service (smaller of the two reductions to apply); if employment terminates before age 55, the pension is actuarially reduced on commencement below age 65. Amount of Pension At normal retirement date, a member will receive an annual pension, payable monthly, equal to: (a) for service prior to 1990: (i) 2.13% of the member's final average earnings multiplied by the years of credited service, less (ii) 0.63% of the YMPE average multiplied by credited service after January 1, 1966, plus 1 We understand that the Plan is being administered under the current ITA rules, which allow for a maximum pensionable age at the end of the calendar year a member turns 71 (rather than 69). Appendix A

10 8 (b) for service after 1989: (i) (ii) 1.7% of final average earnings multiplied by the years of credited service, less 0.5% of the YMPE average multiplied by the years of credited service, and less (c) pension credits earned under the prior TIAA/CREF pension plan (we are advised there are no longer any offsets from this plan for active members). For purposes of the above, final average means the annualized average of the earnings during the 260 consecutive calendar weeks of highest earnings; YMPE average means the lesser of final average and the average YMPE over the three calendar years ending with the calendar year in which the member s service terminates; earnings include only the basic annual rate of salary. Pensions are limited by the maximum pension provisions of the Income Tax Act. The amounts described above, before adjustment for any early retirement reductions, are limited to the lesser of: (i) (ii) the defined benefit limit for the calendar year as defined in the Income Tax Act multiplied by the member s years of credited service; and 2% of the average of the member s best three years remuneration multiplied by the years of credited service. The defined benefit limit is currently set equal to $2,494 in 2010, $2,552 in 2011, and will be increased in accordance with an external general wage index thereafter. At the time of the previous valuation, the corresponding limit was $2,222 in 2007, $2,333 in 2008, $2,444 in 2009, and increased in accordance with an external general wage index thereafter. Pension Indexing Pensions in payment are automatically adjusted each January 1 by the increase in the consumer price index (CPI) over the 12 months ending on the immediately preceding September 1, to a maximum increase of 3% each year; pensions are not reduced if the CPI decreases, and excesses/shortfalls from the 3% cap are not carried forward to future years. On termination before retirement, the deferred vested pension is increased by a fixed 3% per year (i.e. regardless of actual changes in the CPI), from the later of the date of termination or age 45 to the earlier of age 65 or the actual retirement date (this applies only to members terminating after January 1, 1989). Appendix A

11 9 Normal and Optional Forms of Pension The normal form of pension depends on whether or not a member has a spouse (as defined under the PBSA) at termination of employment. Where there is no spouse, or where the member s spouse at actual retirement or pre-retirement death is not the same as the one at termination, the normal form of pension is payable for the lifetime of the member only. Where the spouse at retirement or pre-retirement death is the same as the spouse at termination, the normal form provides a 50% continuation to the spouse on the member's death, for the balance of the surviving spouse's lifetime. Notwithstanding the above, and pursuant to the PBSA, a retiring member with a spouse is deemed to elect the 60% optional type of pension; this option provides for an adjusted amount payable to the member, continuing to the spouse after the member s death at 60% of the initial adjusted amount. If the member wishes a form of pension that provides for less than a 60% continuation to the surviving spouse, the spouse must complete a waiver form as prescribed under the PBSA. A number of alternative optional forms are available. All optional forms are calculated on an actuarially equivalent basis. Death Before Retirement The death benefit is equal to the commuted value of the member s pension accrued to the date of death. Where there is a spouse, the benefit must be paid to the spouse (under certain prescribed forms). Death After Retirement The benefit payable will depend on the type of retirement option that the member may have elected. The normal and optional forms were discussed in a previous paragraph. Vesting and Termination of Employment Before Retirement Vesting occurs after two years of continuous service in the case of members working in positions normally eligible for overtime compensation. Vesting is immediate for other members, and at death and disability for all members. In lieu of a deferred pension, a terminating vested member is entitled to transfer the lump sum commuted value of the deferred pension in full settlement of any rights under the Plan. Commuted values in respect of benefits accrued for service after 1992 must be transferred to one of a number of prescribed locked-in arrangements. Under certain limited conditions (dealing with small benefits and/or small commuted values for service after 1992) the locking-in requirement is waived. Appendix A

12 10 Disability A member who is entitled to disability income under the University s long term disability insurance plan continues to receive service credits while disabled and until age 65 at the earnings rate in effect at the date of disability. Money-Purchase Accounts Pursuant to an agreement dated June 28, 1990 between the University and the Employee Organizations, surplus disclosed by an actuarial valuation, that is in excess of 15% of the liabilities, is to be allocated to money-purchase accounts maintained within the fund, for the members. The first such allocation was made in late 1993, on the basis of the January 1, 1992 valuation results. To the extent that allocated amounts are not transferrable within the Plan to money-purchase accounts under the ITA rules, the excesses are distributed in cash. The 1990 agreement was modified on September 17, 1997, to reduce the 15% surplus allocation threshold noted above, to 8% of liabilities, coincident with the adoption of an asset smoothing approach for the December 31, 1996 actuarial valuation. As a result of that valuation, surplus in excess of the 8% threshold, plus investment earnings thereon during 1997, was distributed in December The 1997 procedures continued in respect of the December 1997 valuation, i.e. surplus in excess of an 8% threshold, plus investment earnings thereon during 1998, was distributed in November Starting with the December 1998 valuation, the procedure has reverted to that used in 1993, namely, surplus in excess of 15% of liabilities, with assets taken at market values, is to be distributed. This resulted in a surplus distribution in There have been no distributions since then. Administration The administration of the Plan is jointly controlled by a Board of six Trustees, three of whom are nominated by the University and three are nominated by the Employee Organizations. The day-to-day administration is done by the University. Appendix A

13 11 Appendix B Membership Data The information with respect to members and pensioners as at 31 December 2010 was supplied by the plan administration office at the University. We reviewed the information and tested it against the data provided for the previous valuation and the audited financial statements. We subjected the data to a number of tests of reasonableness and consistency, including the following: a member s (and partner s as applicable) age is within a reasonable range; all dates remained unchanged from the data used in the previous actuarial valuation of the Plan (or that any changes represent corrections to the data); accrued pensions changed by a reasonable amount; a member s gender did not change; the form of pension payment did not change (other than resulting from the death of a retired member); and we examined the additions to and deletions from each of the data files (i.e., the files for active employees, pensioners and terminated members entitled to a deferred vested pension) since the previous valuation to determine whether all Plan members were accounted for in this valuation, to check for duplicate records and to confirm pension amounts. All of our tests had satisfactory results or missing or inconsistent information was discussed with the administrator and corrections were made to the data. The following summarizes the changes in membership in the inter-valuation period from 31 December 2007 to 31 December Appendix B

14 12 Summary of Changes in Membership 31 December 2007 to 31 December 2010 Actives LTD Vested deferred CV holdback Retirees Beneficiaries Total Membership at , ,326 Additions: - new members Changes: - terminations with deferred pensions (87) CV with holdback 1 (37) (4) (10) retirements with immediate pensions (64) (3) (13) CV with holdback 2 (34) (1) deaths with spousal pension (7) 7 - CV with holdback (1) (1) disablement (19) returned to active 9 (4) (5) Deletions: - terminations with CV paid in full (47) (4) (34) (85) - terminations not vested (21) (21) - deaths (1) (9) (10) (20) - retirements with CV paid in full (13) - (1) (14) Membership at , ,537 1 One member with CV holdback was classified as payable at the last valuation. 2 One member with CV holdback has two records. Appendix B

15 13 The active membership data as at 31 December 2010 is summarized below. Active Membership Data - 31 December 2010 Age group 1 Number Average credited service (years) Average salary 2 $ pre-1990 post-1989 Males Under , , , , , , , , , & Over ,100 Sub Total ,379 Females Under , , , , , , , , , & Over ,318 Sub Total 1, ,347 Total 1, ,934 1 Age nearest birthday as at 31 December Annual earnings rate as at 31 December Appendix B

16 14 A comparison of the 31 December 2010 active membership profile with that as at 31 December 2007 is shown below. Active Membership Profiles Males Females Total 31 December number of members 585 1,005 1,590 - proportion of total 36.8% 63.2% 100.0% - average age average credited service average salary 1 $63,379 $56,347 $58,934 - total payroll 1 $37,076,858 $56,628,285 $93,705, December number of members ,556 - proportion of total 37.2% 62.8% 100.0% - average age average credited service average salary 1 $60,223 $52,687 $55,491 - total payroll 1 $34,869,045 $51,475,457 $86,344,502 The above comparison indicates that the covered membership has increased by about 2.2% over the 3 year inter-valuation period. The proportion of males to females has decreased slightly, while the average ages have increased by 0.7 of a year. The average service has also increased by 0.7 of a year. The average salaries have increased over the 3 year period by 5.2% for males and 6.9% for females (6.2% overall). 1 Rate at December 31. Appendix B

17 15 The 42 members on long term disability at December 2010 have the following profile; the December 2007 comparisons are also shown: Disabled Members Males Females Total 31 December number average age average credited service average salary $55,058 $48,563 $51, December number average age average credited service average salary $38,675 $44,143 $42,503 Appendix B

18 16 The pensioner and beneficiary data at 31 December 2010 are summarized below. Pensioners and Beneficiaries Age group Number Average annual pension Males Females Total Males Females Pensioners: $10,301 $12, ,776 14, ,032 12, ,967 10, ,937 7, ,372 8, ,711 11, ,052 7,709 Total $16,109 $11,870 Average age Age group Beneficiaries 1 : Number Total Average annual pension Total $6, , , , ,492 Total 35 $5,321 Average age 84.0 The pension amounts quoted above include the January 1, 2011 CPI increase of 1.9%. The corresponding averages at the 31 December 2007 valuation (including the 2008 increase of 2.5%) were: 1 Of the 35 beneficiaries, 4 are male and 31 are female. Appendix B

19 17 Pensioners and Beneficiaries Prior Valuation Males Females Total Pensioners: - number average age average annual pension $14,327 $10,503 $12,144 Beneficiaries: - number average age average annual pension $4,152 $4,937 $4,813 The deferred vested data at 31 December 2010 is summarized below. The corresponding averages at 31 December 2007 are also shown. The pension amounts are those payable at age 65 and include the 3% indexing between ages 45 and 65 for those who terminated after January 1, The 2010 data includes 4 members who terminated after age 55; they are entitled to more advantageous reductions on early retirement; we therefore assumed they would retire immediately. Deferred Vested Data Age group Number Average annual pension Males Females Total Males Females At December 31, 2010: $901 $2, ,149 2, ,121 4, ,169 5, ,528 5, ,394 4, ,047 4, ,081 1, & over ,575 1,118 Total $3,365 $3,551 Average age At December 31, 2007: Total $3,396 $3,099 Average age Appendix B

20 18 Appendix C Operation of the Fund All contributions are paid into and all benefit payments are made out of a trust fund under the control of the plan Trustees. The assets are held by CIBC Mellon and are invested by professional managers engaged by the Trustees. We have relied upon the audited financial statements of the fund as prepared by Ernst & Young for purposes of our valuation. The growth in the fund during the last three years is shown below. ($,000 s) Market value on January 1 188, , ,357 Contributions - University 10,897 11,794 11,706 - Voluntary Investment income - Interest and dividends 5,898 6,028 5,323 - Net capital gain (loss) (32,452) 14,899 13,450 - Investment & custodial fees (709) (647) (601) Benefits - Pensions paid (2,897) (3,337) (3,787) - Commuted value transfers (9,869) (4,839) (7,392) - Voluntary contributions refunded (324) (104) (95) - Money purchase balances paid to terminating members (295) (266) (318) Other administrative expenses (286) (169) (201) Market value on December , , ,490 Summary Market value at beginning 188, , ,357 Net cash flow (2,752) 3,186 (39) Net investment earnings (27,263) 20,280 18,172 Market value at end 158, , ,490 Net yield at market -14.5% 12.6% 10.0% The yields shown above are determined assuming that cash flows occur at mid- year and are net of investment and custodial expenses charged to the fund. The assumption of mid-year cash flows will distort the results if the weighted cash flows are too far from mid-year. The yields are based on the total net assets of the fund including both invested and non-invested assets (i.e. receivables and payables are included in the asset base to determine yields). The nature of our calculations is such that the results will likely differ somewhat from those produced by performance measurement services who apply more refined techniques. Appendix C

21 19 The assets of the fund are allocated as follows: ($,000 s) Voluntary contribution accounts Members money purchase accounts 3,692 3,858 3,892 Balance available for formula benefits 154, , ,001 Total market value at December , , ,490 The distribution of assets on December 31 is shown below for each of the last three years. All items are at market values and are taken from the audited financial statements. Amount $,000's % of total % Amount $,000's % of total % Amount $,000's Cash Contributions receivable Accounts receivable Accrued investment income Investments: - short term notes 1, , , bonds & debentures 65, , , balanced pooled funds 1 % of total % - money market 1, , , Canadian equities & equity pooled funds 49, , , foreign equity pooled funds 40, , , Less accrued expenses and accounts payable (215) (0.1) (199) (0.1) (175) (0.0) Total net assets 158, , , The splits of the balanced pooled fund into its money market and Canadian equity components are taken from the auditor s report for the respective year. Appendix C

22 20 Appendix D Actuarial Basis and Assumptions All contributions to the Plan are deposited into a trust fund, from which benefits and expenses are paid. There is not, of course, any guarantee that the assets of the fund are sufficient at any particular time to meet the liabilities for plan benefits that have accrued up to then. The adequacy of the fund is examined at the time of each actuarial valuation, when the value of the assets on hand is compared with the value placed upon the Plan's liabilities according to certain actuarial assumptions. Emerging experience, differing from the assumptions, will result in gains or losses which will be revealed in future valuations. The assumptions that underlie the calculation of the liabilities for the going concern valuation were reviewed, and in light of the current long-term expectation of salary increases and inflation, the inflation assumption was increased to 2.5% per annum from 2.25% per annum used in the previous valuation, and the rate of increase to salaries for seniority was decreased to 0.5% per annum from 1.0% per annum used in the previous valuation. As a result of these changes, the salary increase assumption was decreased to 3.50% per annum from 3.75% used in the previous valuation (reflecting inflation plus seniority), the assumed increase to YMPEs was increased to 3.0% per annum from 2.5% per annum used in the previous valuation and the assumed increase to the maximum Income Tax Act pensions was increased to 3.0% per annum from 2.75% per annum used in the previous valuation. The remaining going concern assumptions are unchanged from the previous valuation. The solvency basis has been revised as outlined under Solvency Valuation Basis on page 28. The going concern valuation is based on the premise that the plan will continue to operate indefinitely, while the solvency valuation incorporates the assumption that the plan is terminated immediately. The principal assumptions are set out below. Employees Included in Valuation We have described and summarized the data in Appendix B. All members were included in the valuation. Net Investment Return We have assumed that the investment earnings of the fund, net of investment-related expenses, would be at a rate of 6% per annum compounded annually over the future long term. This is the same assumption as that was used in the 2007 valuation, and has been set taking into account the investment mix and anticipated long-term returns on invested assets. Additional details are set out below. Appendix D

23 21 Investment expenses have averaged 0.37% over the past three years; this has been taken into account in setting the net investment return assumption. Based on the long-term government of Canada Bond yields at the valuation date and other key economic expectations over the long term, and taking into account a margin for adverse deviations, the going concern discount rate assumption has been developed as follows: Discount rate Long-term Government of Canada Bond 3.48% Weighted average risk premium based on the plan s Investment Fund Quality and Diversification Guidelines 2.77% Diversification effect 0.43% Gross expected investment return 6.68% Provision for investment related expenses (passive management) (0.37%) Estimated net investment return before margin 6.31% Margin for adverse deviation (0.30%) Discount return assumption (rounded) 6.00% In calculating the weighted average risk premium, our model determined the expected long term return for each major asset class (bonds, Canadian equities, global equities, etc.) by using historic returns, current yields and forecasts to develop expected long term capital market returns, standard deviations and correlations for each asset class. We then stochastically generated projected asset class returns for 1000 paths over 20 years to create expected returns and standard deviations for each asset class. The risk premium for each asset class within the Plan s target asset mix is then determined as the excess of the expected long term return over the long term Government of Canada Bond rate. The weighted average risk premium is then determined using the percentage asset allocation as the weight. For the purposes of establishing the discount rate used in this report, we have assumed that there will be no added-value returns from employing an active management strategy in excess of the associated additional investment management fees. The investment expense allowance of 0.37% provides for passive management fees. Appendix D

24 22 Asset Value Smoothing For this valuation we have continued to apply the asset smoothing technique that was applied in the previous valuation. (The unadjusted market value of assets was used in the determination of any excess surplus to be allocated to members.) On this smoothed value basis, we first determine the increase in market values during the year after allowing for the net contributions minus benefits and non-investment expenses. We then include the assumed return of 6% 1 during the year and spread the remaining difference in market values over a five year period, recognizing one-fifth of it in each of the current and four succeeding years. This approach effectively spreads the difference between (a) the total investment return (including both realized and unrealized capital changes) and (b) the assumed 6% 1 return, over a five year period. The adjustments in the last three years are as follows: Determination of Actuarial Value of Assets Market value on January 1 $188,906,286 $158,890,882 $182,357, Net contributions (contributions less benefits and non-investment expenses) (2,751,868) 3,186,133 (39,109) 3. 6% interest on (# x #2) 11,251,821 9,629,037 10,940, = ,406, ,706, ,258, Market value on December ,890, ,357, ,489, Excess (shortage) of market over assumed returns = 5-4 (38,515,357) 10,651,191 7,231, Withheld from current year (T) excess = item 6 of year T x 4/5 (30,812,286) 8,520,953 5,785, Withheld from excess in year T-1 = item 6 of year T-1 x 3/5 (5,764,188) (23,109,214) 6,390, Withheld from excess in year T-2 = item 6 of year T-2 x 2/5 4,604,575 (3,842,792) (15,406,143) 10. Withheld from excess in year T-3 = item 6 of year T-3 x 1/5 1,774,492 2,302,288 (1,921,396) 11. Total amount withheld (added) = (30,197,407) (16,128,765) (5,151,542) 12. Smoothed asset value on December 31 = 5-11 $189,088,289 $198,486,008 $205,641,539 1 The assumed rate for the past 5 years has been 6.25% for 2006 and 2007, and 6.0% for 2008 to Appendix D

25 23 The market and smoothed asset values are summarized below for the last 10 years, together with the net yields (i.e. after subtracting investment-related expenses). Dec. 31 Market value (MV) $,000 s Adjusted smoothed value (AV) $,000 s Difference MV - AV $,000 s Ratio AV/MV % Net yields on MV % on AV % , ,409 (4,460) , ,126 (15,310) (5.7) , ,971 (4,755) , ,178 1, , ,242 10, , ,333 18, , ,079 3, , ,088 (30,197) (14.5) , ,486 (16,129) , ,642 (5,152) Salary Increases The amount of pension payable to a member at retirement is generally based upon an average of earnings in a short period just prior to retirement. It is thus necessary to estimate the level of earnings in the period prior to retirement. For this purpose we have assumed salaries will increase 3.5% annually, consisting of a 3% across-the-board increase, applying to all employees, due to general factors such as inflation and productivity gains, plus an additional 0.5% to reflect increasing seniority, recognition of merit and promotion. This is decrease of 0.25% from the previous valuation where we assumed a salary increase assumption of 3.75% (2.75% across-the-board plus 1% seniority). The salary data provided to us were 26 times the bi-weekly rates of pay at January 1, We assumed that increases thereafter are applied continuously during each year; the same approach was applied in the previous valuation. We have assumed that the maximum earnings covered by the Canada Pension Plan will increase 3% annually from the 2011 level of $48,300 (an annual 2.75% increase from a 2008 base of $44,900 was assumed in the previous valuation). Pension Indexing Indexing on deferred vested pensions between age 45 and age 65 is at a flat 3% per year. We have continued to assume that the post-retirement CPI-related indexing will be the full CPI assumption, which is Appendix D

26 24 2.5%. This is increase of 0.25% from the previous valuation where we assumed an annual CPI of 2.25%. Since the actual indexing provision will provide less than 3% in years when the CPI is below 3%, without any carry-forward of the excess in years when the CPI exceeds 3%, the actual long-term indexing should average less than 2.5% per year, and thus we will have overstated the liabilities slightly. The actual indexing granted on January 1, 2011 is included in the pensioner data, and indexing is assumed to next apply at January 1, 2012 and annually thereafter. Relationship between Economic Assumptions The economic assumptions are summarized below: 2010 valuation 2007 valuation 1. Investment return 6.0% 6.00% 2. General salary increase rate 3.0% 2.75% 3. Seniority salary increase 0.5% 1.00% 4. Underlying CPI 2.5% 2.25% 5. Post-retirement indexing 2.5% 2.25% 6. Implied real investment return = % 3.75% 7. Implied real salary increase = % 0.50% The 2010 assumptions might be viewed as an underlying CPI (i.e. inflation) assumption of 2.5% per year (with indexing at the full 2.5%), coupled with real general salary increases of 0.5% per year, and a real investment return of 3.5% per year (compared to underlying assumptions of 2.25% CPI plus a real investment return of 3.75% per year at the 2007 valuation). While the revised assumptions produce higher costs and liabilities, with the general reductions in market interest rates and real returns, it should be noted that these relationships are still towards the aggressive end of an acceptable range for the longer term (i.e. producing lower costs and liabilities). Mortality The incidence of mortality among members both prior to and after retirement was assumed to be in accordance with the 1994 Uninsured Pensioner Mortality Table projected to 2015 using mortality projection scale AA. For deferred vested pensions, mortality was ignored during the deferral period before retirement. The same basis was used in the previous valuation. The 1994 Uninsured Pensioner Mortality Table projected to 2015 reflects mortality experience as at 1994 for a large sample of North American pension plans, with projected improvements in mortality based on an individual s year of birth. This table is common for valuations of pension plans where the amount of data Appendix D

27 25 relating to actual mortality experience of the specific plan is of limited statistical significance and there is no reason to believe mortality experience for the plan will differ significantly from that of other plans. Hence the use of this table is reasonable for this Plan. Withdrawal The valuation recognizes a probability that a member will terminate employment other than by death or retirement. For selected attained ages, the rates of withdrawal underlying the valuation are shown below expressed as the number out of a group of 1,000 active members at the stated age who will withdraw within 12 months: Attained age Withdrawal rate per 1,000 active members & over 0 The same rates were used in the previous valuation. We understand that these rates were originally developed on the basis of the actual turnover experience during Retirement We used the same retirement rates as in the previous valuation. Members with less than 10 years of service are assumed not to retire until age 65. The retirement rates used, i.e. the percentage of eligible members retiring each year, are shown below. Ages Minimum Service Age + Service Annual Retirement Rate less than 70 Nil " % " or more 10% n/a 20% 65+ n/a n/a 100% The rates have been developed as our expectation of best-estimates rates of retirement based on the Plan provisions and our experience with other similar plans. Appendix D

28 26 Disability Periods during which a member is in receipt of long-term disability benefits count as credited service. As in the previous valuation, we ignored the incidence of disability before retirement, though we have treated those members disabled at the valuation date as deferred vested pensions with additional service projected to age 65. Proportion Married and Age Difference between Spouses As in the previous valuation, we assumed that 80% of the currently active members would be married at retirement and that the spouse of a male (female) member would be 3 years younger (older) than the member. With respect to former members entitled to deferred vested pensions, we assumed that 90% of those married at termination would be married to the same spouse at retirement. Those unmarried at termination are entitled to pensions on the life-only normal form. Expenses We have assumed that the non-investment expense will equal $250,000, which is equivalent to about 0.27% of active payroll. The assumption in the previous valuation was $125,000. The actual non-investment expenses were $286,000 in 2008, $169,000 in 2009 and $201,000 in The provision for the investment-related expenses was discussed earlier in the section on the net investment return assumption. Maximum Pension Rule The pension plan limits the amount of pension as required by the Income Tax Act. The maximum annual pension currently permitted is the lesser of: (i) (ii) the defined benefit limit for the calendar year multiplied by the years of service; and 2% multiplied by the years of service further multiplied by the average of the best 3 years of remuneration paid to the member. The defined benefit limit is equal to $2,494 in 2010, increasing to $2,552 in 2011 and is automatically indexed thereafter in accordance with increases in an average wage index. For an individual in this plan to be currently affected by the limit the final average salary must be very high and current salaries are not such as to cause many pensions in excess of the maximum. However, the salaries projected in the future through application of the assumed salary increase rates outlined above are such that some individuals would be limited. We have accordingly applied a 3% per annum increase to the $2,552 limit after A similar Appendix D

29 27 approach was applied in the previous valuation, using the rules in effect at that time (with the initial limit set at $2,333 in 2008, increasing to $2,444 in 2009 and indexed annually thereafter at 2.75% per annum). Commuted Value Basis The Plan permits any member terminating or retiring to elect a transfer of the commuted value of the accrued pension. The calculation basis for these commuted values is prescribed by legislation, and varies each month as a function of market yields on Government of Canada benchmark bonds. When interest rates are low, as they have been in the recent past, the commuted values can exceed the immediate or deferred vested liabilities calculated on the valuation basis. In addition, the commuted value standard was changed effective April 1, 2009 and again effective February 1, 2011, reflecting increased life expectancies and a revised basis for calculating the economic assumptions. In general, under current market conditions, the revised economic assumptions tend to produce even higher commuted values than before. Due to these relationships, the Plan incurs an actuarial loss, measured on the going concern basis, with every commuted value transferred out in the current interest rate/mortality environment. A significant proportion of terminating members elect a transfer of commuted value rather than a deferred vested or immediate pension. For example, of 119 active members terminating at age 55 or over since 2007, 55 (or 46%) took commuted value transfers. The transfers for members entitled to unreduced pensions can be especially large. If the majority of members eligible for retirement pensions continue to take lump sum transfers, the investment horizon could be shortened considerably. The PBSA does not require that commuted values be offered to members over age 55. The Trustees/parties may wish to consider placing some restrictions on such payouts after age 55. In order to incorporate an allowance for members eligible to retire who elect a transfer of commuted value, for this valuation, we have for the first time assumed that 45% of the members eligible to retire in the 10 years following the valuation will elect a commuted value instead of a pension. The commuted value has been valued based on the statutory rates in force as of December 31, 2010 for commuted values, adjusted for the post-retirement indexing under the plan. This results in a net interest assumption of 1.7% per annum for 10 years from the assumed retirement date and 2.6% thereafter. Mortality is assumed to follow the 1994 Uninsured Pensioner Mortality Table projected to 2020 on a sex distinct basis. The assumption of valuing only members who retire in the 10 years following the valuation on this basis, in effect reflects an inherent assumption that the commuted value basis will produce a higher liability for the next 10 years, then revert to a basis producing a value that is equal to or less than the going concern basis. The increase in the liability that results from this assumption is then amortized over the 10 year period Appendix D