Keeping the Pension Plan Healthy Pension Plan Changes in National webinar series January 8, 2014

Transcription

1 Keeping the Pension Plan Healthy Pension Plan Changes in 2014 National webinar series January 8,

2 Your presenters Panelists Howard Van Mersbergen Vice President of Employee Benefits Luc Girard (Mercer) The Plan s actuary Diane Stronks Executive Director of Edifide, Plan Trustee Julius de Jager Executive Director of the Ontario Alliance of Christian Schools TO SUBMIT A QUESTION To submit a question while in full screen mode, use the Q&A button at the top of your screen. Move your mouse to the top of your screen to reveal the toolbar. CLICK HERE TO ASK A QUESTION TO ALL PANELISTS 2

3 A refresher Defined Benefit (DB) Pension Plans Provides a retirement benefit using a formula What goes in: Contributions from employers and members What comes out: Pension benefit based on: Years of service, and Earnings 3

4 A refresher DB Pension Plans (cont d) DB plans can also have additional features such as: Early retirement subsidies Post-retirement indexing Survivor benefits Bridge payments from early retirement to age 65 The employer assumes the retirement savings risk 4

5 A refresher Defined Contribution (DC) Pension Plans Contributions are based on a formula, usually a percentage of earnings Retirement benefit is dependent on investment performance Employees arrange their own pension and assume the retirement savings risk individually 5

6 A refresher Target Benefit Pension Plans The Canadian Christian Schools Pension Plan is a target benefit pension plan with multiple participating employers. Features include: Contributions from employers and employees based on a formula, like a DC plan Lifetime pension benefits are based on a formula like a DB plan The ability to change contribution and pension benefit formulae if a funding gap exists Employees share the retirement savings risk collectively 6

7 Retirement and Savings Plans recent history and challenges Since 2008, retirement savings have been negatively affected by: Low interest rates (increases the cost of benefits) Low investment returns (decreases asset growth) The demographics of longevity (increases the cost of benefits) This means that assets have not grown as expected, yet liabilities (or the cost of benefits) have been increasing Assets Liabilities Low interest rates Low investment returns Demographics of longevity Generous plan features 7

8 Economic and demographic factors DB plans - increased employer contributions to pay for higher cost of future benefits and existing deficits for already promised benefits DC plans - immediate reduction in value and/or increase in contributions to deal with higher benefit costs and investment losses TB plans - benefit reductions and/or increased contributions Change is not immediate Impact can be smoothed over time No one individual plan member is subject to unreasonable risk The plan can take more risk than individuals 8

9 What are other Canadian Pension Plans doing? Increasing normal retirement age Old Age Security (OAS) Making early retirement less attractive Canada Pension Plan (CPP) Federal Public Service Pension Plan New Brunswick Public Service Superannuation Plan Increasing contribution levels Alberta Teacher s Retirement Fund British Columbia Teacher s Federation Federal Public Service Pension Plan 9

10 Sustainability of CSI Pension Plan Actuarial valuations (currently done annually) show: A comparison at the valuation date of the plan s assets to its liabilities (what the plan owes to current retirees, deferred vested members and employees for past service) Going concern funded status: 80% at (87% estimated at ) Whether contributions cover: 1. The cost of service earned by employees in a year (the current service cost ), 2. The Plan s administrative expenses, and 3. Special payments to eliminate any funding shortfall (excess of liabilities over assets) over a set period. 10

11 Sustainability of CSI Pension Plan (cont d) Projection study Done every 5 years Projects assets, liabilities, contributions over 20 years Stochastic approach: 1,000 economic scenarios that assign probabilities of results due to various change to: Investment policy Contribution formula Benefit formula and features Study concluded that adjustments to the Plan are necessary 11

12 Adjustments to the CSI Plan Changes to the Plan s asset investment policy Increased investment in equities from 55% to 70% More diversification Resetting the balance between the pension formula and the features to create a sustainable, affordable benefit Changes to the features Updating the FAE basis to a more current level Discontinuing the early retirement subsidy and indexing after retirement No changes to the formula (contribution levels, the pension benefit received at age 65, retiree pensions in payment) 12

13 Why is the CSI Plan making changes again? Interest rates remain historically low Recent experience studies point to increases in longevity The funding shortfall that arose as a result of the 2008 financial crisis has not been eliminated yet 13

14 Our priority updating Final Average Earnings Continuing to update the FAE basis is a key priority of the Trustees As of September 1, 2014, final average earnings (FAE) will be calculated to include earnings to August 31, 2013 Over the past years, FAE has been calculated based on earnings to August 31, 2011 This increases future pension payments for future retirees and those who retired since August 31, 2011 No retroactive payments will be made to those who retired since August 31,

15 The early retirement subsidy Current early retirement subsidy under CSI Plan: Normal Retirement Age is 65 Unreduced Retirement Age - no reduction in pension at age 60 for those who have 10 years of service; otherwise, age 65 Early Retirement Reduction for retirement prior to Unreduced Retirement Age, pension reduction is less severe than actuarial reduction (approx. 6% per year) The changes to the early retirement subsidy affect: Unreduced Retirement Age Alignment with the Normal Retirement Age (65) in phases Early Retirement Reduction Removal of subsidy 15

16 Increasing the Unreduced Retirement Age in phases Unreduced Retirement Age increasing to age 65: September 1, 2014 age 61 with 10 years of service September 1, 2015 age 62 with 10 years of service September 1, 2016 age 63 with 10 years of service September 1, 2017 age 64 with 10 years of service September 1, 2018 age 65 (Normal Retirement Age) 16

17 Example Erin plans to retire on September 1, At that time, she will: Be age 58, and Have 10 years of service On September 1, 2016, Erin s subsidized Unreduced Retirement Age will be age 63 (because she has 10 years of service) Erin will be retiring 5 years early (age 58 vs. age 63), and her pension will be reduced accordingly 17

18 Example (cont d) If Erin planned to retire on September 1, 2015, she would: Be age 57, and Have 9 years of service Erin would need 10 years of service to qualify for the subsidized Unreduced Retirement Age of 62 Since she has 9 years of service, her Unreduced Retirement Age would be 65 Erin would be retiring 8 years early (age 57 vs. age 65), and her pension would be reduced accordingly 18

19 Subsidy for early retirement reduction is being removed The subsidy softens the pension reduction for retiring before the Unreduced Retirement Age The subsidies are reflected in the percentage of pension reduction at early retirement. The percentages of pension reduction are less than if calculated on an actuarial basis As of September 1, 2014, the pension reduction at early retirement will be 6% per year Regardless of age, years of service, or any other factor Puts the pension reduction on to an actuarial basis 19

20 Impact of the new early retirement reduction amount A 6% per year reduction replaces the current amount Today s reductions: If you retire at age 55+ with less than 10 years of service The current reduction percentage is 4% for every year between date of retirement and age 65 If you retire between age with 10+ years of service The current reduction percentage is 5% for every year between date of retirement and Unreduced Retirement Age (currently age 60 with 10 years of service) If you leave employment before age 55 The current reduction percentage is 4% for every year between date of retirement and age 65 20

21 Example Warren planned to retire on September 1, At that point, he will: Be age 60 Have 35 years of service Warren s unreduced retirement age will be 62 Warren is retiring 2 years early (age 60 vs. age 62); his pension will be reduced by 12% (2 years x 6%) Before these changes, Warren s pension would not have been reduced To mitigate these reductions, Warren may decide to continue working longer. 21

22 Other recent changes Discontinuing indexing Indexing will not be restored as a permanent plan feature The suspension in 2011 was meant to be a temporary measure The Plan cannot currently support this feature Indexing is a very expensive feature for a plan to support The current contribution and benefit levels cannot support the cost of indexing. 22

23 The future financial stability of the Plan The Plan s long term priority is to pay down the existing shortfall These changes are intended to help achieve that without increasing member or school contributions With these changes, it s projected that shortfall will paid off in years Year 1 Year 5 Year 10 Year 15 Assets Liabilities Year 1 Year Year Year Assets Liabilities 23

24 Value of the CSI plan The CSI Plan remains valuable! Long-term investment allows higher risk with higher returns Low investment/administration fees Average return generally 1% to 2% higher in pension plans than in savings plans Individual participants don t have to worry about making investment decisions Alleviates much of the investment risk vs. a DC plan where individuals take on 100% of the risk Participants receive a predictable lifetime pension no risk of outliving your money Lower contributions needed because the Plan is funded for average life expectancy across all members 24

25 Future of the Plan In the short term It is a high priority to continue to assess the Plan s financial position and review potential to keep updating FAE basis The next opportunity for this is in Spring 2014 In the long term, once the shortfall is paid off We can begin making positive Plan changes in the future Build reserves To ensure that we can continue to update the FAE basis in future years Plan improvements: Enhancing formula (reducing contributions, increasing benefit at normal retirement) Enhancing features of the Plan 25

26 Questions QUESTIONS Please type your questions in the Q&A section of the toolbar and we will do our best to answer as many questions as we have time for. To submit a question while in full screen mode, use the Q&A button at the top of your screen. Move your mouse to the top of your screen to reveal the toolbar. To submit a question while in half screen mode, use the Q&A panel on the bottom right-hand side of your screen. 26