University of Saskatchewan and Federated Colleges Non-Academic Pension Plan. For the Year Ended December 31, 2016

Transcription

1 University of Saskatchewan and Federated Colleges Non-Academic Pension Plan For the Year Ended December 31, 2016

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3 UNIVERSITY OF SASKATCHEWAN AND FEDERATED COLLEGES NON-ACADEMIC PENSION PLAN STATEMENT OF FINANCIAL POSITION As at December 31 Statement 1 Assets Investments (Notes 3 & 4): Short-term $ 497,744 $ -- Bonds -- 50,715,631 Equities 137,903, ,240,171 Pooled funds 207,125, ,606, ,526, ,562,238 Receivables: Employee contributions 448, ,271 Employer contributions 840, ,211 Accrued investment income 236, ,837 Other Receivables 38, ,059 1,564,825 2,274,378 Cash 1,110,886 1,458,032 Total assets 348,202, ,294,648 Liabilities Accounts payable 1,200,497 1,161,033 Total liabilities 1,200,497 1,161,033 Net Assets Available for Benefits (Statement 2) 347,001, ,133,615 Pension Obligations (Statement 3) 350,797, ,184,400 (Deficit) $ (3,795,306) $ (9,050,785) (See accompanying notes)

4 UNIVERSITY OF SASKATCHEWAN AND FEDERATED COLLEGES NON-ACADEMIC PENSION PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS For The Year Ended December 31 Statement 2 Increase in Assets Investment income: Interest $ 1,271,800 $ 1,564,645 Dividends - equities 2,652,513 2,800,030 Distributions - pooled funds 5,292,215 4,036,959 9,216,528 8,401,634 Current period change in fair values of investments 21,124,555 12,522,874 Contributions: Employee 5,389,820 5,467,127 Employer 10,086,805 9,849,317 15,476,625 15,316,444 Total increase in assets 45,817,708 36,240,952 Decrease in Assets Plan expenses (Note 7) 2,407,806 2,336,110 Pension benefits paid 14,986,509 14,027,808 Refunds and transfers: Retirement benefits 138,414 9,642 Termination benefits 2,269,897 1,072,761 Death benefits 146,703 1,129,809 2,555,014 2,212,212 Total decrease in assets 19,949,329 18,576,130 Increase in net assets 25,868,379 17,664,822 Net assets available for benefits at beginning of year 321,133, ,468,793 Net assets available for benefits at end of year (to Statement 1) $ 347,001,994 $ 321,133,615 (See accompanying notes)

5 UNIVERSITY OF SASKATCHEWAN AND FEDERATED COLLEGES NON-ACADEMIC PENSION PLAN STATEMENT OF CHANGES IN PENSION OBLIGATIONS For the Year Ended December 31 Statement (Note 8) (Note 8) Pension Obligations, beginning of year $ 330,184,400 $ 309,556,200 Increase in Pension Obligations: Interest on pension obligations 20,306,300 19,656,800 Benefits accrued with interest 11,832,200 11,566,900 Change in assumptions 5,915,700 6,171,600 Plan experience 629, ,683,800 37,395,300 Decrease in Pension Obligations: Benefits paid with interest 18,070,900 16,745,300 Plan experience -- 21,800 18,070,900 16,767,100 Pension Obligations, end of year (to Statement 1) $ 350,797,300 $ 330,184,400 (See accompanying notes)

6 UNIVERSITY OF SASKATCHEWAN AND FEDERATED COLLEGES NON-ACADEMIC PENSION PLAN NOTES TO THE FINANCIAL STATEMENTS December 31, Description of the Plan The following description of the University of Saskatchewan and Federated Colleges Non-Academic Pension Plan (Plan) is a summary only. For more complete information, reference should be made to the Plan Agreement. a) General The Plan is registered under The Pension Benefits Act, 1992 (Saskatchewan) and the Income Tax Act (Canada). The Plan is a contributory defined benefit pension plan open to all eligible Non- Academic employees of the University of Saskatchewan who are employed on a permanent full time, seasonal full time or permanent part time basis. Participation in the plan is compulsory after completing one year of service. b) Administration The Non-Academic Pension and Benefits Committee (Committee), composed of an equal number of appointees of the Board of Governors and the University of Saskatchewan Employees Union, provides oversight for the Plan as delegated by the Board of Governors. The Committee provides recommendations to the Board of Governors in matters of Plan amendments and investment policy and also maintains liaison with all those concerned with the operations of the Plan, including the Board of Governors, the trustee, the investment advisors, the actuary and the members of the Plan. c) Retirement Benefits The normal retirement date of a member is the first day of the month immediately following their 65th birthday. The annual amount of pension is determined as 2% of the member s best four years average pensionable salary multiplied by the member s service. The above is a normal form of pension which provides for monthly payments for life with a minimum of 120 monthly payments being guaranteed. d) Disability Retirement Benefits The annual amount of pension is determined by applying the regular retirement benefit formula. Section 4.01(2) of the Plan document provides that during a period of disability the member will be deemed to have received earnings at the member s full normal rate of pay.

7 2 e) Termination Benefits A member becomes vested upon completion of two years of continuous service. A member who terminates employment with the University prior to being vested is entitled to an amount equal to their accumulated contributions with interest. Upon termination of employment after achieving vested status and before retirement eligibility, a member may elect: i) to receive a deferred retirement benefit; or ii) a locked-in transfer equal to the greater of: a) the commuted value of the member s accrued pension; or b) two times the member s required contributions with interest. iii) to receive a partial cash refund of 50% of their accumulated contributions with interest to December 31, 1993, in which case the member s deferred retirement benefit or transfer amount will be reduced accordingly. f) Death Benefits The beneficiary of an employee who dies before retirement will be entitled to receive the greater of a refund of two times the required contributions made by the member with interest or the commuted value of the retirement benefit accrued by the employee to the date of death. For an employee who is deceased after retirement, the surviving beneficiary will be entitled to receive the benefit outlined by the form of pension elected by the member at the member s retirement date. g) Plan Improvements Section 4.02 of the Plan document makes provision for the use of any actuarial surplus to be applied firstly to the declaration of bonus pensions to existing pensioners, with any remaining surplus to be used to improve the benefits of members in the Plan. h) Required Contributions In accordance with the terms of the Pension Plan Agreement, members are required to contribute 8.50% of regular earnings.

8 3 i) Funding The University, on the advice of the Actuary, contributes to the Plan such amounts as are required to maintain the Plan at a level that at least meets the minimum funding requirements prescribed by The Pension Benefits Act and which are not less than the amount contributed by the members. The following table summarizes the total contributions as a percentage of earnings: Fixed rate contributions Employee contribution rate 8.50% Employer contribution rate 8.50% Additional employer contributions to fund going concern deficiencies 2014 unfunded liability (Jan 2015 Dec 2022) 4.91% Current service cost deficiency 2.24% Total 7.15% 2. Significant Accounting Policies These financial statements have been prepared in accordance with Canadian accounting standards for pension plans. These standards include reference to guidance found in International Financial Reporting Standards with respect to the fair value measurement for investment assets and liabilities. For accounting policies that do not relate to its investments or pension obligations, the financial statements comply with Canadian accounting standards for private enterprises, to the extent that these standards do not conflict with the standards for pension plans. The following policies are considered significant: a) Basis of Presentation These financial statements are prepared using the accrual basis of accounting and on the going concern basis and present the aggregate financial position of the Plan as a separate financial reporting entity independent of the sponsor and plan members. They 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 Investments are classified as held for trading and are stated at fair value. Bonds, pooled funds, and equities are determined with reference to year end prices from recognized security dealers. Short-term investments are valued at cost, which approximates fair value. Investment transactions are recorded on the trade date.

9 4 c) Foreign Currency Translation The Plan s financial statements are presented in Canadian dollars. Transactions conducted in foreign currency are translated into Canadian dollars using the exchange rate in effect at the transaction date. Monetary assets and liabilities denominated in foreign currencies are adjusted to reflect exchange rates at year end. d) Use of Estimates The preparation of financial statements require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the year. Actual results could differ from those estimates. Changes in estimates are recorded in the period when identified. Significant estimates and assumptions are used primarily in the determination of investments and pension obligations. 3. Capital Management and Investment Performance The Plan receives capital from employee and employer contributions. The Plan also benefits from income and market value increases on its invested capital. The objective of the Plan is to meet future pension obligations and to generate sufficient cash flow to meet pension payments, while complying with The Pension Benefits Act, 1992 and Canada Revenue Agency regulations. In accordance with regulatory requirements, the Non-Academic Pension and Benefits Committee and the Board of Governors has established a Statement of Investment Policies and Procedures (SIPP) which sets out the investment principles, guidelines and monitoring procedures. The SIPP sets out benchmarks and asset allocation ranges that are intended to best secure the obligations for the pension benefits and result in a reasonable risk-adjusted return on investment. Individual investment decisions are delegated to investment managers subject to the constraints of the SIPP and individual manager mandates. As required, the Committee reviews the SIPP at least annually. With the assistance of an investment consultant, the Committee regularly monitors the asset mix of each manager to ensure compliance with the SIPP.

10 5 The current benchmark and ranges are as follows: Asset class Index Min Benchmark Max Equities Canadian S&P/TSX Capped Composite Index 10% 20% 30% Global MSCI World Index (Cdn. $) 20% 40% 60% Real Estate 0% 5% 10% Fixed Income Bonds FTSE TMX Universe Bond Index 25% 33% 50% Short-term FTSE TMX 91-Day T-Bills 0% 2% 10% 100% The primary long-term investment performance objective is to out-perform the benchmark portfolio. The following is a summary of the Plan s investment performance: As of December 31, year 4 year Plan Return 9.6% 11.1% Benchmark 6.5% 10.1% The annual returns are gross of investment management fees and plan expenses. 4. Investments Short-term Investments Short-term investments are comprised of treasury bills and bankers acceptances. The Plan s investment policy states that investments must meet a minimum investment standard of R-1 Low, as rated by a recognized credit rating service. Bonds In 2016, the Plan s investment policy changed from a segregated fixed income mandate to a PH&N Core Plus Bond strategy. The Plan s investment policy states that bonds have a maximum quality standard as shown in the table below: Credit quality Maximum BBB and above 100% BB+ and below 25% CCC+ and below 5% In 2015, the Plan s investment policy stated that bonds must meet a minimum quality standard of BBB as rated by a recognized credit rating service. BBB rated bonds could not exceed 15% of the market value of the bond portfolio.

11 Years to Maturity Federal Provincial Corporate Total Market Value Current Yield Under 5 $ 7,949,511 $ -- $ 439,332 $ 8,388, % % ,085,709 10,672, ,758, % % Over 10 3,424,409 26,050,139 94,015 29,568, % % Market Value $13,459,629 $ 36,722,655 $ 533,347 $ 50,715,631 Actual maturity may differ from contractual maturity because certain borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties. Equities The Plan s investment policy restricts individual holdings to a maximum of 12% of the market value of the equity portfolio and to a maximum of 10% of the common stock in any corporation. The average dividend rate is 2.0% ( %) Canadian $ 70,096,708 $ 56,093,669 U.S. 44,580,169 46,400,731 Global 23,226,452 20,745,771 $ 137,903,329 $ 123,240,171 Pooled Funds The Plan holds units in pooled funds which have no fixed interest rate and its returns are based on the success of the manager. In 2016, the Plan established the PH&N Core Plus Bond Fund. All existing PH&N pooled funds were incorporated into the new PH&N Core Plus Bond Fund. An investment in a pooled fund should not exceed 10% of the market value of the pooled fund. The Plan s pooled funds are comprised of the following: Phillips, Hager & North (PH & N) Institutional Short Term Investment Fund $ $ 1,831 PH & N Investment Grade Corporate Bond Trust ,733,642 PH & N Mortgage Pension Trust Fund ,820,250 Sprucegrove Global Equity Pooled Fund 73,108,825 64,997,891 PH & N Core Plus Bond Fund 107,031, Greystone Real Estate Fund 26,985,671 25,052,822 $ 207,125,707 $ 144,606,436

12 7 Fair Value The Plan has classified its required fair valued financial instrument holdings using a hierarchy that reflects the significance of the inputs used in determining their measurements. Under the classification structure, financial instruments recorded at unadjusted quoted prices in active markets for identical assets and liabilities are classified as Level 1. Instruments valued using inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly are classified as Level 2. Instruments valued using inputs that are not based on observable market data are classified as Level 3. There were no items transferred between levels in 2016 or The Plan s investments at year end are classified as follows: 2016 Level 1 Level 2 Total Short-Term $ -- $ 497,744 $ 497,744 Bonds Equities 137,903, ,903,329 Pooled Funds Fixed Income ,031, ,031,211 Equities -- 73,108,825 73,108,825 Real Estate -- 26,985,671 26,985,671 Total Investments $ 137,903,329 $ 207,623,451 $ 345,526, Level 1 Level 2 Total Short-Term $ -- $ -- $ -- Bonds -- 50,715,631 50,715,631 Equities 123,240, ,240,171 Pooled Funds Fixed Income -- 54,555,723 54,555,723 Equities -- 64,997,891 64,997,891 Real Estate -- 25,052,822 25,052,822 Total Investments $ 123,240,171 $ 195,322,067 $ 318,562,238

13 8 5. Financial Risk Management The nature of the Plan s operations results in a statement of financial position that consists primarily of financial instruments. The risks that arise are credit risk, market risk (consisting of interest rate risk, foreign exchange risk and equity price risk) and liquidity risk. Financial risks are related to the Plan s investments. These financial risks are managed by having an investment policy, which is approved by the Board of Governors based on the recommendation of the Committee. The investment policy provides guidelines to the Plan s investment managers for the asset mix of the portfolio regarding quality and quantity of fixed income and equity investments. The asset mix helps to reduce the impact of market value fluctuations by requiring investments in different asset classes and in domestic and foreign markets. The Committee reviews regular compliance reports from its investment managers as to their compliance with the investment policy. Credit risk Credit risk is the risk that one party does not pay funds owed to another party. The Plan s credit risk arises primarily from certain investments. The maximum credit risk to which it is exposed at December 31, 2016 is limited to the carrying value of the financial assets summarized as follows: Accounts receivable $ 1,564,825 $ 2,274,378 Investments 1 107,528, ,271,354 1 includes short term investments, bonds and fixed income pooled funds. Credit risk within investments is primarily related to bonds and fixed income pooled funds and is managed through the investment policy. In 2016, the PH&N Core Plus Bond fund was established and maximum standards were instituted with respect to any one issuer, sector concentration and credit quality. The following shows the percentage of bond holdings by credit rating: Credit Rating 2016 AAA 14.5% AA 28.2% A 17.1% BBB 22.1% BB 3.4% B 5.1% CCC 1.3% Mortgages 8.3% Total 100.0%

14 9 In 2015, the policy limited fixed income investments to those of high credit quality (minimum rating for bonds is BBB, and for money market instruments is R-1 Low) and limited the maximum notional amount of exposure with respect to any one issuer. Within bond investments, there are no holdings from one issuer, other than the federal or provincial governments, over 10% of the market value of the combined bond and short-term investment portfolios. Market risk Market risk represents the potential for loss from changes in the value of financial instruments. Value can be affected by changes in interest rates, foreign exchange rates and equity prices. Market risk primarily impacts the value of investments. Interest rate risk The Plan is primarily exposed to changes in interest rates in its bond investments. Duration is a measure used to estimate the extent market values of fixed income instruments change with changes in interest rates. Using this measure, it is estimated that a 1% change in interest rates would change net assets available for benefits by $8,241,000 representing 7.7% of the fair value of $107,031,000. Foreign exchange The Plan is subject to changes in the U.S./Canadian dollar exchange rate through its U.S. investments. Also, the Plan is exposed to EAFE (Europe, Australasia and Far East) currencies through its international investments. At December 31, 2016, the Plan s exposure to U.S. equities was 12.9% ( %) and its exposure to non- North American equities was 27.9% ( %). At December 31, 2016, a 10% change in the Canadian dollar versus U.S. dollar exchange rate would result in approximately a $4,458,000 change in the net assets available for benefits. A 10% change in the Canadian dollar versus the EAFE currencies would result in approximately a $9,634,000 change in the net assets available for benefits. Equity Prices The Plan is exposed to changes in equity prices in Canadian, U.S. and EAFE markets. At December 31, 2016 equities comprise 61.1% ( %) of the fair value of the Plan s total investments. Individual stock holdings are diversified by geography, industry type and corporate entity. No one investee represents greater than 10% of the fair value of the Plan. The following table indicates the approximate change that could be anticipated to the net assets available for benefits based on changes in the Plan s benchmark indices at December 31, 2016:

15 10 10% increase 10% decrease S&P/TSX Composite Index $ 7,010,000 $ (7,010,000) S&P 500 Index 4,458,000 (4,458,000) MSCI EAFE Index 9,634,000 (9,634,000) Liquidity risk Liquidity risk is the risk that the Plan is unable to meet its financial obligations as they fall due. Cash resources are managed on a daily basis based on anticipated cash flows. 6. Fair Value of Financial Instruments Accounts payable and receivables are non-interest bearing and are due or payable within the next year. Due to their immediate or short-term maturity, the fair value of these financial instruments approximates carrying value. Fair values of investments are disclosed in note Plan Expenses Budget Actual Actual Investment management fees $1,837,943 $1,761,471 $ 1,727,272 Actuarial fees 120, , ,186 Trustee fees 228, , ,083 Investment consulting fees 68,000 68,647 66,703 Administration expenses 314, , ,866 Total $2,568,863 $2,407,806 $2,336, Pension Obligations The present value of pension obligations was determined using the projected benefit method prorated on service and management s best estimate assumptions approved by the Committee. An actuarial valuation of the Plan was performed by Aon Hewitt as at December 31, 2016 and December 31, The next actuarial valuation is expected to be performed at December 31, Significant long-term actuarial assumptions used in the valuation were: Discount rate 6.00% 6.15% Inflation rate 2.25% 2.25% Salary escalation rate CUPE & Other Members: 2.75% per annum CUPE & Other Members: 2.75% per annum

16 11 Mortality table ASPA Members: 1.50% effective May 1, 2017, 1.50% effective May 1, 2018, 2.75% per annum thereafter CPM 2014 Private (unadjusted) with mortality improvements in accordance with CPM Improvement Scale B ASPA Members: 1.50% effective May 1, 2016, 1.50% effective May 1, 2017, 1.50% effective May 1, 2018, 2.75% per annum thereafter CPM 2014 Private (unadjusted) with mortality improvements in accordance with CPM Improvement Scale B The actual rates may vary significantly from the long-term assumptions used. The following illustrates the effect of changing certain assumptions from assumed rates of: discount rate of 6.00%, inflation rate of 2.25% and salary rate of 2.75%. Assumption Change Made Discount rate Plus 1% Minus 1% Inflation Plus 1% Minus 1% Change in Pension Obligations $ (38,258,800) 47,147,500 (31,857,000) 38,060,100 Percentage Change in Pension Obligations (10.9%) 13.4% (9.1%) 10.8% Salary increase and Income Tax Act Maximum Pension Increase Plus 1% Minus 1% 7,865,400 (7,079,500) 2.2% (2.0%) The plan experience of $629,600 was attributable to several factors, which include retirement, termination and death experience different than expected and pensionable earnings increases different than expected. The change in the discount rate assumption resulted in an increase to the pension obligations of $6,246,400. The change to the interest on contributions assumption resulted in a decrease to pension obligations of $330,700. The assets, including any potential surplus in the Plan, are for the benefit of the members and their beneficiaries. There is no provision that allows the withdrawal of the surplus by the University. The pension obligations disclosed in these statements differ from that used to determine funding requirements. An actuarial valuation for funding purposes was performed as at December 31, 2014 by Aon Hewitt and was filed with regulatory authorities. The next valuation to be filed with regulatory authorities will be required effective December 31, 2017.

17 12 The pension liability is long-term in nature and there is no market for settling these pension obligations. Therefore, determination of the fair value of the pension liability is not practical. 9. Related Parties The Plan is related to the University of Saskatchewan and other pension plans sponsored by the University of Saskatchewan. The Plan pays for plan expenses, including certain administration fees and miscellaneous expenses, which the University of Saskatchewan incurs and charges the Plan. The expenses charged by the University of Saskatchewan in 2016 were $257,782 ( $240,866). Account balances resulting from the above transactions are included in the statement of changes in net assets available for benefits and are settled on normal trade terms. Other transactions are disclosed separately in these financial statements.