Pension Plan for Academic Employees of the University of New Brunswick ( AEPP )

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1 Pension Plan for Academic Employees of the University of New Brunswick ( AEPP ) Overview of Proposed Plan Changes Information Session for Active Members Robert Blais and Dylan Moser October 29 and 30, Towers Watson. All rights reserved.

3 Background The financial condition of the AEPP and the outlook for funding requirements has been a serious concern for some time now To help improve the financial position of the plan and provide funding stability, a 6-year Improvement Program was put in place effective July 1, 2007 Benefit accruals were reduced for the 6-year period (from 1.3/2.0 to 1.0/1.7) Additional contributions were remitted to a Rate Stabilization Account (RSA) Blended contribution rate of 10.05% of pensionable salary at the onset Despite these actions, the financial condition of the AEPP has deteriorated in recent years due to: Decreases in bond yields (impacts the liability discount rate assumption); Volatility in investment markets; and Improvement in life expectancy The most recent actuarial valuation revealed that the AEPP was significantly underfunded as at July 1, 2012: Deficit of $81 million on a going concern basis (i.e., 72% funded ratio) Deficit of $204 million on a hypothetical wind-up basis (i.e., 50% wind-up ratio) 3

4 Background Contributions are at an all time high and risk increasing in future years Blended contribution rate under most recent valuation was 12.65% (excluding the additional RSA contribution) Could conceivably increase to 15-16% range per Party as a result of: The depletion of the RSA in October 2012 The expiration of the current Improvement Plan in July 2013 Further potential decreases in the discount rate assumption and continued volatility in investment markets; and Anticipated changes in mortality assumptions Status quo is not an option Existing and projected funding rates are not sustainable for UNB as they place excessive pressure on the operating budget Current arrangement becoming unaffordable for members Canada Revenue Agency would likely not allow employee contributions at this level Unfortunately, the alternatives available for dealing with this pension issue are limited 4

5 Potential Alternatives for Addressing Pension Issue 1) Maintain current plan but reduce future benefits accruals Would not have an immediate material financial impact The existing deficit would still need to be funded Contribution requirements would initially remain around the current level Both UNB and members would continue to be exposed to the various risks associated with the defined benefit legacy liability for the foreseeable future In order to result in significant long term savings, future benefit accruals would have to be reduced significantly or completely altered (e.g., Defined contribution accruals for future service) Would result in inequitable treatment between membership groups as new members would be effectively be funding benefits for prior generations Various plan design options were investigated but ultimately the parties concluded that this would not be a viable solution 5

6 Potential Alternatives for Addressing Pension Issue 2) Wind-up the current plan and start over Winding-up the plan would mean that the current plan assets would be used to settle the benefit entitlements earned to date As the AEPP is currently in a significant deficit position, this would mean that: a) The parties would have to remit significant one-time contributions to fund the wind-up deficit (e.g., deficit estimated to be $204 Million as at July 1, 2012); b) Accrued benefits and pensions in payment would have to be drastically reduced (e.g., based on the actuarial valuation as at July 1, 2012, members would only receive 50% of their accrued benefit entitlements, if reductions were applied on a pro-rata basis); or c) A combination of a) and b) The parties concluded that a plan wind-up would not be a viable solution 6

7 Potential Alternatives for Addressing Pension Issue 3) Shared risk model New plan design option available under New Brunswick legislation since July 2012 Developed by the Task Force on Pensions following consultation with unions, the private sector and the Province Aims to maintain defined benefit type plans, but within a more viable and stable financial framework Based on the Dutch Model National pension program widely considered to be one of the most effective pension plans in the world Been operating for 15+ years now Existing plans registered in New Brunswick may be converted to the shared risk model A number of public sector and private sector plans have already converted After a thorough review, the parties concluded that the shared risk model is the best option available 7

Overview of Shared Risk Model Recipe for a Shared Risk Plan Target Benefit Plan Features Contributions may only vary within a small range Benefits targeted, not guaranteed Defined benefit risk

9 Overview of Shared Risk Model Recipe for a Shared Risk Plan Target Benefit Plan Features Contributions may only vary within a small range Benefits targeted, not guaranteed Defined benefit risk pooling features Rules for Surplus & Deficits Funding policy must list actions and priorities that trigger when funding level increases above or below regulated thresholds New Brunswick s Shared Risk Model Risk Management Framework Robust risk management objectives mandated to target high degree of benefit security Joint Sponsorship Features Independent administrator Cost sharing permitted up to 50/50 Changes to the Benefit Promise Accrued benefits under existing plan are converted to base benefits Subject to same risks as future accruals going forward Future earnings-linked upgrades and post-retirement indexing conditional on affordability 9

Risk Management Goals & Procedures There are two fundamental risk management objectives which have been converted into measurable goals Objectives Measurable Goals Primary Benefits are secure over

10 Risk Management Goals & Procedures There are two fundamental risk management objectives which have been converted into measurable goals Objectives Measurable Goals Primary Benefits are secure over long term At least a 97.5% probability that base benefits will not have to be reduced in any year over a 20-year period Secondary Provide benefit increases as intended On average, over a 20-year period, provide at least 75% of: a) The prior plan s post-retirement indexing provisions b) Annual CPI increases on accrued benefits which were previously based on final average earnings Annual stochastic modeling required to test plan s viability At least 1,000 economic scenarios over a 20 year projection period Model must be approved by Superintendent 10

12 Proposed Shared Risk Plan Base Benefit Accruals Benefits in respect of service up to June 30, 2013 On conversion, your base benefit will be determined in accordance with: The applicable benefit accrual formulas under the AEPP for each period of service; and Your best average pensionable salary as at June 30, 2013 Benefits in respect of service on or after July 1, 2013 For each year of service on or after July 1, 2013, you will accrue additional base benefits equal to: 1.1 % PENSIONABLE X % SALARY X UP TO YMPE PENSIONABLE SALARY ABOVE YMPE Your accrued base benefits will be increased in accordance with the plan s preretirement indexing provisions * Subject to Income Tax Act limits 12

13 Proposed Shared Risk Plan Pre-retirement Indexing Provisions (for active members) PTR Indexing Incomplete without accompanying discussions Your accrued base benefits will be adjusted annually to reflect any Progress Through the Rank (PTR) increases based on the Frozen PTR Scale Such increases are granted automatically each year (not based on funded status) The Frozen PTR Scale is the actual scale in effect on June 30, 2013, as may be increased to reflect any conditional indexing granted from time to time Conditional Indexing Your accrued base benefits and the plan s Frozen PTR Scale will be increased to reflect any conditional indexing granted Such increases are subject to the plan s ability to pay (i.e., determined annually based on funded status) Annual pre retirement conditional indexing target equal to inflation 13

14 Proposed Shared Risk Plan Post-retirement Indexing Provisions Conditional Post retirement Indexing After retirement or termination of employment, your pension will be adjusted annually to reflect any conditional indexing granted Such increases are subject to the plan s ability to pay (i.e., determined annually based on funded status Annual post retirement indexing target based on the current plan formula: Pensionable Service Target Indexing Formula Before July 1, 2003 Inflation subject to a maximum of 6.0% Between July 1, 2003 and June 30, 2004 Inflation subject to a maximum of 4.5% From July 1, 2004 (i) Inflation subject to a maximum of 0.5%; plus (ii) the lesser of: (A) (B) excess of the Average Investment Return over 7.75%; and excess of the 3 year average percentage inflation over the increase in (i) above. 14

15 Proposed Shared Risk Plan Required Member Contributions Initial member contributions are set at a blended rate of 11.5% of pensionable salary The specific contribution rates for pensionable salary below and above the YMPE threshold will fluctuate year to year For 2013, the rates will be 10.55% for pensionable salary up to $51,100 and 12.25% for pensionable salary in excess of $51,100 In addition, these contribution rates may be increased or decreased by up to 2.25% in future years, depending on the funded status of the plan Contribution adjustments will be triggered in accordance with the priorities established under the funding deficit recovery plan and funding excess utilization plan Unless a contribution holiday is required in accordance with the Income Tax Act (Canada) The University will contribute an amount equal to the total of the Members contributions each year 15

16 Proposed Shared Risk Plan Managing Deficits Funding Deficit Recovery Plan Triggered when open group funded ratio drops below 100% in two successive valuation reports First line of defense: Increase contributions Both member and employer contributions will be increased equally Subject to funding policy limits Last resort: Reduce base benefits Only required if the primary risk management goal* is not met following the maximum permitted contribution increase Base benefits must be reduced in equal proportion for all members As soon as funding position improves, any reductions to base benefits must be reversed * Primary risk management goal: At least a 97.5% probability that base benefits will not have to be reduced in any year over a 20-year period. Annual stochastic modeling required to test plan s viability. 16

17 Proposed Shared Risk Plan Managing Surplus Funding Excess Utilization Plan Triggered when the open group funded ratio exceeds 105% Surplus spending limits: 17% of any funding excess between funding level of 105% and 140%; plus Any funding excess above 140% funding level The following actions must be taken prior to any other: 1. Reverse any previous reductions to base benefits 2. Remove any contribution increases in effect 3. Provide conditional indexing After the above priorities have been met: 50% of any available funding excess will be used to increase Frozen PTR scale to current PTR level 50% of any available funding excess above 140% funding level shall be used to reduce contributions in accordance with the funding policy limits Initial open group funded ratio of 114% (estimated as at July 1, 2013) Initial risk management tests indicate plan will be able to provide 78% of target indexing on average over 20 years (not guaranteed) 17

18 Proposed Shared Risk Plan Payment Terms on Retirement Normal Retirement Provisions in Respect of Service Up to June 30, 2013 On or After July 1, 2013 When you reach age 65 Same If you retire before age 65 If you have attained 85 Points Your accrued base benefits will be payable immediately (unreduced) Your accrued bridge benefit will be payable in accordance with AEPP terms If you have not attained 85 Points Your accrued base benefits will be reduced by 5.0% for each year that your pension commences prior to age 65 Your accrued base benefits will be reduced by 7.2% for each year that your pension commences prior to age 65 No bridge benefits are payable Normal form of pension payments A 60% joint and survivor spousal pension Same 18

19 Proposed Shared Risk Plan Payment Options on Termination of Employment Members terminating employment prior to age 55 may elect to transfer their termination value out of the plan Termination value is equal to the greater of: a) The member s funding policy liability multiplied by the plan s termination funded ratio* at most recent valuation date, and * Note: ratio does not include present value of excess contributions over next 15 years b) The member s contributions with interest No provision for future conditional indexing Alternatively, terminated members who leave their benefit in the plan Will be entitled to any conditional indexing granted in future years May be an incentive to not transfer out benefit Will remain subject to the risk of future benefit reductions 19

21 Example Base Benefit on Conversion Date Let s start by reviewing the base benefit calculation on conversion for a hypothetical member Member Profile on Conversion Current age Pensionable service Prior to July 1, 2007 On or after July 1, 2007 Total 50 years 9 years 6 years 15 years Pensionable salary $110,000 Average salary $95,500 Average YMPE $49,800 Frozen PTR Scale $2,800 Base Benefit on Conversion Base benefit for service prior to July 1, 2007 = [ (1.3% x $49,800) + (2.0% x $45,700) ] x 9 years Base benefit for service on or after July 1, 2007 = [ (1.0% x $49,800) + (1.7% x $45,700) ] x 6 years $14,100 + $7,600 Base benefit on conversion = $21,700 21

22 Example Projected Base Benefit One Year Later One year following the conversion date, the member s base benefit will have increased to reflect additional service and conditional indexing Projected Base Benefit One Year Following Conversion Date Base benefit on conversion $21,700 Adjustment to reflect PTR increases and conditional indexing granted during the year * = 2,800 x [ 2.0% x 9 years + 1.7% x 6 years ] + 21,700 x 2.25% x 80% Benefit accruals for service on or after July 1, 2013 * = (1.1% x 52, % x 57,200) x 1 year + $1,200 + $1,600 Total projected base benefit conversion date + 1 year = $24,500 Frozen PTR Scale One Year Following Conversion Date Adjustment to reflect conditional indexing granted during the year * = $2,800 x ( % x 80%) $2,850 * Assuming that pre-retirement conditional indexing target equal to 80% of inflation is granted annually 22

23 Example Projected Base Benefit at Normal Retirement Continuing with our example, let s assume the member retires at age 65 following a 30-year career Projected Benefit Payable at Retirement In respect of service up to June 30, 2013 Base benefit on conversion $21,700 Subsequent PTR increases and conditional indexing granted up to retirement date * + $16,500 Total = $38,200 In respect of service on or after July 1, 2013 Total Future benefit accruals Including subsequent PTR increases and conditional indexing granted in respect of those accruals* Projected base benefit at retirement As a percentage of average salary at retirement = $83,100 / $211,500 + $44,900 = $83, % * Assuming that pre-retirement conditional indexing target equal to 80% of inflation is granted annually on accrued pension and Frozen PTR Scale 23

24 Example Projected Base Benefit at Early Retirement To illustrate how the early retirement rules will work after conversion, let s assume a member retires at age 60 following an identical 30-year career Projected Benefit Payable at Early Retirement In respect of service up to June 30, 2013 In respect of service on or after July 1, 2013 Base benefit payable at normal retirement date $38,200 Reduction for early retirement Unreduced as member has more than 85 points (i.e., age + service = 90) Base benefit payable at age 60 = $38,200 x (100% 0%) 0% $38,200 Base benefit payable at normal retirement date $44,900 Reduction for early retirement 7.2% per year that pension commences prior to age 65 =7.2% x 5 years Base benefit payable at age 60 = $44,900 x (100% 36%) 36% $28,700 Total Projected base benefit at age 60 = $66,900 24

26 Illustrations of Projected Pension at Age 65 Member Profiles Additional illustrations have been prepared for the three following member profiles in various stages of their career as at July 1, 2013 Profile at Conversion New Entrant Early Career Mid Career Late Career PROFILE #1: 30 YEAR CAREER PROFESSOR Age Pensionable Service * Pensionable Salary $60,000 $80,000 $110,000 $140,000 PROFILE #2: 25 YEAR CAREER PROFESSOR Age Pensionable Service Pensionable Salary $60,000 $80,000 $110,000 $125,000 PROFILE #3: 30 YEAR CAREER INSTRUCTOR / LIBRARIAN Age Pensionable Service * Pensionable Salary $50,000 $65,000 $95,000 $120,000 * Member would also have 5 years of pensionable service under the PSSA. Not included in benefit illustrations herein. 26

27 Illustrations of Projected Pension at Age 65 Projection Scenarios For each member profile, the illustrations present projected pensions under the following scenarios: Future Benefit Accrual Scenario Incomplete without accompanying discussions Plan Type Benefit Accruals for Future Service Assumption for Future Conditional Indexing * Pessimistic Shared Risk 1.1% / 1.8% 60% of inflation Neutral Shared Risk 1.1% / 1.8% 80% of inflation Optimistic Shared Risk 1.1% / 1.8% 100% of inflation Current Plan AEPP DB 1.0% / 1.7% Not applicable * Notes: Target indexing for active members is: (i) Inflation on accrued base benefits; and (ii) Inflation on Frozen PTR scale Target indexing for inactive members is the plan s post-retirement indexation formula (i.e., different rules for pre and post-2004 service) Detailed projection assumptions summarized in appendix 27

28 Illustration: Member Profile #1 Projected Pension at Age 65 Summary Baseline Inflation plus 1% Projected SRP Pension at Age 65 as a Percentage of Current Plan Pension Future Benefit Accrual Scenario Optimistic Neutral Pessimistic 105% 100% 95% 90% 85% 80% 75% 70% 65% 60% Profile at Conversion New Entrant Early Career Mid Career Late Career Age Pensionable Service * Pensionable Salary $60,000 $80,000 $110,000 $140,000 * Member would also have 5 years of pensionable service under the PSSA. Not included in benefit illustrations herein. 28

29 Illustration: Member Profile #2 Projected Pension at Age 65 Summary Baseline Inflation plus 1% Projected SRP Pension at Age 65 as a Percentage of Current Plan Pension Future Benefit Accrual Scenario Optimistic Neutral Pessimistic 105% 100% 95% 90% 85% 80% 75% 70% 65% 60% Profile at Conversion New Entrant Early Career Mid Career Late Career Age Pensionable Service * Pensionable Salary $60,000 $80,000 $110,000 $125,000 29

30 Illustration: Member Profile #3 Projected Pension at Age 65 Summary Baseline Inflation plus 1% Projected SRP Pension at Age 65 as a Percentage of Current Plan Pension Future Benefit Accrual Scenario Optimistic Neutral Pessimistic 105% 100% 95% 90% 85% 80% 75% 70% 65% 60% Profile at Conversion New Entrant Early Career Mid Career Late Career Age Pensionable Service * Pensionable Salary $50,000 $65,000 $95,000 $120,000 * Member would also have 5 years of pensionable service under the PSSA. Not included in benefit illustrations herein. 30

31 Questions 31

33 Key projection assumptions Inflation Increase in YMPE Increase in Pensionable Salary Economic Adjustment PTR Adjustment * PTR Salary Ceiling Baseline Inflation plus 1% 2.25% per annum 3.25% per annum Economic Adjustment plus PTR Adjustment 3.25% per annum $2,800 for first year, increasing at 3.25% per annum thereafter $150,500 (Profiles 1 & 2) and $123,000 (Profile 3) for the first year, increasing at 3.25% per annum thereafter * Note: No PTR adjustments are granted once Pensionable Salary attains the PTR Salary Ceiling. 33

The University of New Brunswick Shared Risk Plan for Academic Employees of the University of New Brunswick. Funding Policy

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