DALHOUSIE UNIVERSITY REPORT ON THE ACTUARIAL VALUATION November 2010 Prepared by: Eckler Ltd. 1969 Upper Water Street, Suite 503 Halifax, Nova Scotia B3J 3R7
TABLE OF CONTENTS SECTION PAGE SUMMARY OF RESULTS I INTRODUCTION AND PURPOSE OF VALUATION... 1 II TYPE OF PENSION PLAN... 2 III FINANCIAL POSITION OF THE PLAN... 3 Going Concern Basis...3 Solvency Basis...6 Transfer Ratio...8 Hypothetical Wind-up Basis...9 IV FUNDING REQUIREMENTS... 10 Current Service Costs...10 Special Payments...11 V ACTUARIAL OPINION... 13 APPENDICES A PLAN ASSETS... 15 B ACTUARIAL METHODS AND ASSUMPTIONS... 17 Valuation of Assets...17 Going Concern Valuation...19 Solvency Valuation...27 C MEMBERSHIP DATA... 28 D SUMMARY OF PLAN PROVISIONS... 35 E EMPLOYER CERTIFICATION... 42
SUMMARY OF RESULTS All Figures in ($000 s) Going Concern Financial Position March 31, 2010 Going concern value of assets 729,525 Going concern actuarial liabilities (802,933) Going concern excess/(unfunded actuarial liabilities) (73,408) Solvency Financial Position March 31, 2010 Solvency assets 728,775 Solvency liabilities (858,315) Solvency excess/(deficiency) prior to accounting for present value of special payments (129,540) Present value of 5 years worth of going concern special payments 27,872 Solvency excess/(deficiency) after accounting for pv of 5 years worth of special payments (101,668) Present value of 10 years worth of going concern special payments 55,704 Solvency excess/(deficiency) after accounting for pv of 10 years worth of special payments (73,836) Transfer Ratio 85.0% Wind-up Financial Position March 31, 2010 Wind-up assets 689,161 Total wind-up liabilities (860,288) Wind-up surplus/(deficiency) (171,127) Funding Requirements (annualized) March 31, 2010 % of Payroll $ Estimated Pensionable Earnings 205,661 Total annual current service cost 15.59% 32,060 Employee Contributions 6.04% 12,427 Employer Matching Contributions 6.04% 12,427 Balance of cost = Employer Overmatching Contribution 3.51% 7,206 Employer Contributions as a Percentage of Employee Contributions 158.1% Minimum special payments towards amortization of unfunded actuarial liabilities and solvency deficiencies under 5 year solvency funding (to be made in each of the 5 years following the valuation). 12.88% 26,487 Minimum special payments towards amortization of unfunded actuarial liabilities and solvency deficiencies under the University solvency relief Regulations In the year commencing March 31, 2010: Commencing March 31, 2011 (to be made in each of the 9 years following) 2.77% 6.85% 5,699 14,094
SECTION I: INTRODUCTION AND PURPOSE OF VALUATION At the request of Dalhousie University, we have completed an actuarial valuation of the Dalhousie University Staff Pension Plan as of March 31, 2010. The last formal valuation was conducted at June 30, 2007. The purposes of this actuarial valuation may be summarized as follows: to determine the funded position of the Plan by calculating and comparing the Plan's actuarial liabilities to the assets that have been accumulated to secure the Plan s benefits; to provide funding recommendations for the purpose of accumulating assets to provide for Plan benefits in advance of their actual payment; to determine whether the Plan is funded on a solvency valuation basis in accordance with the Nova Scotia Pension Benefits Act, and to provide recommendations with respect to the appropriate level of special payments if it is not; and to meet the statutory filing requirements under the Nova Scotia Pension Benefits Act and the Income Tax Act. In this report, we have first provided the valuation results, along with an actuarial opinion with recommended funding levels for use until the next valuation. The data, actuarial assumptions and methodology used in valuing both the assets and the actuarial liabilities are provided by way of Appendices for ease of reference. ACTUARIAL VALUATION DALHOUSIE UNIVERSITY PAGE 1
SECTION II: TYPE OF PENSION PLAN This pension plan is one which may be described as a "best average salary" defined benefit plan. This means that each Member's retirement pension is calculated as a specified percentage (2% in this case) of his or her average salary during the best three years of membership in the Plan. For Members who retired on and after July 1, 1982, indexing of pensions is provided by means of an excess interest formula based on a 3-year annualized average of investment returns of the Retirees Trust Fund. The Plan is a contributory plan, in that Members are required to make contributions at the rate of 4.65% on the first $5,000 of annual salary, plus 6.15% of annual salary in excess of $5,000 (subject to limits on the overall salary to which these percentages apply). The University is required to fund any additional contributions as recommended by the Plan s actuary from time to time. A more detailed description of the Plan is contained in Appendix A. ACTUARIAL VALUATION DALHOUSIE UNIVERSITY PAGE 2
SECTION III: FINANCIAL POSITION OF THE PLAN A. Going Concern Basis: Financial Position as at March 31, 2010 The tables below, set out the going concern valuation balance sheet as of March 31, 2010 for the Pension Trust Fund (PTF), the Retirees Trust Fund (RTF), and the Plan as a whole, respectively. PENSION TRUST FUND - GOING CONCERN ACTUARIAL BALANCE SHEET (ALL FIGURES IN $000 S) Pension Trust Fund Going Concern Balance Sheet March 31, 2010 Going Concern Assets: Market Value of Assets as at Valuation Date $401,660 Financial Statement (Payables)/Receivables (1,373) Smoothing Adjustment 27,128 Total Going Concern Assets $427,415 Going Concern Actuarial Liabilities: In Respect of Active Members $499,070 Additional Voluntary Contributions 788 Pending Transfers 14,201 Total Going Concern Actuarial Liabilities $514,059 Going Concern Excess/(Unfunded Actuarial Liability): ($86,644) RETIREES TRUST FUND - GOING CONCERN ACTUARIAL BALANCE SHEET (ALL FIGURES IN $000 S) Retirees Trust Fund Going Concern Balance Sheet March 31, 2010 Going Concern Assets: Market Value of Assets as at Valuation Date $291,059 Financial Statement (Payables)/Receivables (1,435) Smoothing Adjustment 12,486 Total Going Concern Assets $302,110 Going Concern Actuarial Liabilities: In Respect of Pensions in Payment $279,094 In Respect of Deferred Members 9,780 Total Going Concern Actuarial Liabilities $288,874 Going Concern Excess/(Unfunded Actuarial Liability): $13,236 ACTUARIAL VALUATION DALHOUSIE UNIVERSITY PAGE 3
TOTAL PLAN - GOING CONCERN ACTUARIAL BALANCE SHEET (ALL FIGURES IN $000 S) Total Plan Going Concern Balance Sheet March 31, 2010 Going Concern Assets: Market Value of PTF Assets as at Valuation Date* $400,287 PTF Smoothing Adjustment 27,128 Market Value of RTF Assets as at Valuation Date* 289,624 RTF Smoothing Adjustment 12,486 Total Going Concern Assets $729,525 Going Concern Actuarial Liabilities: PTF Actuarial Liabilities $514,059 RTF Actuarial Liabilities 288,874 Total Going Concern Actuarial Liabilities $802,933 Going Concern Excess/(Unfunded Actuarial Liability): ($73,408) * Net of (Payables)/Receivables As shown above, the March 31, 2010 actuarial valuation has revealed an unfunded actuarial liability in the amount of $73,408,000. This compares to a going concern excess at the previous valuation of $259,000. Funding requirements in respect of the unfunded actuarial liability are detailed in Section IV. Reconciliation of Going Concern Financial Position The reconciliation provides an independent cross-check of the calculations performed, and also determines the chief reasons leading to the change in the surplus and/or unfunded liabilities (deficiencies) that have occurred since the previous valuation date. Although a complete analysis down to the final dollar can be made, such an analysis requires the processing of a considerable amount of detailed data relating to the Plan, the expense of which would not normally be justified unless there were special circumstances. It is possible, however, to make an approximate analysis along broader lines and, under normal circumstances, this type of analysis will produce meaningful results. The table below summarizes the results of our reconciliation of change in financial position over the past three years under consideration. ACTUARIAL VALUATION DALHOUSIE UNIVERSITY PAGE 4
ANALYSIS OF SOURCES OF GAIN AND LOSS BETWEEN JUNE 30, 2007 AND MARCH 31, 2010 (GOING CONCERN VALUATION) PTF RTF Total Surplus/(deficit) at June 30, 2007 [measured at market value, i.e., without the smoothing adjustment] (18,845) 50,942 32,097 Add interest at the valuation rate to the surplus/(deficit) (3,708) 6,782 3,074 Add gain from investment income greater than/(less than) that which would have accrued had the Funds earned the valuation rate (124,621) (46,318) (170,939) Cost of January 1, 2009 indexing, and January 1, 2003 catchup indexing 0 (957) (957) Impact of SOCC crediting rates being different than expected according to actuarial assumptions 16,942-16,942 Impact of change in maximum pension increase assumption 4,056-4,056 Pensioner mortality experience - (6,223) (6,223) Experience Loss due to salary increases greater than expected according to actuarial assumptions (4,030) - (4,030) Retirement experience gain/(loss) 977-977 SOCC take-up experience gain/(loss) 2,074-2,074 Net impact of changes made to certain of the actuarial assumptions 15,954 (2,691) 13,263 Misc experience gains/(losses) affecting liabilities 1 (2,571) (785) (3,356) Surplus/(deficit) at March 31, 2010 [measured at market value, i.e., without the smoothing adjustment] (113,772) 750 (113,022) Add (subtract) smoothing adjustment at March 31, 2010 27,128 12,486 39,614 Surplus/(deficit) at March 31, 2010 [measured at smoothed value] (86,644) 13,236 (73,408) 1 Miscellaneous experience includes all items not specifically traced, and imprecision imposed by valuation and measurement methodologies in some of the items that are traced. Included will be experience gains and losses associated with termination benefits, with the basis implicit in PTF to RTF transfers (e.g., assumed vs. actual proportion of married members among new retirees), with data refinements, and with the interplay among assumptions in dealing with actual versus expected results (e.g., between incidence of retirement and SOCC take-up). ACTUARIAL VALUATION DALHOUSIE UNIVERSITY PAGE 5
B. Solvency Basis: Financial Position as at March 31, 2010 The tables below set out the solvency valuation balance sheet as of March 31, 2010 for the Pension Trust Fund (PTF), the Retirees Trust Fund (RTF), and the Plan as a whole, respectively. PENSION TRUST FUND SOLVENCY BALANCE SHEET (ALL FIGURES IN $000 S) Pension Trust Fund Solvency Balance Sheet March 31, 2010 Solvency Assets: Market Value of Assets as at Valuation Date $401,660 Financial Statement (Payables)/Receivables (1,373) Estimated Wind-up Expenses (750) Smoothing Adjustment 27,128 Total Solvency Assets $426,665 Solvency Liabilities: In Respect of Active Members $549,822 Additional Voluntary Contributions 788 Pending Transfers 14,201 Total Solvency Liabilities $564,811 Solvency Excess/(Deficiency): ($138,146) RETIREES TRUST FUND SOLVENCY BALANCE SHEET (ALL FIGURES IN $000 S) Retirees Trust Fund Solvency Balance Sheet March 31, 2010 Solvency Assets: Market Value of Assets as at Valuation Date $291,059 Financial Statement (Payables)/Receivables (1,435) Smoothing Adjustment 12,486 Total Solvency Assets $302,110 Solvency Liabilities: In Respect of Pensions in Payment $283,360 In Respect of Deferred Members 10,144 Total Solvency Liabilities $293,504 Solvency Excess/(Deficiency): $8,606 ACTUARIAL VALUATION DALHOUSIE UNIVERSITY PAGE 6
TOTAL PLAN SOLVENCY BALANCE SHEET (ALL FIGURES IN $000 S) Total Plan Solvency Balance Sheet March 31, 2010 Solvency Assets: Market Value of PTF Assets as at Valuation Date* $400,287 PTF Smoothing Adjustment 27,128 Estimated Wind-up Expenses (750) Market Value of RTF Assets as at Valuation Date* 289,624 RTF Smoothing Adjustment 12,486 Total Solvency Assets $728,775 Solvency Liabilities: PTF Solvency Liabilities $564,811 RTF Solvency Liabilities 293,504 Total Solvency Liabilities $858,315 Solvency Excess/(Deficiency) Prior to Accounting for Special Payments: ($129,540) Present Value of 5 Years Worth of Special Payments $27,872 Solvency Deficiency After Accounting for 5 years Worth of Special Payments: ($101,668) Present Value of 10 Years Worth of Special Payments $55,704 Solvency Deficiency After Accounting for 10 years Worth of Special Payments: ($73,836) * Net of (Payables)/Receivables As shown above, the solvency valuation has revealed a solvency deficit of $129,540,000 as at March 31, 2010 (prior to accounting for special payments). After accounting for 5 years worth of special payments, the solvency deficiency (to be amortized over 5 years) would be $101,668,000. The Government has recently amended the regulations under the Nova Scotia Pension Benefits Act to temporarily extend solvency funding from five years to ten years for plans that report a solvency deficit between December 30, 2008 and January 2, 2011. Further, for Universities, the regulations allow solvency special payments to be delayed for one year following the valuation date (i.e., in Dalhousie s case, the one year period ending March 31, 2011), with the balance of the solvency deficiency to be funded over the remaining 9 year period. Under the 10 year solvency relief Regulations, the solvency deficiency (to be amortized over 9 years, starting in one year) would be $73,836,000. Funding requirements in respect of the solvency deficiency (under both the 5 year and 10 year funding requirements) are detailed in Section IV. ACTUARIAL VALUATION DALHOUSIE UNIVERSITY PAGE 7
C. Transfer Ratio as at March 31, 2010 The Regulations under the Nova Scotia Pension Benefits Act require the determination of a transfer ratio. This transfer ratio is used to determine whether transfers of commuted values to terminating members can be made in full, immediately. The transfer ratio is the ratio of the solvency assets (at market value or at a value that averages fluctuations in market value), plus any receivable income (i.e., contributions/benefits in transit), to the solvency liabilities. As at March 31, 2010 the transfer ratio was 85.0% (i.e., (solvency assets without provision for wind-up expenses = $728,775,000 + 750,000) divided by solvency liabilities of $858,315,000). If the transfer ratio is less than 100% then, unless certain conditions are met, a portion of a terminated member s commuted value cannot be paid in a lump sum, but instead must be held back and paid with interest within 5 years. For this plan, the portion is 15.0%. The conditions that allow full payment of the commuted value are: if an additional contribution is remitted to the fund equal to the portion of the commuted value that should be held back; or if the portion that should be held back for each terminating member is less than 5% of the Canada Pension Plan earnings ceiling (YMPE) in the year of termination (i.e., less than $2,360 in 2010), and the aggregate of the portions that should be held back for all members who terminated since the last valuation date is less than 5% of the assets of the Plan (for this plan, any termination benefit of less than $15,733 will qualify for full payment, as long as the aggregate of the portions that should be held back for all members that meet this criteria does not exceed $34,496,000); with each of these conditions also being subject to the University not making special payments under the Temporary solvency funding relief provisions of the Regulations under the Pension Benefits Act. In the event the University is making special payments under the Temporary solvency funding relief provisions, conditions for transfer may be different from those indicated above. We are currently waiting for clarification on this issue from the Superintendent of Pensions. ACTUARIAL VALUATION DALHOUSIE UNIVERSITY PAGE 8
D. Hypothetical Wind-up Basis: Financial Position as at March 31, 2010 The financial position of the Plan on a wind-up basis as of March 31, 2010 is as follows: TOTAL PLAN WIND-UP BALANCE SHEET (ALL FIGURES IN $000 S) Total Plan Wind-up Balance Sheet March 31, 2010 Wind-up Assets: Market Value of PTF Assets as at Valuation Date* $400,287 Estimated Wind-up Expenses (750) Market Value of RTF Assets as at Valuation Date* 289,624 Total Wind-up Assets $689,161 Wind-up Liabilities: PTF Wind-up Liabilities $566,784 RTF Wind-up Liabilities 293,504 Total Wind-up Liabilities $860,288 Wind-up Excess/(Deficiency): ($171,127) * Net of (Payables)/Receivables As shown above, on a wind-up basis there is an estimated deficiency of $171,127,000 in the Plan after providing for settlement of all accrued benefit entitlements as at March 31, 2010. ACTUARIAL VALUATION DALHOUSIE UNIVERSITY PAGE 9
SECTION IV: FUNDING REQUIREMENTS A. Current Service Costs The Plan s current service cost (also referred to as the normal cost ) is the value of the benefits accruing to members in the year following the valuation, determined on a going concern basis. The table below summarizes the results of the Plan s current service cost for the 12-month period following March 31, 2010. CURRENT SERVICE COST % of Payroll ($000 s) Estimated Pensionable Earnings 205,661 Total annual current service cost 15.59% 32,060 Employee Contributions 6.04% 12,427 Employer Matching Contributions 6.04% 12,427 Balance of cost = Employer Overmatching Contribution 3.51% 7,206 Employer Contributions as a Percentage of Employee Contributions 158.1% The cost of benefits accruing in respect of the year following the valuation date is $32,060,000. This amounts to 15.59% of active contributory payroll. The employee required and employer matching contributions in the year amount to $12,427,000 (i.e., 6.04% of contributory payroll) each. The balance remaining (i.e., $7,206,000 or 3.51% of payroll) represents employer overmatching contributions. Total employer contributions (i.e., 12,427,000 + 7,206,000 = 19,633,000, or 6.04% + 3.51% = 9.55% of payroll) amount to 158.1% of employee required contributions. ACTUARIAL VALUATION DALHOUSIE UNIVERSITY PAGE 10
B. Special Payments In addition to current service contributions, special payments are required in order to amortize the Plan s going concern unfunded liability and solvency deficiency, as identified in Section III. The following table summarizes the minimum required special payments under 5 year solvency funding: Valuation Date Type of Deficit Payment in $000 s of dollars in the year following the valuation Special Payment (% of Payroll) Term Remaining Present Value of Remaining Payments ($000 s) March 31, 2010 Going Concern 5,699 2.77% *5.00 27,872 March 31, 2010 Solvency 20,788 10.11% 5.00 101,668 $26,487 12.88% **$129,540 *As per Regulation 6(2) under the Nova Scotia Pension Benefits Act, the schedule of special payments which extends beyond the period established for the amortization of the solvency deficiency must be reduced or eliminated so that the total present value of all special payments will be equal to the going concern unfunded liability. In this case, going concern special payments beyond 5 years can be eliminated due to the sizeable solvency special payments which result in amortization of the going concern unfunded liability within 5 years. **Note that this figure is equal to the solvency deficit as at March 31, 2010. As outlined in Section 6A(3A) of the Regulations under the Nova Scotia Pension Benefits Act, Dalhousie can apply for solvency relief as follows: (a) payments may be omitted in the first year of the 3-year period beginning with the first actuarial valuation report prepared between December 30, 2008, and January 2, 2011; and (b) payments made after the first year of the 3-year period must not be less than the amount required to fully liquidate the outstanding balance of the solvency deficiency over the next 9 years, by equal instalments with interest at the solvency valuation interest rate. ACTUARIAL VALUATION DALHOUSIE UNIVERSITY PAGE 11
The following table summarizes the minimum required special payments under the above solvency funding relief regulations: Valuation Date Type of Deficit Payment in $000 s of dollars in the year following the valuation Special Payment (% of Payroll) Term Remaining Present Value of Remaining Payments ($000 s) March 31, 2010 Going Concern 5,699 2.77% *10.00 55,704 March 31, 2010 Solvency **8,395 **4.08% **9.00 73,836 $14,094 6.85% ***$129,540 *As per Regulation 6(2) under the Nova Scotia Pension Benefits Act, the schedule of special payments which extends beyond the period established for the amortization of the solvency deficiency must be reduced or eliminated so that the total present value of all special payments will be equal to the going concern unfunded liability. In this case, going concern special payments beyond 10 years can be eliminated due to the sizeable solvency special payments which result in amortization of the going concern unfunded liability within 10 years. ** To be made for 9 years, commencing one year from the valuation date (i.e., commencing March 31, 2011). The actual solvency special contribution commencing in one year s time should be equal to 4.08% of pensionable payroll (versus the dollar amount shown here). ***Note that this figure is equal to the solvency deficit as at March 31, 2010. In summary, special payments under 5 year solvency funding would be 12.88% of pensionable payroll (or an estimated $26,487,000 in the year following the valuation) for 5 years. Under the University solvency relief Regulations, special payments would be 2.77% of pensionable payroll (or an estimated $5,699,000 in the year following the valuation) for the first year following the valuation, and 6.85% of pensionable payroll for each the 9 years thereafter. Prior to applying the payment schedule in accordance with the solvency relief provisions, the following conditions must be met: Written notice must be provided to members and former members of the Pension Plan detailing the solvency position of the Plan, as well as required special payments with and without the solvency special payments. A list of requirements for the written notice can be found in section 6A(5) of the Regulations under the Nova Scotia Pension Benefits Act. Members have the right to object to the extended amortization period. They must be given 30 days, from the time they receive the notice, to send an objection to the Administrator should they wish to do so. Providing that no more than one-third of the members and former members object to the extended amortization period, the following must be provided to the Superintendent within 60 days of providing the written notice to members: o a copy of the written notice; and o a statement that fewer than one-third of the members and former members object. ACTUARIAL VALUATION DALHOUSIE UNIVERSITY PAGE 12
SECTION V: ACTUARIAL OPINION The following represents our primary conclusions as a result of our actuarial valuation of the Dalhousie University Staff Pension Plan as at March 31, 2010: 1. As at the valuation date there exists a going concern unfunded actuarial liability of $73,408,000. 2. Prior to accounting for the present value of any going concern special payments, and prior to the application of any temporary solvency funding relief, the Plan has a new solvency deficiency of $129,540,000. The Plan can apply to amortize this deficiency in accordance with the Temporary solvency funding relief Regulations under Nova Scotia Pension Benefits Act. 3. The going concern unfunded actuarial liability and applicable solvency deficiency must be amortized according to the special payment schedule detailed in Section IV. In summary, special payments under 5 year solvency funding would be 12.88% of pensionable payroll. Under 10 year solvency funding, special payments would be 2.77% of pensionable payroll for the first year, and 6.85% of pensionable payroll for the 9 years thereafter. 4. In order that the benefits in respect of future years of service will be adequately funded, contributions totalling 15.59% of payroll should be made to the Plan until the next actuarial review of the Plan takes place. Current employee contribution rates are expected to generate contributions of 6.04% of payroll. In addition to the University s matching contribution, an overmatching contribution of 3.51% of payroll will need to be made in respect of current service. These contribution levels (plus the special payments noted above) will apply until the time of the next actuarial valuation. 5. The adequacy and appropriateness of this funding level should be reviewed at the next actuarial valuation of this Plan, which should take place as of March 31, 2013 at the latest. 6. Pursuant to the Income Tax Act and Regulations, there is no excess surplus as of the valuation date. 7. If the plan were to be wound up on the valuation date, the value of Plan assets would be less than the Plan s wind-up liabilities by an amount of $171,127,000. 8. The transfer ratio of the Plan is 85.0%. 9. We are not aware of any events that occurred between the valuation date and the date this report was completed that would have a material impact on the results of this valuation. ACTUARIAL VALUATION DALHOUSIE UNIVERSITY PAGE 13
10. In our opinion, a. the data on which the valuation is based are sufficient and reliable for the purposes of the valuation as described in Section I; b. the assumptions described herein are, in aggregate, appropriate for the purposes of the valuation; c. the methods employed in the valuation are appropriate for the purposes of the valuation; and d. this report has been prepared, and our opinions given, in accordance with accepted actuarial practice. Nonetheless, emerging experience, differing from the assumptions, will result in gains or losses which will be revealed in future valuations. Respectfully submitted, Peter C. Hayes F.S.A., F.C.I.A. Jeff Turnbull F.S.A., F.C.I.A. ACTUARIAL VALUATION DALHOUSIE UNIVERSITY PAGE 14
APPENDIX A: PLAN ASSETS The Plan s assets are currently managed in such a way as to allow for a mix of equity and fixed income investments. Several independent fund managers, who are at arm s length from the University, manage the assets, which are segregated into two trusts: the Pension Trust Fund (PTF) invests the accumulated contributions in respect of active Members and supports benefits payable during the period of active membership, and the Retirees Trust Fund (RTF) supports pension payments after retirement. The two trusts, together and in aggregate, form the portfolio of assets supporting the Plan. Financial statements of the Plan s holdings, in aggregate by asset class, were provided to us by the University for this valuation. The tables below contain summaries of the revenue accounts for the PTF and the RTF, respectively, based on the information supplied in respect of the period covered by this valuation (i.e., July 1, 2007 through March 31, 2010). RECONCILIATION OF ASSETS IN THE PENSION TRUST FUND (ALL FIGURES IN $000'S) For the Year Ending June 30, 2008 June 30, 2009 9 months ending March 31, 2010 Market value at beginning of period $485,222 $445,134 $376,252 + Contributions Employee* 11,583 14,633 11,075 Employer 17,267 18,283 14,573 + Investment gains/(losses) inclusive of expenses (26,378) (48,173) 38,420 +/- Net change in payables 3,118 (1,973) (1,126) - Transfer to RTF (31,359) (41,243) (31,850) - Benefit withdrawals (14,319) (10,409) (5,684) = Market value at end of period $445,134 $376,252 $401,660 *Employee contributions include additional voluntary contributions, past service purchases, and transfers from other plans. ACTUARIAL VALUATION DALHOUSIE UNIVERSITY PAGE 15
RECONCILIATION OF ASSETS IN THE RETIREES TRUST FUND (ALL FIGURES IN $000'S) For the Year Ending June 30, 2008 June 30, 2009 9 months ending March 31, 2010 Market value at beginning of period $256,336 $259,492 $251,684 + Transfers in from PTF 31,359 41,243 31,850 + Investment gains/(losses) inclusive of expenses (8,424) (26,088) 27,503 +/- Net change in payables (625) (519) (1,663) - Pension payments (19,154) (22,444) (18,315) = Market value at end of period $259,492 $251,684 $291,059 The following table summarizes the net rate of return on the Plan s assets over each of the past five years, using a June 30th end date (the last observations in the table therefore being as at June 30, 2009). Subsequent returns for the 9 months from July 1, 2009 through March 31, 2010 were 10.4% for the PTF and 10.7% for the RTF. PENSION FUND RATES OF RETURN (NET OF EXPENSES) 12 Months Ending June 30 Pension Trust Fund Retirees Trust Fund Total Plan (i.e., Combined PTF and RTF) 2005 12.6% 12.4% 12.5% 2006 6.2% 6.6% 6.3% 2007 15.1% 13.7% 14.6% 2008-5.6% -3.1% - 4.7% 2009-11.7% -9.0% -10.6% 5 year average 2.8% 3.7% 3.1% ACTUARIAL VALUATION DALHOUSIE UNIVERSITY PAGE 16
APPENDIX B: ACTUARIAL METHODS AND ASSUMPTIONS A. Valuation of Assets For purposes of making funding recommendations, the practice normally followed is to value assets at market, subject to an adjustment the purpose of which is to smooth some of the short term volatility inherent in a portfolio comprised primarily of stocks and bonds. The specific method employed at this valuation compares actual investment earnings each year with the amount expected in accordance with the discount rate used to determine the Plan s actuarial liabilities, and amortizes any difference in a straight line over the current and two subsequent years. The results of our calculations are contained in the tables below for the PTF and RTF respectively. PTF ACTUARIAL VALUE OF ASSETS AT MARCH 31, 2010 Period Ending: June 30, 2008 June 30, 2009 March 31, 2010 Market value (Beg of period) $485,222 $445,134 $376,252 Market value (End of period) $445,134 $376,252 $401,660 Contributions $28,850 $32,916 $25,648 Benefits $42,560 $53,618 $38,673 Expenses $2,328 $2,079 $1,726 Interest rate 6.75% 6.75% 6.75% Expected interest $30,880 $31,188 $22,363 Actual interest ($26,378) ($48,180) $38,433 Difference ($57,258) ($79,368) $16,070 Amortization ($19,086) ($26,456) $5,357 Fund (Beg of period) $464,336 $472,401 $448,250 + Cash flow ($13,710) ($20,702) ($13,025) + Expected Interest $30,880 $31,188 $22,363 + Amortization (current period) ($19,086) ($26,456) $5,357 + Amortization (last year) $10,905 ($19,086) ($19,842) + Amortization (2 years ago) ($923) $10,905 ($14,314) Fund (End of period) $472,401 $448,250 $428,788 Remaining amortizations - this year ($38,172) ($52,912) $10,713 - last year $10,905 ($19,086) ($33,070) - two years ago ($4,771) Smoothing adjustment ($27,128) Smoothing adjustment as percentage of market value (6.75%) ACTUARIAL VALUATION DALHOUSIE UNIVERSITY PAGE 17
RTF ACTUARIAL VALUE OF ASSETS AT MARCH 31, 2010 Period Ending: June 30, 2008 June 30, 2009 March 31, 2010 Market value (Beg of period) $256,336 $259,492 $251,684 Market value (End of period) $259,492 $251,684 $291,059 Contributions $31,359 $41,243 $31,850 Benefits $19,779 $22,954 $20,037 Expenses $1,066 $1,073 $891 Interest rate 6.75% 6.75% 6.75% Expected interest $16,954 $18,912 $14,988 Actual interest ($8,424) ($26,097) $27,562 Difference ($25,378) ($45,009) $12,574 Amortization ($8,459) ($15,003) $4,191 Fund (Beg of period) $245,384 $271,041 $290,150 + Cash flow $11,580 $18,289 $11,813 + Expected Interest $16,954 $18,912 $14,988 + Amortization (current period) ($8,459) ($15,003) $4,191 + Amortization (last year) $5,370 ($8,459) ($11,252) + Amortization (2 years ago) $211 $5,370 ($6,345) Fund (End of period) $271,041 $290,150 $303,545 Remaining amortizations - this year ($16,919) ($30,006) $8,383 - last year $5,370 ($8,459) ($18,754) - two years ago ($2,115) Smoothing adjustment ($12,486) Smoothing adjustment as percentage of market value (4.29%) Application of the smoothing process results in the actuarial value of assets being greater than the market value as at the valuation date. The magnitude of the adjustment relative to the market value (approximately 5.7% for the total plan) is tolerable, and is acceptable for a going-concern (funding) valuation. The smoothed value of assets has also been used in performing the solvency test required under the Nova Scotia Pension Benefits Act. ACTUARIAL VALUATION DALHOUSIE UNIVERSITY PAGE 18
B. Going Concern Valuation Actuarial Assumptions For the purposes of a going concern valuation, we select actuarial assumptions with a long term focus. That is, we anticipate that the Pension Plan will continue indefinitely into the future. Actuarial assumptions are selected giving consideration to historical trends, future expectations and Pension Plan specific experience, where possible. The assumptions chosen, in aggregate, are expected to produce a stable pattern of funding and meet the Plan sponsor s desire to minimize potential for significant shortfalls or deficits in the future. The purpose of this part of our analysis is to determine an appropriate method and series of assumptions to make proper allowance for the Plan's future liabilities by way of payment of pensions and other benefits. In making these calculations, assumptions must be made as to: (1) the probability that a particular payment will be made at a certain time (for example, depending upon whether or not the individual concerned survives to that date), and (2) the expected amount of each such payment. In order to do this, we must make a series of assumptions in connection with the many factors which will have a bearing upon the future financial operation of the Pension Plan. These include the following: (a) (b) (c) (d) (e) (f) (g) future rates of mortality (and the corresponding life expectancies of the Plan members and their spouses), future rates of salary increase for members of the Plan, the rate of increase in the maximum pension (as mandated by the Income Tax Act) that the Plan is allowed to pay, future rates of employee turnover (withdrawal from the Plan), the age at which retirement occurs, the propensity for members who are eligible for an immediate pension, but who may choose between the receipt of such pension and a lump-sum termination benefit, to choose the latter; and the rate of interest that will be earned on the assets of the Plan in future years. As part of our process of analysis, all of these factors have received consideration. Where applicable, we have taken into account the actual experience of this Pension Plan. However, it should be noted that, from a statistical point of view, actual experience data developed from a single pension plan has limited validity unless the number of plan members is very large. Therefore, it becomes necessary to take into account statistics developed from many other larger pension plans. ACTUARIAL VALUATION DALHOUSIE UNIVERSITY PAGE 19
Revised Assumptions A number of assumptions have been revised since the previous valuation. Many of the assumption changes resulted from work completed by ACOPS (the Ad-hoc Committee on Pension Sustainability a committee authorized by Dalhousie s Pension Advisory Committee in June 2009 to examine the shortterm and long-term challenges facing the pension plan). ACOPS went through a process of education and verification of actuarial assumptions, and the work of ACOPS was tested and verified by Eckler as to reasonableness for purposes of this valuation. The assumptions we have adopted, as well as a brief commentary where appropriate, are described below. Economic Assumptions Interest rate We have lowered the interest assumption from 6.75% to 6.25% per annum, or by 50 basis points. The rationale for changing the interest assumption is tied to the decline in long-term interest rates over the past 15 to 20 years. We have examined the correlation between the average rates of return earned by pension funds over longer periods and the yield to maturity on long-term bonds at the start of those periods, and found it to be quite high. The decline in bond yields has brought them to levels not seen in Canada since the late 1950 s, and, given our correlation analysis, we believe there is risk associated with an interest rate assumption that is significantly higher than current yields. We have therefore chosen to reduce our interest assumption. Our expectation, given the way the pension fund is invested, is that fund returns will be volatile over the next several years, but that, on average, will be such that our revised assumption contains sufficient provision for adverse deviation, particularly when viewed in concert with the other economic assumptions. Another approximate means of justifying the interest rate assumption is through a building-block approach as follows: Discount rate Assumed inflation rate 2.50% Risk free real return available on government bonds 1.50% Additional return based on investment in equities, manager alpha and diversification 3.00% Gross expected investment return 7.00% Provision for expenses (0.50%) Estimated net investment return before margin 6.50% Provision for adverse deviation (0.25%) Going concern discount rate assumption 6.25% ACTUARIAL VALUATION DALHOUSIE UNIVERSITY PAGE 20
In respect of the post-retirement period, we have maintained the assumption used in the last valuation, i.e., 4.55% per annum (except 4.95% per annum for members who retired before June 30, 1994, and 4.65% per annum for members who retired between June 30, 1994 and June 30, 1996). Salary Scale Pensions from the Dalhousie University Plan are predicated on the average of an employee s best 3 years earnings. Since wage levels typically increase over time, an employee s best 3 years of earnings usually occur towards the end of their career. In conducting our valuation, it is prudent to project each employee s accrued pension to the time of their retirement by projecting their earnings level, and this is accomplished through the use of a salary scale assumption. In respect of the salary scale assumption, we have moved from a flat salary scale, wherein we assume salaries increase at a constant rate (i.e., 4.50% per annum was the rate used in the June 30, 2007 actuarial valuation), to a stepped salary scale which reflects the fact that over an individual s career, larger salary increases generally occur at younger ages. The stepped salary scale is comprised of a flat 3.40% assumption combined with the following merit/promotion table: 1.75% for ages below 45; 1.00% for ages between 45 and 55; and 0.00% for ages after 55 This assumption is the same as that arrived at in ACOPS work. When comparing with actual experience, ACOPS noted that the above salary scale would have produced salary increases 0.60% per annum lower than the increases recently experienced at Dalhousie. In discussions with the University, however, and in light of the low inflation environment that exists at the present time (and that is expected to persist), the above assumption was deemed reasonable. Maximum Pension Pensions are capped by regulation at $2,494.44 per year of service for retirements occurring in 2010. It is expected that this maximum will be increased in accordance with an average wage index from 2010 onward. For purposes of the valuation, we have assumed that the maximum pension will increase after 2010 by 3.00% per annum (i.e., 0.40% below the base salary scale rate of 3.40%). This compares to an assumed rate of increase of 4.00% per annum in the June 30, 2007 valuation. ACTUARIAL VALUATION DALHOUSIE UNIVERSITY PAGE 21
Demographic Assumptions Mortality Prior to completing the June 30, 2006 valuation of the Dalhousie Plan, we completed a study of university pensioner mortality that showed the UP94@2015 table to be a good fit to the observed pensioner mortality for the universities involved in the study, including Dalhousie when the Dalhousie experience was isolated. Having validated the UP94@2015 table, we used it in both the June 30, 2006 and 2007 valuations. We have changed the mortality table for this valuation to the UP94@2020 mortality table. The change in our mortality assumption reflects the need to recognize longer life expectancies. The mortality table used in the last valuation the UP94@2015 table was the standard used in Canada for several years. The table adopted for this valuation the UP94@2020 table is the table currently mandated by the Canadian Institute of Actuaries for purposes of calculating transfer values from registered pension plans and, by extension, is the proxy for calculating solvency liabilities. It has been widely adopted for use in going concern actuarial valuations. In the following table we have provided a comparison of life expectancies under each of the variations of the UP94 table used in the previous and current valuations, respectively, for males and females at selected ages. COMPARISON OF MORTALITY UNDER PREVIOUS AND CURRENT VALUATION ASSUMPTION Age Life Expectancy For Male under Previous Assumption Life Expectancy For Male under Current Assumption Life Expectancy For Female under Previous Assumption Life Expectancy For Female under Current Assumption 25 56.2 56.8 59.7 60.0 35 46.6 47.1 49.9 50.1 45 37.0 37.5 40.1 40.4 55 27.6 28.1 30.5 30.7 65 19.0 19.4 21.6 21.8 75 11.8 12.0 13.8 14.0 85 6.3 6.4 7.5 7.6 ACTUARIAL VALUATION DALHOUSIE UNIVERSITY PAGE 22
We expect to review the mortality assumption from time to time, both to reflect continued societal improvements in mortality, as well as the development of new actuarial tables and standards. The UP94@2020 table, for instance, is a static table, and the Canadian Institute of Actuaries has published an Educational Note that indicates inclusion of a projection scale should be considered in developing the mortality assumption at future valuations. So, although the UP94@2020 table provides an appropriate representation of Dalhousie Plan Members mortality at the present time, we recommend that its continued use be reviewed at the next valuation of the Plan. Retirement Age The retirement age assumption used in the June 30, 2007 valuation was 20% at age 57, 20% at age 62, and the remainder at age 65 (i.e., Normal Retirement Date). Through the work of ACOPS, a new (more refined) table was developed. Rates of retirement for ages prior to 65 were developed based on recent experience. Prior to this valuation, it was assumed that all Plan Members would be retired on a mandatory basis at their Normal Retirement Date. However, in 2009, mandatory retirement was removed in the province of Nova Scotia. Given experience for retirement at ages over 65 is next to none for Dalhousie, we relied on a research paper prepared by Statistics Canada titled Mandatory Retirement Rules and the Retirement Decisions of University Professors in Canada for purposes of determining expected retirement rates for ages between 65 and 71. Age of Member Probability of Retirement 55 2% 56 2% 57 3% 58 3% 59 4% 60 6% 61 7% 62 12% 63 12% 64 12% 65 60% 66 25% 67 25% 68 25% 69 25% 70 25% 71 *100% * Note the 100% reflects the fact that, under the Income Tax Act, all Members, whether or not they retire from active employment, must commence their pension by no later than the end of the year in which they turn age 71 ACTUARIAL VALUATION DALHOUSIE UNIVERSITY PAGE 23
With regard to retirement rates between age 65 and age 71, we will continue to monitor actual Dalhousie experience over time, to determine whether the assumed rates of retirement need to be adjusted to be more Dalhousie-specific. SOCC Take-up Rate Upon termination of employment, a Member is offered the choice between a lump sum transfer from the Plan and a deferred pension. The value of the lump sum transfer is the greater of (i) the Member s Sum of Contributions Compounded, or SOCC, which generally represents the Member s required contributions, times two, plus interest, and (ii) the commuted value of the deferred pension. For each Member of the Plan, we have projected the Member s SOCC to the assumed points of early and normal retirement, and, at each point, compared the SOCC to the amount that would be transferred from the Pension Trust Fund to the Retirees Trust Fund were the Member to retire at that point. The SOCC Take-up Rate used in the June 30, 2007 valuation was as follows: eighty percent of Members who are assumed to retire at age 57 and age 62 would elect to transfer their SOCC rather than receive an immediate pension, if the projected SOCC is greater than the projected PTF-to-RTF-transfer. We also assumed, in respect of the Members who would otherwise have been assumed to retire at Normal Retirement Date, that 27% of them would elect to receive their SOCC in lieu of a pension, with the remainder electing to receive a pension from the Plan. The SOCC Take-up Rate has been revised such that we now assume that 40% of members (where their projected SOCC is greater than the projected PTF-to-RTF-transfer) at all ages up to and including age 65 would take their SOCC rather than receive an immediate pension. Withdrawal Rates The scale of termination of membership rates has been changed slightly to better reflect recent Plan experience. The following table details the rates used in the previous valuation as well as the rates used in the current valuation. Service of Member June 30, 2007 Termination Rates March 31, 2010 Termination Rates 1 year 12.0% 12.0% 2 years 10.2% 10.2% 3 years 8.7% 8.7% 4 years 6.9% 8.4% 5 years 6.9% 8.4% 6-10 years 3.9% 6.5% 11-15 years 1.7% 2.7% 16-20 years 0.7% 2.7% 21-25 years 0.3% 0.8% More than 25 years 0.0% 0.0% ACTUARIAL VALUATION DALHOUSIE UNIVERSITY PAGE 24
Termination benefits are projected to each service date, and the liability determined. Projected liabilities take into consideration the minimum withdrawal benefit of twice contributions, plus interest. Proportion Married and Spouse s Age We have continued to assume that seventy percent of active members have a spouse at the time of their retirement or death. We have continued to assume that Male spouses are 2 years older than their female counterparts. Cost Method The actuarial cost method used in conducting this valuation is the projected unit credit method. This is the same method as was used in the previous valuation. In using this method, as a first step, a calculation is made of the liability in respect of all benefits that have accrued to Members on account of service up to and including the valuation date. This represents the "accrued liability". It should be noted that this calculation takes into account projected future pay increases for each member up to and including expected retirement date. Then, as a completely separate process, the current year cost has been calculated (using exactly the same actuarial assumptions). This represents the cost of providing the benefits that will accrue in respect of the 12 month period following the valuation date. This is compared with the amount of required employee contributions and the matching employer contributions over that period. The difference represents the minimum required employer contribution (referred to as the overmatching contribution ) necessary in order for these benefits to be properly funded. For an individual member, the funding pattern produced by the projected unit credit cost method is one that increases (both in dollar terms and as a percentage of salary) over time. However, for the group as a whole, if the average age remains constant (which can occur through the retirement of older members and the addition of new, younger members) and salary levels increase in accordance with the salary scale, the contribution rate recommended under this method will remain relatively constant. If the plan's average age increases, on the other hand, the current year cost will also increase. Such increases would be revealed in future valuations. ACTUARIAL VALUATION DALHOUSIE UNIVERSITY PAGE 25
The following table details the actuarial assumptions that have been used in the going concern valuation: GOING CONCERN VALUATION ACTUARIAL ASSUMPTIONS Interest Pre-retirement: 6.25% p.a. Post-retirement: 4.55% p.a. for members who retire(d) after June 30, 1994, 4.95% p.a. for members who retired before June 30, 1994, and 4.65% p.a. for members who retired between June 30, 1994 and June 30, 1996. Salary Scale: 3.40% p.a. plus merit/promotion scale of 1.75% p.a. for ages below 45, 1.00% p.a. for ages between 45 and 55, and 0.00% for ages after 55. Maximum Pension: Mortality: Retirement Age: Withdrawals: Percentage Married: Spouse s Age: $2,494.44 in 2010, increasing at 3.0% p.a. thereafter. UP94@2020 In accordance with the retirement rates described previously in this section. In accordance with the termination rates described previously in this section. 70% of active members Males spouses are assumed to be 2 years older than their female counterparts SOCC-Take-up: 40% at all ages up to and including age 65 Funding Method: Projected Unit Credit ACTUARIAL VALUATION DALHOUSIE UNIVERSITY PAGE 26
C. Solvency Valuation The Nova Scotia Pension Benefits Act prescribes a solvency valuation. A solvency valuation permits the regulator to assess the solvency of the Plan should it terminate or wind-up effective on the valuation date. That is, an assessment is made as to whether the assets of the pension fund would be sufficient if no further benefits were provided and all members were paid their entitlements. If solvency assets are not sufficient to fund solvency liabilities (i.e., the Plan has a solvency deficiency), then special payments are required in order to eliminate the deficiency. For active members not eligible for immediate retirement (i.e., those under age 55), the interest rate used for calculating solvency liabilities was 3.70% p.a. for 10 years and 5.50% p.a. thereafter. This rate was in accordance with the recommendations of the Canadian Institute of Actuaries ( CIA ) Recommendations for the Computation of Transfer Values from Registered Pension Plans in effect for the month of March 2010. For retired lives and active members 55 or older, the solvency liabilities were calculated using an interest rate of 4.40% per annum and mortality at UP 1994 projected to 2020. These assumptions represent the estimated basis for settlement of the Plan s obligations for retired lives by the purchase of insured annuities on the valuation date, and are in accordance with the CIA Annuity Survey at such date. Note that the solvency valuation does not make any assumptions about future pay increases or future termination of employment, since all members are assumed to terminate on the valuation date. The actuarial assumptions for the solvency valuation are described in the following table: SOLVENCY VALUATION ACTUARIAL ASSUMPTIONS Interest: For actives < 55, 3.70% p.a. for 10 years, 5.50% p.a. thereafter. For pensioners and actives > 55, 4.40% p.a. Mortality: Salary Scale: ITA Maximum Pension: Retirement Age: UP94@2020 None $2,494.44 per year of service Immediate for Active Members greater than age 55; age 55 for Active Members less than Age 55 SOCC Take-up Assumption 100% for Active Members less than Age 55; 0% for Active Members greater than Age 55. Withdrawals: None ACTUARIAL VALUATION DALHOUSIE UNIVERSITY PAGE 27