Actuarial Funding Report as at January 1, 2018

Transcription

1 Ontario Retirement Pension Plan Actuarial Funding Report as at January 1, 2018

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3 Ontario Retirement Pension Plan Actuarial Funding Report as at January 1, 2018 i Table of Contents Section 1 : Executive Summary... 1 A. Purpose of the Report... 1 B. Scope of the Report... 1 C. Key Report Dates and Subsequent Events... 2 D. Key Results and Findings... 2 E. Limitations... 3 F. Actuarial Opinion... 6 Section 2 : Overview... 7 A. Background... 7 B. Intergenerational and Intragenerational Equity... 8 C. Intended Purpose... 9 Section 3 : Sustainability A. Introduction B. Assessment of Sustainability C. Sustainability Contribution Rate Differential D. Impact of Actuarial Valuation Section 4 : Projection Methodology A. Introduction B. Development of Projection System C. Projection Method D. Projection Period E. Population Projection F. ORPP-eligible Members and Comparable Workplace Pension Plans G. Contributor and Contribution Projection H. Expenditures Projection I. Assets Projection Section 5 : Data Collected A. Introduction B. Population Data C. Covered Members and Tax Data D. Economic Outlook Section 6 : Actuarial Assumptions A. Introduction B. Demographic Assumptions C. Workforce Assumptions D. Economic Assumptions E. Other Assumptions... 41

4 ii Ontario Retirement Pension Plan Actuarial Funding Report as at January 1, 2018 Section 7 : Key Results A. Overview B. Projection of Population C. Projection of Contributions D. Projection of Expenditures E. Projection of Plan Assets F. Sustainability Metrics / Sustainability Rate Determination G. Balance Sheet H. Intergenerational and Intragenerational Equity Metrics I. Summary of Key Projection Results Section 8 : Risks A. Introduction B. Projection System C. Data D. Employer and Plan Member Behaviours E. Economic Cycles F. Investment Returns G. Operational Costs H. Sensitivity Testing I. Risk Mitigation Section 9 : Sensitivity and Scenario Analysis A. Description of Sensitivity Analysis B. Results of Sensitivity Analysis C. Results of Combined Sensitivity Analysis D. Investment Experience Scenario Analysis E. Conclusions Appendix A : Actuarial Assumption Details A. Overview B. Demographic Assumptions C. Workforce Assumptions D. Economic Assumptions Appendix B : Plan Provisions A. Definitions B. Membership C. Contributions D. Pension Benefits E. Pre-retirement Death Benefit Appendix C : Applicable Actuarial Standards A. Overview B. International Standards of Actuarial Practice C. Canadian Standards of Actuarial Practice D. Actuarial Standards Applied for Actuarial Funding Report... 87

5 Ontario Retirement Pension Plan Actuarial Funding Report as at January 1, 2018 iii List of Tables and Charts Table 5-1: Ontario Population (thousands) Table 5-2: Births (thousands) Across Selected Data Sources Table 5-3: Net Migration into Ontario (thousands) Across Selected Data Sources Table 5-4: Ontario Population (thousands) Across Selected Data Sources Table 5-5: Number of Tax Filers (thousands) by Age Range and 2012 Adjusted Eligible Earnings Range (thousands of dollars) Table 5-6: Number of Tax Filers (thousands) by Sex Table 5-7: Number of Tax Filers (thousands) by Age and Sex and 2012 Adjusted Eligible Earnings (thousands of dollars) Table 6-1: Summary of Actuarial Assumptions Table 6-2: ORPP Design Assumptions Table 6-3: ORPP Participation Rates and Calibration Factors Table 7-1: Population and Active Contributor Projection (thousands) Table 7-2: Projection of Contributions (Active Contributors in thousands; dollars in millions) Table 7-3: Projection of Expenditures (pensioners in thousands; dollars in millions) Table 7-4: Projection of Plan Assets Contributions at Total Contribution Rate of 3.80% (dollars in millions) Table 7-5: Projection of Plan Assets Contributions at Total Contribution Rate of 3.80% (constant 2016 dollars in millions) Table 7-6: Projection of Plan Assets Contributions at Sustainability Rate Prior to Rounding (dollars in millions) Table 7-7: Projection of Plan Assets Contributions at Sustainability Rate Prior to Rounding (constant 2016 dollars in millions) Chart 7-8: Projection of Assets to Expenditures Table 7-9: Balance Sheet at Total Contribution Rate of 3.80% (dollars in millions) Table 7-10: Internal Rates of Return by Group Table 7-11: Internal Rates of Return by Entry Age... 53

6 iv Ontario Retirement Pension Plan Actuarial Funding Report as at January 1, 2018 Table 9-1: Sensitivity Analysis Assumptions Table 9-2: Sensitivity Analysis Results Table 9-3: Combined Sensitivity Assumptions Table 9-4: Combined Sensitivity Results Table 9-5: Investment Experience Scenarios Chart 9-6: Projection of Assets to Expenditures Ratio for Investment Experience Scenarios at Total Contribution Rate of 3.80% Table 9-7: Projected Impact on Plan Provisions Due to Investment Experience Scenarios Table A-1: Annual and Total Fertility Rates Table A-2: Annual Mortality Rates (deaths per 1,000 persons) Table A-3: Mortality Rates: Ministry Demographic Projection vs. CPP Actuarial Report (rates per thousand) Table A-4: Mortality Improvement Ratios: Ministry Demographic Projection vs. CPP Actuarial Report Table A-5: Cohort Life Expectancies, Including Subsequent Improvements (years) Table A-6 Cohort Life Expectancies, Including Subsequent Improvements: Ministry Demographic Projection vs. CPP Actuarial Report (years) Table A-7: Net Migration into Ontario (thousands) Table A-8: Labour Force Participation Rates Table A-9: Retirement Assumptions Table A-10: Price Inflation Table A-11: Real Wage Growth... 79

7 Ontario Retirement Pension Plan Actuarial Funding Report as at January 1, Section 1: Executive Summary A. Purpose of the Report This is the Actuarial Funding Report on the Ontario Retirement Pension Plan (ORPP). It presents the initial actuarial projections of the ORPP for the 100-year period from the ORPP s implementation date of January 1, 2018 to December 31, The Actuarial Funding Report was commissioned by the Ontario Ministry of Finance (Ministry) in support of the Ministry s development of the ORPP legislation and plan documentation and for registration of the ORPP under the Income Tax Act, Canada (ITA). The Government of Ontario (Government) tabled the Ontario Retirement Pension Plan Act (Strengthening Retirement Security for Ontarians), 2016 (ORPP Act) in April The ORPP Act received Royal Assent on June 9, 2016 but has not been proclaimed, and its provisions form the basis for this Actuarial Funding Report. The regulations described in the ORPP Act remain forthcoming. The key purposes of this Actuarial Funding Report are to: provide the Ministry the projected financial status of the ORPP over a long projection period, provide the Ministry the information needed to evaluate the sustainability of the ORPP, as defined in the ORPP Act, provide the Ministry the information needed to assist the Government with finalizing the plan provisions in accordance with the ORPP Act, and provide the Ministry the information needed by the Canada Revenue Agency (CRA) to approve the registration of the ORPP under the ITA. B. Scope of the Report Section 2 of this Actuarial Funding Report provides the background of the ORPP. Section 3 provides the Ministry s definition of sustainability and sets out the funding mechanisms to be used to maintain sustainability. Sections 4, 5 and 6 provide an overview of the methodology employed in the actuarial projections, the data collected and the actuarial assumptions used for the projections. The projections of contributions, expenditures 1 and assets are set out in Section 7, along with an evaluation of the ORPP s sustainability and balance sheet, as well as analysis in respect of intergenerational and intragenerational equity. Section 8 provides an overview of several risks affecting both the near-term and long-term projection of the ORPP. Section 9 shows the sensitivity of the projections to selected alternative assumptions, as well as illustrating how hypothetical scenarios of outcomes could impact the ORPP. 1 In this Actuarial Funding Report, expenditures are defined as pensions and other amounts payable to eligible ORPP pensioners, including beneficiaries, plus ORPP operational costs.

8 2 Ontario Retirement Pension Plan Actuarial Funding Report as at January 1, 2018 Appendix A provides further details in respect of the actuarial assumptions used for the projections and additional information collected in support of certain of the assumptions. Appendix B provides a summary of the plan provisions provided by the Ministry for this Actuarial Funding Report. Appendix C provides a summary of the actuarial standards applicable to this Actuarial Funding Report. C. Key Report Dates and Subsequent Events This Actuarial Funding Report was completed on (Report Date). We completed the projections contained in this report in April 2016 using a measurement date of January 1, 2018, the effective date of the ORPP. The date at which the tax data and population projection data from the Ministry and population projection assumptions were finalized for purposes of this Actuarial Funding Report is August 31, The date at which the plan provisions, other projection assumptions, and directions from the Ministry were finalized for purposes of this Actuarial Funding Report is March 31, 2016 (Cut-off Date). To our knowledge, there were no substantive changes to the ORPP Act between the Cut-off Date and June 9, 2016, the date on which the ORPP Act received Royal Assent. Similarly, there were no changes to the directions received from the Ministry between the Cut-off Date and the Report Date. The ORPP will not take full effect until the ORPP Act is proclaimed, the ORPP is approved and registered by the CRA, and the administrative practices are adopted. The Government (or the ORPP Administration Corporation, where applicable) has the authority to modify the plan provisions and the funding mechanisms to maintain sustainability, and to establish other policies or procedures as it deems appropriate. The plan provisions and funding mechanisms to maintain sustainability for the projections used in this Actuarial Funding Report are based on the ORPP Act and directions from the Ministry. The plan provisions and funding mechanisms to maintain sustainability described in this Actuarial Funding Report should not be construed as representing the final decisions or policies of the Government and/or the ORPP Administration Corporation. D. Key Results and Findings The results of the actuarial projections show the ORPP to be sustainable for the period until 2117, based on the definition of sustainable in the ORPP Act and our understanding as to how sustainability may be defined in the regulations. In particular: The number of Active Contributors 2 is projected to be 4.6 million in 2020, when all Implementation Waves are complete, out of a total working-age population of 9.3 million. By 2060, ORPP Active Contributors are projected to reach 5.1 million out of a total working-age population of 11.5 million, and by 2117, ORPP Active Contributors are projected to reach 7.6 million out of a total working-age population of 17.1 million. 2 In this Actuarial Funding Report, Active Contributors, for a given year, are defined to mean the ORPP members expected to contribute at least one dollar during the year.

9 Ontario Retirement Pension Plan Actuarial Funding Report as at January 1, Based on the ultimate legislated contribution rate of 3.80% of Contributory Earnings (the Total Contribution Rate for members and employers combined and after all Implementation Waves): the assets of the ORPP are projected initially to grow significantly faster than expenditures between 2018 and By 2030, assets are projected to be $97 billion ($72 billion in constant 2016 dollars) and annual contributions and expenditures are projected to be $8.7 billion and $1.4 billion respectively ($6.5 billion and $1.1 billion in constant 2016 dollars). In 2030, the Assets to Expenditures Ratio is projected to reach a peak of 69.1; between 2030 and 2060, the assets are projected to continue to grow significantly, reaching $960 billion ($394 billion in constant 2016 dollars). In 2060, annual contributions and expenditures are projected to be $26 billion and $28 billion respectively ($11 billion and $12 billion in constant 2016 dollars), with expenditures projected to exceed annual contributions for the first time. In 2060, the Assets to Expenditures Ratio is projected to be 33.8; and beyond 2060, while the assets continue to increase, the Assets to Expenditures Ratio continues to decline until it levels off at approximately 25.5 in 2095, when the ORPP is projected to reach a mature financial condition. By 2117, the assets are projected to reach $9.6 trillion ($1.3 trillion in constant 2016 dollars) and annual contributions and expenditures are projected to reach $222 billion and $373 billion respectively ($30 billion and $50 billion in constant 2016 dollars). The Sustainability Rate, 3 as defined in the ORPP Act, is 3.78% of Contributory Earnings (member and employer combined). Since this is less than the Total Contribution Rate (following the Implementation Waves), the Total Contribution Rate is projected to be sufficient to maintain the ORPP. The significant growth in the Assets to Expenditures Ratio in the early years, followed by a lengthy period of gradual decline, is a natural progression for a new social security program such as the ORPP. The ORPP is projected to take a significant number of years to mature before the Assets to Expenditures Ratio can become stable. E. Limitations For the purpose of this Actuarial Funding Report, the ORPP is considered a social security program. The actuarial analysis of social security programs is based on numerous assumptions. Social security programs are complex and their future contributions and expenditures depend on many economic and demographic factors. Further, the projection of cash flows for a social security program is performed for an extended time period. With the passage of time, the financial position of the social security program will almost certainly differ from any actuarial projections. Users of an actuarial projection must be aware that the actual outcome is inherently unknowable in advance and will differ from the projections. 3 The Sustainability Rate is the lowest contribution rate (members and employers combined) to sustain the ORPP as defined by the funding mechanisms used to maintain sustainability. A more detailed description is provided in Section 3-C of this report.

10 4 Ontario Retirement Pension Plan Actuarial Funding Report as at January 1, 2018 The projections in this Actuarial Funding Report are based on the available data and best-estimate actuarial assumptions. There will be many factors that create favourable or unfavourable experience for the ORPP. For example, given that the ORPP is a new social security program which is not universal in design, the actual number of members will be directly affected by the number of employers who provide workplace pension plans that meet the definition of Comparable Workplace Pension Plans in the ORPP Act. 4 Since self-employed and certain other workers are not currently eligible for the ORPP, the number of ORPP members could be higher or lower than the projections herein (or the distribution of members by age, sex or earnings bands could be different than assumed), affecting the projections of contributions, expenditures and plan assets. The future is inherently unknowable and the projections herein are intended to provide only an initial assessment of the sustainability of the ORPP. As no contributions have yet been collected and the ORPP Administration Corporation (ORPP AC), established by the Ontario Retirement Pension Plan Administration Corporation Act, 2015 (ORPP AC Act), is not yet fully operational, the Ministry specified, based on its analysis, that Willis Towers Watson use particular assumptions for the real rates of investment return (i.e., above price inflation), investment management expenses and operational costs. The specified assumptions include an ultimate real rate of investment return of 4.0% per year and ultimate investment management expenses of 0.5% per year. While the ORPP AC has not yet developed an investment strategy, nor has it determined how that strategy will be deployed, the process is underway for the ORPP AC to develop an investment framework that will form the foundation for a long-term investment strategy for the prudent and effective investment of ORPP assets. Independent from the due diligence conducted by the Ministry, Willis Towers Watson performed analysis to assess whether the investment return assumptions were plausible. First, we compared the assumptions specified by the Ministry to the investment return assumptions (net of investment expenses) employed by several large Ontario pension plans and found no evident shortcomings. Then, Willis Towers Watson modeled the potential real investment returns for some investment strategies which would be considered customary in Canada, without making any allowance for possible added value from active management net of related investment management expenses. We determined that there are a range of such asset mixes that could be expected to generate the specified real rate of investment return assumption of 4.0% per year, with investment management expenses of 0.5% per year. As a result of the foregoing assessments, we consider the assumptions specified by the Ministry to be plausible. However, Willis Towers Watson has no opinion as to whether the investment strategy ultimately selected by the ORPP AC would generate such returns. Similarly, the ORPP AC must develop its administration infrastructure. Willis Towers Watson is unable to assess the plausibility of the per capita rates for operational costs specified by the Ministry and has no opinion as to whether these ORPP operational costs will be within the cost projections contained in this Actuarial Funding Report. The projections shown in this Actuarial Funding Report were prepared using best-estimate assumptions that we selected (except for assumptions specified by the Ministry). Section 9 provides 4 Refer to Subsection 5(3) of the ORPP Act.

11 Ontario Retirement Pension Plan Actuarial Funding Report as at January 1, an illustration of the sensitivity of the projections to changes in the economic or demographic outlook, by analyzing alternatives for many of the key projection assumptions. For each of the selected assumptions, a low-cost and high-cost assumption has been modeled (in each case all other assumptions remain at the current best estimate), with the effect on the key ORPP metrics summarized. The sensitivity analysis revealed that the hypothetical Sustainability Rate developed using the low-cost and high-cost alternative assumptions could be between 2.9% and 5.1% of Contributory Earnings. Further, Section 9 includes sensitivity analysis under which the economic and demographic outlook for all three of the most impactful assumption sensitivities net investment return, wage growth and mortality is changed to the low-cost or high-cost assumptions analyzed earlier. The foregoing sensitivities and scenarios are based on a premise where it would be possible to know from the outset how the economic and demographic factors will evolve over time. In reality, this is not possible and experience differing from the assumptions will arise over time. Therefore, Section 9 also includes two scenarios where the ORPP experiences substantial favourable and unfavourable investment experience in 2050, at a time when the ORPP has amassed a considerable amount of assets. As a result, this scenario provides insight into the potential impact such positive or adverse experience would have on the ORPP funded status and illustrates how the funding mechanisms to maintain sustainability contained in the ORPP Act would be applied in response to such experience. The ORPP Act sets out the requirement for periodic actuarial valuations of the ORPP. Each actuarial valuation will allow for actual membership data to be collected and for actuarial assumptions and methodologies to be refined.

12 6 Ontario Retirement Pension Plan Actuarial Funding Report as at January 1, 2018 F. Actuarial Opinion In our opinion: the data upon which this Actuarial Funding Report is based are sufficient and reliable for the purposes of this Actuarial Funding Report; the assumptions for the real rates of investment return, investment management expenses and operational costs were specified by the Ministry, and have been relied upon by Willis Towers Watson. There is insufficient information at this time on the investment strategy, its implementation, and on the administration structure to fully assess the specified assumptions. Therefore, we do not have an opinion on the appropriateness of these assumptions for the purposes of this Actuarial Funding Report; the other assumptions used are, individually and in aggregate, reasonable and appropriate for the purposes of this Actuarial Funding Report; the methodology used, including the selection of the open group projection method, is appropriate for the purposes of this Actuarial Funding Report and is consistent with the funding mechanisms to maintain sustainability of the ORPP as specified in the ORPP Act and the objective announced by the Government in respect of intergenerational equity; based on the results of the projections contained in this Actuarial Funding Report, including the data, assumptions (including the assumptions specified by the Ministry) and methodologies disclosed herein, the Sustainability Rate to finance the Ontario Retirement Pension Plan is projected to be 3.78% of Contributory Earnings; and the Total Contribution Rate of 3.80% of Contributory Earnings established in the ORPP Act exceeds the Sustainability Rate of 3.78% of Contributory Earnings. This Actuarial Funding Report has been prepared, and our opinions given, in accordance with both accepted actuarial practice in Canada and internationally accepted actuarial practice as specified by International Standard of Actuarial Practice 2 Financial Analysis of Social Security Programs. Towers Watson Canada Inc. C. Ian Markham Philip A. Morse Fellow, Canadian Institute of Actuaries Fellow, Canadian Institute of Actuaries

13 Ontario Retirement Pension Plan Actuarial Funding Report as at January 1, Section 2: Overview A. Background In its 2014 Budget, the Government announced its commitment to introduce the ORPP, a new social security program intended to provide Ontarians with a predictable and secure stream of income to improve their living standard in retirement. Ontario workers, like those in other provinces, currently have three pillars supporting them financially in retirement: Government of Canada programs, such as Old Age Security (OAS) and Guaranteed Income Supplement (GIS), and the Ontario Guaranteed Annual Income System (GAINS) program that provide benefits based on residency in Canada and level of income and which are entirely financed from the revenues of the Governments of Canada and Ontario, respectively, the Canada Pension Plan (CPP), 5 which provides a retirement benefit based on the years of participation and covered earnings for each worker, where the benefits are financed by employees and their employers (with self-employed persons paying both shares), and workplace pension plans and tax-assisted savings plans. 6 With the implementation of the ORPP in 2018, eligible Ontario workers and their employers will both contribute, potentially increasing the level of savings for all eligible workers and effectively creating another pillar of support for their financial security in retirement. While the ORPP may have certain similarities to the CPP, the Government is developing the ORPP to meet its retirement income objectives for Ontarians. The high-level plan provisions announced by the Government include the following: certain Ontario workers, such as the self-employed and those employed by a federally-regulated employer will not be eligible for the ORPP; Ontario workers with a Comparable Workplace Pension Plan provided by their employer will not be eligible for the ORPP, except as a result of an election by their employer to opt in to the ORPP; following a transition period of three years, eligible Ontario workers and their employers will each contribute above a minimum earnings threshold 1.9% of covered earnings up to the annual Maximum Annual Earnings Threshold of $90,000 (in 2017 dollars), with the Maximum Annual Earnings Threshold expected to increase in line with the annual growth in the Canadian average wage, as measured by Statistics Canada; 5 Quebec workers instead participate in the Quebec Pension Plan, which provides very similar benefits to the CPP. Saskatchewan residents also have the option to contribute to the Saskatchewan Pension Plan (with no matching or other contributions from their employers or by the Saskatchewan Government). 6 Tax-assisted savings plans include Registered Retirement Savings Plans, Tax-Free Savings Accounts and Deferred Profit Sharing Plans.

14 8 Ontario Retirement Pension Plan Actuarial Funding Report as at January 1, 2018 the ORPP is targeting a benefit of up to 15% of average covered earnings for Ontarians who contribute for a 40-year career; and the ORPP will be administered by the ORPP AC, an entity that is arm s length from the Government. The Ministry engaged Willis Towers Watson to provide actuarial advice in respect of the development of the ORPP. A key component of the actuarial advice provided to the Ministry relates to the long-term sustainability of the ORPP. In particular, this Actuarial Funding Report sets out projections of ORPP revenues (defined in this report as the contributions from eligible members and their employers plus net investment returns on ORPP assets), ORPP expenditures and the ORPP assets. This Actuarial Funding Report sets out the projected financial status of the ORPP over a 100-year period reflecting the plan provisions and funding mechanisms to maintain sustainability of the ORPP contained in the ORPP Act and, based on the best-estimate assumptions and methodologies employed for the projection, confirms the sufficiency of the member and employer contribution rates, along with expected net investment returns thereon, to finance all expenditures under the ORPP. B. Intergenerational and Intragenerational Equity In addition to the other objectives established for the ORPP, the Government has also expressed its desire that the ORPP will provide a degree of intergenerational and intragenerational equity. Intergenerational equity focuses on the contributions and benefits between one generation of members and another. Intragenerational equity focuses on the contributions and benefits of the members within a given generation. One means of assessing equity between groups of members is to determine and compare the Internal Rate of Return (IRR) that each group of members is expected to earn from the ORPP. The IRR is the constant annual rate of investment return that would need to be applied to the pool of assets generated by the group s expected contributions such that the accumulated assets are sufficient to precisely pay the group s expected benefits. Naturally, the IRR for a group of members cannot be fully determined until all members in the group have made all their contributions and collected all their benefits, so the IRR analysis is based on a projection of future contributions and benefits for the group. Given the pooling concepts embedded in a defined benefit social security program like the ORPP, it is not intended that each member (or group of members) receive a value exactly equal to their own (and their employer s) contributions accumulated with an allocation of investment return and reduced by an allocation of operational costs. Such an approach would see some retirees outliving such an accumulated value if they live longer than expected, thus defeating the broader social security objectives of the ORPP.

15 Ontario Retirement Pension Plan Actuarial Funding Report as at January 1, As a result, the objective of the ORPP is to ensure that the degree of intergenerational and intragenerational equity is reasonable. In Section 7, we analyze the intergenerational equity and intragenerational equity for the ORPP. C. Intended Purpose Since the ORPP Act and related regulations have not been proclaimed or otherwise brought into force, and the plan has not been approved for registration by the CRA, this Actuarial Funding Report has been developed based on certain directions from the Ministry in respect of the plan provisions and the funding mechanisms used to maintain sustainability of the ORPP. Until such time as the ORPP Act is proclaimed and the regulations under the ORPP Act are finalized, this Actuarial Funding Report should be considered preliminary in nature. Subsequent to this Actuarial Funding Report, changes may be made to the ORPP Act, its regulations or the funding mechanisms to maintain sustainability which could affect the projections. Therefore, any distribution of this report should be accompanied by a clear statement that the ORPP Act has not yet been proclaimed. An Actuarial Funding Report may be prepared in respect of the final ORPP legislation if there are any provisions which differ from those used in the preparation of this Actuarial Funding Report. This report has been prepared to present the initial projections of the ORPP based on the data collected and assumptions developed solely for this purpose. The data, assumptions and results of the projections in this Actuarial Funding Report should not be used or relied upon for any other purpose.

16 10 Ontario Retirement Pension Plan Actuarial Funding Report as at January 1, 2018 Section 3: Sustainability A. Introduction The ORPP has been established to provide pension benefits to Ontarians for generations to come. To fulfill this commitment, it is necessary to ensure that adequate contributions are collected and are invested so that the future expenditures of the ORPP can be met. For any pension plan, the Basic Funding Equation over the life of the plan is: Contributions + Net Investment Return = Benefits Paid + Operational Costs or, in other words: INPUTS = OUTPUTS Actual contributions, investment returns (net of investment management expenses), benefits paid and operational costs may be different than assumed. For example, if investment returns are greater than assumed, and all other factors remain constant, the total of the inputs will be greater than the outputs. Alternatively, if pensioners live longer than expected, this could cause the outputs to exceed the inputs. While this Basic Funding Equation is over the whole life of the ORPP, for practical implementation it needs to be considered over a finite period and the evolution of the balance between inputs and outputs needs to be monitored. In order to manage the ORPP as a sustainable plan, it is necessary to understand each element of the Basic Funding Equation and, if the equation gets out of balance, to understand the means by which the ORPP can be returned to a sustainable state. The ORPP AC is responsible for administering the ORPP in accordance with the ORPP AC Act and its regulations and the ORPP Act and its regulations. B. Assessment of Sustainability The ORPP Act incorporates a means for assessing the sustainability of the ORPP and the mechanism(s) for making adjustments to the plan provisions to address any imbalances that could occur. These provisions are expected to be supplemented in future by regulations made under the ORPP Act. Following consultations with the Ministry, assumptions in respect of the specific requirements to be applicable to future Plan actuarial valuations have been made for the purposes of this Actuarial Funding Report. The assessment of Plan sustainability (as defined by the ORPP Act) is based on a long-term projection for 100 years from the actuarial valuation measurement date (Projection Period), of the annual ratios of Plan assets to Plan expenditures (Assets to Expenditures Ratio), the Sustainability Rate and the Sustainability Contribution Rate Differential (SCRD) of the Plan, which is derived from this projection, as outlined below:

17 Ontario Retirement Pension Plan Actuarial Funding Report as at January 1, The Assets to Expenditures Ratio, for a given year, is determined as the market value of Plan assets on December 31 of the year divided by the expenditures (i.e., benefits paid plus operational costs) in the year. This ratio provides an indication of the number of years that the current level of expenditures could be provided from the Plan assets without any future contributions or net investment return. As the ORPP matures, the projected value of the Assets to Expenditures Ratios should level off, meaning that the relationship between contributions, net investment returns and expenditures has also levelled off; and The Sustainability Rate is the lowest contribution rate 7 (members and employers combined) such that the Assets to Expenditures Ratio at the Second Stability Test Year is not less than the Assets to Expenditures Ratio at the Initial Stability Test Year, where: the Initial Stability Test Year is at least 10 years after the Actuarial Review Period, defined below, and not earlier than 2080, and the Second Stability Test Year is at least 10 years after the Initial Stability Test Year, and not earlier than 60 years from the end of the Actuarial Review Period. C. Sustainability Contribution Rate Differential The SCRD is the key measure by which the sustainability of the ORPP is assessed. It is determined as the difference between the current Total Contribution Rate being made to the Plan as of the date for which the sustainability is being assessed and the Sustainability Rate. The ORPP Act requires an actuarial valuation of the ORPP to be conducted every three years to ensure a periodic assessment of the sustainability of the ORPP. Each actuarial valuation will cover 100 years, including both the Actuarial Review Period (defined as the three-year period immediately following the actuarial valuation measurement date) and the subsequent 97 years. For the ORPP to be considered to be Funded on a Sustainable Basis, the ORPP Act requires that the actuarial valuation must demonstrate that the SCRD, determined at the end of the Actuarial Review Period, is greater than -0.10% and less than +0.10% of Contributory Earnings. D. Impact of Actuarial Valuation A key component of the ORPP Act is the specification of actions that may be taken by the ORPP AC based on the SCRD at each actuarial valuation. Actions may be required to bring the Basic Funding Equation back into balance in a specific and consistently applied manner at each actuarial valuation. If, based on an actuarial valuation, the ORPP is considered to be Funded on a Sustainable Basis, the ORPP Act does not permit the ORPP AC to make changes to the plan provisions. The ORPP Act specifies the ORPP to have a Funding Shortfall if the SCRD is equal to or less than -0.10% of Contributory Earnings (i.e., if the projected inputs are less than the projected outputs). If the ORPP has a Funding Shortfall, the ORPP Act provides that the plan provisions would be amended in order to eliminate the Funding Shortfall and bring the ORPP back to being Funded on a 7 The Sustainability Rate is assumed to take effect at the end of the Actuarial Review Period and, following consultation with the Ministry, is assumed to be rounded to the nearest 0.01% of Contributory Earnings.

18 12 Ontario Retirement Pension Plan Actuarial Funding Report as at January 1, 2018 Sustainable Basis. That is, following the amendments, the resulting SCRD would be within ±0.10% of Contributory Earnings. The ORPP Act authorizes the use of the following actions when determining amendments to the plan provisions to address a Funding Shortfall: Reverse previous plan changes made as a result of one or more previous Funding Excesses, in whole or in part; Reduce, simultaneously, the proportions of the growth in average wage and price inflation that are used to annually increase the Maximum Annual Earnings Threshold and pensions in payment, respectively, as follows: 8 the proportion of the growth in average wage that is used to annually increase the Maximum Annual Earnings Threshold is reduced by no more than 10%; the proportion of price inflation that is used to annually increase pensions in payment is reduced by no more than 25%; the above reductions in the proportions are determined in a 2:5 ratio; and In the event that, following the above amendments, the SCRD is not greater than -0.10% of Contributory Earnings, the required contribution rates for members and their employers are increased. The ORPP Act does not authorize the ORPP AC to reduce accrued ORPP benefits or pensions in payment when addressing a Funding Shortfall. Rather, the ORPP Act only permits future indexing of the Maximum Annual Earnings Threshold and pensions in payment to be adjusted. The ORPP Act specifies the ORPP to have a Funding Excess if the SCRD is equal to or greater than +0.10% of Contributory Earnings. If the ORPP has a Funding Excess, the ORPP Act provides the following direction as to what action is to be taken, if any: If the SCRD is at least +0.10% of Contributory Earnings and equal to or less than +1.00% of Contributory Earnings, the ORPP AC must give notice to the Government setting out the ORPP AC s recommendations on how to address the funding excess, which could include some or all of the following: reverse previous plan changes made as a result of one or more previous Funding Shortfalls, in whole or in part; decrease the Total Contribution Rate; or maintain the Funding Excess. 8 The reductions in the specified proportions are determined arithmetically and apply to all years following the Actuarial Review Period. The limits for changes are applied independently at each actuarial valuation. The cumulative reductions in the specified proportions over a series of actuarial valuations may exceed 10% and 25%, respectively.

19 Ontario Retirement Pension Plan Actuarial Funding Report as at January 1, If the SCRD is greater than +1.00% of Contributory Earnings, the ORPP AC must give notice to the Government setting out the ORPP AC s recommendations on how to reduce the Funding Excess such that the resulting SCRD would not exceed +1.00% of Contributory Earnings; and if the Government does not make a decision in respect of the recommendation within the prescribed time period, the ORPP AC is required to reverse any previous plan changes made as a result of one or more previous Funding Shortfalls, in whole or in part, and/or decrease the Total Contribution Rate such that following all amendments, the SCRD is +1.00% of Contributory Earnings. To ensure that members and employers can be notified of any forthcoming changes to the ORPP and that the ORPP AC can complete any necessary system changes needed to administer the ORPP as amended, the above actions would take effect following the end of the Actuarial Review Period.

20 14 Ontario Retirement Pension Plan Actuarial Funding Report as at January 1, 2018 Section 4: Projection Methodology A. Introduction The review of the sustainability of the ORPP involves the projection of contributions, expenditures and assets of the ORPP over a long period of time. In an ideal circumstance, the actuary would consider past plan experience when establishing the actuarial assumptions and methodologies, but given that the ORPP is not yet in operation and does not have any members, such historical information does not exist. For projections in this Actuarial Funding Report, certain assumptions were specified by the Ministry. In all other cases, we developed best-estimate assumptions based on the data and other information collected in conjunction with discussions with the Ministry and, when relevant, with consideration of the assumptions used for the CPP actuarial projections. In all cases, we applied our professional judgment. B. Development of Projection System The projection of a social security program is a complex exercise given the sheer number of factors, many of which are inherently unknowable in advance. In order to undertake projections of the financial status of the ORPP, it was necessary to specify and develop an actuarial model representing our bestestimate view of the interrelated demographic, economic and other factors that are expected to affect the ORPP financial status. In actuarial practice, a model designed to provide a best-estimate model is often not unique. Rather, it is possible that another actuary could develop an alternative model reflecting that actuary s views of the factors affecting the projected financial status of the ORPP, and such an alternative model could also be considered by that actuary to be a best estimate. It was necessary to incorporate this actuarial model into a computerized projection system. Since the ORPP is a new pension arrangement, with a design and approach to funding which is significantly different than any other pension plan in Canada, there was no existing projection system which could be directly applied to the ORPP. As a result, we developed our projection system to be consistent with our actuarial model specifications and to enable us to meet the calculation and reporting requirements specified in the ORPP Act. The projection system takes as inputs the available data and actuarial assumptions, applies our actuarial model, and generates a plausible projection of the future financial status of the ORPP for a 100-year period. In developing the projection system, certain simplifications had to be made for computational expedience. For example, it was not possible to project each current and future Ontarian on a person-by-person basis; therefore, the data and projections have been prepared by cohorts. Similarly, it was impractical to define a unique earnings distribution for each age, sex and projection year; therefore, an approximation technique was applied to simulate the earnings distributions as needed. Other refinements were made to reasonably incorporate the actuarial model as well as the available data and assumptions into the projection system.

21 Ontario Retirement Pension Plan Actuarial Funding Report as at January 1, There are a number of limitations related to the development of an actuarial model and its representation in a projection system, noting that every projection system has some degree of limitation, introducing an element of risk. To minimize and, where possible, to mitigate these risks, a number of steps were taken to ensure that the results developed by the projection system were actuarially sound. These steps included: ensuring that the mathematical calculations embedded in the actuarial model and its computerization were developed in a manner consistent with accepted actuarial practice; ensuring that the data collected and, where applicable, any assumptions developed from the data collected were sufficient and appropriate for the purposes of this Actuarial Funding Report; ensuring that the interim calculations from various modules of the projection system (e.g., projections of the population, projections of accrued pension credits for each cohort, projections of new pensioners and total number of pensioners, projections of amounts payable to new pensioners and total payments to pensioners) were reasonable and determined with a consistent approach from module to module; determining the sensitivity of the projection results to variations in the membership data, plan provisions and/or projection assumptions, and ensuring that the alternative projection results under each sensitivity are as expected; and ensuring that the calculations and sensitivities are consistent with published sensitivities from the CPP Actuarial Report, or where such calculations or sensitivities are inconsistent, that any such differences are appropriate given the different plan designs and approaches to funding. There are several key metrics we used to assess the financial status of the ORPP, including the Assets to Expenditures Ratio, the Sustainability Rate and the assets as a percentage of liabilities on the balance sheet. There is a complex, but consistent, relationship between these metrics such that for a given change to the assumptions, the changes to one of the metrics allows us to assess the reasonableness of the corresponding changes to the other metrics. These relationships have been consistently observed throughout our development of the projection system and the projections of the ORPP financial status, increasing our confidence in the credibility of the projection system. Based on the foregoing, we are satisfied that the projection system adequately reflects the actuarial model developed for the purposes of this Actuarial Funding Report. The balance of Section 4, along with the supporting information on assumptions and methods contained in this Actuarial Funding Report, sets out the key elements of our actuarial model. C. Projection Method In consideration of the funding mechanisms used to measure and maintain sustainability of the ORPP set out in the ORPP Act, the open group projection methodology has been used for this Actuarial Funding Report. A social security program is intended to operate for the long term, collecting contributions and paying benefits to successive generations of members. To achieve intergenerational and intragenerational equity, stable contribution rates and benefits under the social security program

22 16 Ontario Retirement Pension Plan Actuarial Funding Report as at January 1, 2018 are important. Therefore, the inclusion of future generations of members is necessary in the sustainability assessment. As a new plan, the ORPP is expected to incur significant start-up costs establishing its infrastructure, administration systems and processes, and investment management operations. The open group projection methodology effectively spreads these costs over the initial and future generations of ORPP members, rather than allocating the costs solely to the initial generation. In our view, the open group methodology, which considers the current and expected future members of the program, is the most appropriate approach for assessing the long-term sustainability of the ORPP. D. Projection Period The projection period needs to be sufficiently long to allow the ORPP, as a new social security program, to mature. In its early years the ORPP will have no or few pensioners, so contributions will far exceed expenditures, allowing the ORPP assets to increase quickly. Then, as an increasing number of the members who have joined the ORPP start to retire and move from being members to pensioners, the assets will still grow significantly, and the Assets to Expenditures Ratio will start to decline. Our projections revealed that the Assets to Expenditures Ratio levels out between 2090 and E. Population Projection Our model starts with the projection of the population of Ontario, building from the data and assumptions developed by the Ministry s Economic Policy Branch Income, Employment and Demographic Issues Unit (Ministry Demographic Projection) for the period from 2012 to Starting with population data subdivided by age and sex in 2012, the Ministry Demographic Model projects annual fertility (i.e., births), mortality (i.e., deaths) and net migration into (or out of) Ontario. Net migration represents the net effect of immigration to (or emigration from) Ontario and other changes in non-permanent residence (e.g., students moving to/from Ontario as they begin/end university programs). We understand that the Ministry Demographic Projection does not represent Government policy targets, desired population outcomes or explicit economic growth assumptions. The Ministry Demographic Projection has been developed based on extensive analysis of recent trends of, and future expectations for, fertility, net migration and mortality that affect the Ontario population. The Ministry prepared the projections separately for each of the 49 Ontario census divisions up to 2041 and projected the population in aggregate thereafter. We have used the work of the Ministry in the preparation of the Ministry Demographic Projection until We compared the population projection prepared by the Ministry to other sources, including the Population Projections for Canada, Provinces and Territories 2013 to 2038 (Statistics Canada

23 Ontario Retirement Pension Plan Actuarial Funding Report as at January 1, Medium Projection), 9 prepared by Statistics Canada, and found the Ministry Demographic Projection to be reasonable and appropriate for the purposes of the ORPP projection. We extrapolated the Ministry Demographic Projection to extend our projections to F. ORPP-eligible Members and Comparable Workplace Pension Plans From the population projection, we projected the distribution by age, sex and earnings of ORPPeligible members, the total contributions remitted and, ultimately, the total benefits paid. This entailed developing a model of the Ontario population and excluding persons who are: not in the labour force (i.e., because of labour force participation rates less than 100%), expected to not be enrolled in the ORPP because of age or because of the nature of their employment (e.g., with a federally-regulated employer or self-employed), or deemed to already be participating in a Comparable Workplace Pension Plan. The initial distribution of Pensionable Earnings was developed based on the data reported on 2012 tax returns and related T4 information slips for Ontario residents. 10 We worked with the Ministry s Office of Economic Policy Statistical and Quantitative Research Branch to construct a dataset from 2012 tax returns and related T4 Statement of Remuneration Paid information slips for Ontario residents. Although self-employment income reported on the tax return is available it was excluded from this analysis. For example, if a tax filer had $50,000 of self-employment income in a year, such person was considered to have $0 of ORPP-eligible employment income in the tax data extract. Alternatively, if a tax filer had $30,000 of employment income and $20,000 of self-employment income in the year, such person was considered to have $30,000 of ORPP-eligible employment income. We similarly needed to eliminate the employment income for workers who reside in Ontario but who are employed by a federally-regulated employer. The Ministry was able to reasonably identify, based on reported employer Business Number, Business Name, NAICS code and pension plan registration numbers, an assessment of the T4 earnings data which related to tax filers in this situation and was able to exclude such earnings from the tax data provided. Next, it was necessary to eliminate the employment income for Ontarians deemed to be participating in a Comparable Workplace Pension Plan. Consistent with the August 11, 2015 announcements by the Government, we worked with the Ministry to isolate and exclude, on a best-estimate basis, 11 the employment income for tax filers where the worker appears to participate in a Comparable Workplace 9 Source: Statistics Canada. Table Projected Population, by Projection Scenario, Age and Sex, as of July 1, Canada, Provinces and Territories, Annual (table) and Table Components of Projected Population Growth, by Projection Scenario, Canada, Provinces and Territories, Annual (table). CANSIM. September The data provided to Willis Towers Watson did not include any individual tax records. The data was tabulated by sex, age and ranges of earnings, ensuring that the privacy of all Ontarians was protected. Further, in the data provided, all earnings used for the distributions were limited to the range of earnings necessary for determining ORPP contributions and benefits (i.e., tax filers with higher earnings had their earnings limited for reporting purposes). 11 The approach described above is only intended to support an extraction of 2012 tax data in respect of tax filers anticipated to be eligible for the ORPP. The ORPP AC will be responsible to establish the detailed procedures and reporting requirements to ensure that all Ontarians eligible for the ORPP are appropriately enrolled and have the necessary contributions withheld and remitted to the ORPP.