University of Saskatchewan 1999 Academic Pension Plan November 8, 2013 Aon Hewitt | © 2014 Aon Hewitt. All Rights Reserved Lump Sum Transfer Option on Retirement October 2014 Prepared by Aon Hewitt

Academic Pension Plan  Academic DB Plan split into two plans on January 1,1999 –1999 Academic Pension Plan –Retirees Pension Plan  1999 Academic Pension Plan is a defined benefit pension plan that provides members at retirement with a: –Monthly Pension; or –Lump sum (LS) transfer equal to greater of: 1.Commuted value of pension 2.Member and University contributions with interest  149 actives, 146 pensioners and 37 inactives at Dec 31, 2013

2 Monthly Pension where:  Service = pensionable service earned while a member of the Plan  BAE4 = Best Average Earnings, based on average of highest 48 continuous months of earnings  Post-2005 Service = pensionable service earned after 2005  FAYMPE3 = Average of the final 3 years of the Year’s Maximum Pensionable Earnings (2% x Service x BAE4) – (0.4% x Post-2005 Service x FAYMPE3)

3 Lump Sum Transfer Option Commuted Value –Value of a member's accrued pension at a given date –Assumption basis used to determine CV prescribed by legislation –Assumption basis sensitive to Government of Canada bond yields 1% increase/decrease in yields results in a 10% decrease/increase in commuted value Member and University Contributions with interest –Interest credited equal to greater of prescribed rate and fund rate less 1% –Average credited rate over past 30 years = 10%

4 Retirement Option History Year # electing a pension from the Plan # electing a lump sum transfer from the Plan Total lump sum payments out of the Plan during year Average lump sum payment out of the Plan in year $4,315,000$616, $3,192,000$456, $5,066,000$724, $4,804,000$1,201, $5,685,000$632, $3,923,000$654, $11,007,000$647, $4,961,000$827, $8,604,000$615, $6,899,000$627, $6,405,000$712,000 Total 88 (48%)97 (52%) –The Total lump sum payments out of the Plan during the year do not include the portion held back due to the solvency deficiency

5 Retirement Calculation Example #1  Age: 68  Retirement Date: June 30, 2014  Service: 39 years  Best Average Earnings: $140,000  Retirement Options: 1.Monthly Pension: $8,955 payable for life 2.Lump sum transfer option: Commuted Value: $1,635,000 Member plus University contributions with interest: $1,815,000

6 Retirement Calculation Example #1  If member chooses to transfer out LS of $1,815,000 at retirement to a PRIF and takes monthly withdrawals, when will money run out under various rates of return (ROR) earned on LS payout and monthly withdrawal amounts Average Annualized ROR Earned on LS Payout Monthly Withdrawals First 10 yrs / thereafter 3%4%5%6% $8,000 / $8, $8,955 / $8, $10,000 / $10, $10,000 / $8, $11,000 / $8, $12,000 / $8,

7 Retirement Calculation Example #2  Age: 60  Retirement Date: June 30, 2014  Service: 30 years  Best Average Earnings: $100,000  Retirement Options: 1.Monthly Pension: $4,855 payable for life 2.Lump sum transfer option: Commuted Value: $1,070,000 Member plus University contributions with interest: $740,000

8 Retirement Calculation Example #2  If member chooses to transfer out LS of $1,070,000 at retirement to a PRIF and takes monthly withdrawals, when will money run out under various rates of return (ROR) earned on LS payout and monthly withdrawal amounts Average Annualized ROR Earned on LS Payout Monthly Withdrawals First 10 yrs / thereafter 3%4%5%6% $4,000 / $4, $4,855 / $4, $6,000 / $6, $6,000 / $4, $7,000 / $4, $8,000 / $4,

9 Putting a Value on Retirement Options  Legislative requirement to assess financial health of plan at least every 3 years (i.e. actuarial valuation)  Among other things, must determine the appropriate “Value” of the retirement options available to Plan members  “Value” depends on: –Assumed rate of return that will be earned on the assets that back the obligation –Expected timeframe over which such assets are liquidated to pay out the obligation –Proportion of members choosing the lump sum transfer option over the monthly pension option

10 Putting a Value on Retirement Options 1.Monthly Pension –Assets are paid out over a member’s life expectancy and/or surviving spouse or named beneficiary –As a result, investment time horizon is considered “longer-term” resulting in less concern over short-term volatility –Value of the monthly pension is much more stable and certain 2.LS transfer option –Assets are paid out all at once on a member’s assumed date of retirement –As a result, investment time horizon is considerably shorter which increases concern over short-term volatility –Leads to greater “margins” being added to the LS transfer option’s value –Furthermore, value has become less certain due to commuted values often being larger than the contribution balance Historically, contribution balance normally higher than commuted value In last 4 to 5 years, commuted values have become greater due to lower interest rates (commuted value changes monthly) Rising interest rates will reverse this trend

11 Funded Status at December 31, 2013 All going-concern positions are based on 5% margin

12 Value of Retirement Options at December 31, 2013

Aon Hewitt | © Aon Hewitt Inc – All Rights Reserved Considerations with Retirement Options Monthly Pension  Fixed lifetime stream of income, regardless of plan returns  Possibility of annual increases  Based on specific plan formula  No opportunity to change income once pension has commenced  Optional forms of pension available to a member with a spouse Transfer of Commuted Value  Benefit likely subject to the ITA Transfer Limit  Member can determine the income stream (within limits)  Member is responsible for the investment of the benefit  Investment is subject to market conditions, thus income stream is not guaranteed  Member is dependent on the advice of a financial advisor  Investment subject to fees, which may be hidden 13

Conclusions  Additional reserves must be set aside to reflect the greater uncertainty currently embedded in the LS transfer option  End result is: –additional employee and/or University contributions that may or may not prove to be necessary over the long term –potential premium being paid to transferees that would otherwise be available to pensioners to better secure pensions  Threatens the long-term sustainability and security of the plan for members choosing monthly pensions  LS option forces investment mix to remain significantly exposed to riskier types of investments (i.e. equities) while the plan matures 14

Conclusions  In light of trying to preserve the initial intent of the Plan (i.e. provide a monthly pension to members), the ADBPC passed a motion recommending to the parties that consideration be given to removing the LS option for members eligible to retire –Legislation still requires the LS option be provided on termination 15

Considerations in Removing LS Transfer Option  Initial intent of Plan was to provide a monthly pension –1999 Academic Pension Plan is a DB plan not a DC Plan –A greater proportion of the Plan’s assets are needed to back the LS transfer option in current low interest rate environment –Consequence is a less secure monthly pension option  LS Transfer Option becoming uncommon in DB industry –Where LS Transfer Option existed, it has been removed in many cases  Removing LS Transfer Option would have no impact on your past or future accrued pension –Still eligible for guarantee period for monthly pension  Time is of the essence –Longer you wait, the less impact this will have and the more money that will leave the Plan –YTD LS Transfers = $6M 16

MOA Effective July 1, 2015, the lump sum option in the Plan shall be removed for all members who qualify for an immediate pension after that date. For greater clarity, members who qualify for an immediate pension on or after July 1, 2015 will only be given the option to take a pension from the Plan. 17

Questions 18