Presentation to Retirees of the PSSA On proposed Shared Risk Pension model 1
Agenda Introduction Presentation on Shared Risk Plan Questions and Discussions 2
Purpose of Meeting Concerns Explain Proposed Shared Risk Plan Option Background Current Situation Shared Risk Plans Summary Respond to questions/listen to concerns 3
Concerns: Pensions will be de-indexed Not accurate Your pension the month after the conversion will be the same. Future indexing of your pension will be dependent on the plan s performance and there will be no cap. 4
Concerns: Survivor pensions will be cut Not true Survivor pensions remain the same. 5
Concerns: Almost certain that retirees will suffer significant losses over next 25 years Not true. 6
Concerns: My pension will be less secure because the Minister of Finance will no longer be the governor of the plan. Your pension will not be less secure Regulations on governance are both explicit and strict Independent legal trust created to operate plan for benefit of members as described in trust document Overseen by Superintendent of Pensions 7
Concerns: Our plan will be the only public sector pension plan that will not provide full indexing for retirees NS, MB and BC are conditionally indexed but management of uncertainty not prescribed AB provides 60% of CPI NL provides 60% of CPI but only at 65+ and caps indexing at 1.2% SK is defined contribution and provides no benefit guarantee of any kind QC is complex but indexing basically less than 50% of CPI (unless inflation exceeds 6%) for service after June 30, 1982. PE and ON currently have full CPI index to a maximum. 8
Concerns: Government took contribution holidays and now changes are required Not accurate $180 $150 Employer Member No Government Contribution Holiday since 1978 under PSSA $120 $90 $60 $30 $0 1978 1982 1986 1990 1994 1998 2002 2006 2010 From 1978 to 2012, employer paid $1.69 for every $1.00 paid by members (about $1 B more) - now paying about $2.50 for every $1.00 9
Concerns: There is no need to change anything. My pension is secure now. Not true. Main concern is that your pension is not sufficiently secure. That is why change is being considered. 10
Background Proposed Shared Risk Plan Intended indexing remains the same More money allocated to benefit security Objective is to manage future uncertainty To improve your benefit security; To be clear on how uncertainty will be managed in the future; and To remove large budget fluctuations due to factors outside anyone s control 11
Current Situation The Problem Pension plans have a huge impact on Province Budget swings of +/- $100 M have happened (for PSSA alone) Bond rating agencies watch pension deficits closely Projected Budget Deficit is $478 M on budget of $8 B PSSA is large (figures at April 1, 2012) $6.2 B in going concern liabilities $5.2 B in the pension fund (assets) $1.0 B shortfall Every year $400 M of investment income required for plan More money going out than coming in $270 M out vs $225 M in during 2011-12 and shortfall increasing 12
Current Situation The Problem Total contributions about $250 M in next fiscal year Government paying about $2.50 for every $1.00 paid by members About a 50% chance that these contributions will not be sufficient to pay the $1.0 B shortfall over next 20 years 25% chance that the shortfall will be about double the size or worse in 20 years Addressing this uncertainty on April 1, 2012 on an estimated guarantee basis would require an extra $5.5 B of cash contributions to be made immediately 13
Current Situation The Problem Nothing is ever 100% guaranteed. Uncertainty is always present. Guarantees are always dependent on: Adequate funds available to back up the promise, and When funding shortfalls exist, additional funding from the entity backing up the guarantee. Consequently, pension guarantees are dependent on the sponsor s willingness AND ability to pay For a government, need for extra funding means Borrowing (if possible under reasonable terms), and/or Increased taxes; and/or Other expenditure cuts. 14
Current Situation The Problem Pensions plans all over the world face similar challenges Shortfall in pension funds around the world measured in trillions of dollars Interest rates are very low - need higher contributions Aging of population means more pensions paid than contributions made limits ability to take investment risks to try to improve long term returns People are living longer - increases pension costs The premises under which current defined benefit plans were developed are no longer valid. 15
Current Situation The Problem Pension plans need to change The challenge facing many of us today, however, is how to accept the necessity for change before our backs are against the wall because given today s high longevity and low growth, change is inevitable The question is not whether or not to change: it s when and by how much. - Jim Leech, CEO OTPP in a speech on February 20, 2013 16
Current Situation The Problem Status Quo is not a valid option; Over past 25 years, government has routinely made very large special payments The world has changed Estimated cost of complete security in excess of $5.5B The financial need is now beyond the capacity to pay Management of uncertainty is now the new reality Balanced approach is necessary to provide the best level of pension security within available means 17
Shared Risk Plans Many alternatives considered Worldwide best practices reviewed Solution balances needs of members and employers Solution also balances needs of all generations and taxpayers Several NB plans have already signed on to an SRP NB circumstances addressed by the proposed plan: Selects best features of well run pension models; Requires adequate funding and strict management of uncertainty Increase benefit security for all 18
Shared Risk Plans Impacts Impact Active Members of the PSSA Stays the same Retirement rules for service up to conversion 50% spousal and dependent benefits Changes Will pay higher contributions Will retire later, especially younger and new employees Pension benefits based on best 5 years replaced by enhanced career average formula Enhancements (indexing) dependent on pension fund performance (same basis and level as retirees) Indexing after retirement (same as retirees) Employees of all ages and status treated consistently New Explicit funding to increase benefit security (at inception plan funded at 115%+ level) Explicit recognition of the possibility of benefit reductions Expected to be rare Occurs only in very bad economic scenarios 19
Shared Risk Plans Impacts Impact Retirees and surviving dependents of the PSSA Stays the same Monthly pension at conversion Survivor benefits at 50% of member s pension Changes Future annual indexing will not be automatic Indexing dependent on pension fund performance (same basis and level as enhancements provided for active member benefits) Indexing could be higher if pension fund performs well Employees of all ages and status treated consistently New Explicit funding to increase benefit security (at inception plan funded at 115%+ level) Explicit recognition of the possibility of benefit reductions Expected to be rare Occurs only in very bad economic scenarios 20
SRP - Governance by Board of Trustees A shared risk plan is created as a legal trust Trustees are bound by strict rules on: Investment and risk(uncertainty) management Funding Resolution of conflicts All overseen by Superintendent of Pensions Examples of large plans run by BoT Ontario Teachers Pension Plan Ontario Municipal Employees Pension Plan Nova Scotia Association of Health Organizations NS PSSA 21
4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Estimated SRP Indexing Performance Using Actual 1993 2012 CPI and Investment Results 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Indexing CPI 22
SRP vs Current PSSA 20 Year Average 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Probability Good 55% chance (4.0% returns p.a) Mediocre 25% chance (3% to 4% p.a) Poor 18 % chance (1.5% - 3% p.a) Very Bad 2% chance (less than 1.5% p.a) SRP: Full Pension+ Full indexing + Contributions continue for everyone PSSA: Full Pension + Full indexing + Contributions decrease for employer SRP: Full Pension + Good Indexing (76% + of CPI) PSSA: Full pension + Full Indexing. Period to fund deficit increases. SRP: Full pension + partial indexing (54% + of CPI) PSSA: Contributions go up to a total of $375 M to $550 M (If employees and employer can afford it) SRP: Total Contrib. $275M + 25% of CPI on average. benefit reduction for active members and retirees (fully reinstated when fund recovers) PSSA: Near or at bankruptcy
Summary for Retirees In summary: Your pensions are not being de-indexed. Proposed plan designed to give indexing vast majority of years. Survivor pensions are not being cut. Any benefit reduction during the next 20 years is highly unlikely (less than 2.5% chance). Your pension will be more secure under an SRP. Your pension will continue to compare favourably with other public sector programs. 24