1. University of Waterloo Pension & Benefits Committee June 12/26, 2012 Pension Information Sessions

2. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 2 Agenda for Pension Information Sessions  Welcome  Pension and Benefits Committee Membership and Role  Purpose of Pension Information Session  Presentation  Q&A

3. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 3 Pension & Benefits Committee Membership Role Janet Passmore, ChairAssociate Provost, Human Resources Rebecca Wickens, SecretaryAssociate University Secretary Members Darren BecksFUAC Representative Monika BothwellUW Staff Association Representative James BroxRetiree Representative Nelson CarrillosUW Staff Association Representative Lori CurtisUW Faculty Association Representative Stewart ForrestCUPE Local 793 Representative Dennis HuberVice-President, Administration & Finance Ranjini JhaUW Faculty Association Representative Sallie Ann KellerVice-President, Academic & Provost Cathy Newell KellyPresident's Appointee Christiane LemieuxUW Faculty Association Representative Gerry RemersBoard of Governors Representative Karen WilkinsonBoard of Governors Representative Resources Allan ShapiraConsulting Actuary, Aon Hewitt Kenton NeedhamDirector, Human Resources

4. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 4 Terms of Reference of Pension & Benefits Committee  Pension & Benefits Committee is a Committee of the Board of Governors. The Committee is accountable to the Board for the administration of employee pension and benefits plans  Terms of Reference include “recommending changes in pension and benefits plans to keep them current with respect to other universities and major employers, being mindful of the financial context within which the University operates”  The Pension & Benefits Committee plays a key role in the stewardship of the University of Waterloo Pension Plan

5. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 5 Purpose of Pension Information Session  In the context of its stewardship role, the Pension & Benefits Committee will be recommending to the Board of Governors changes to the University of Waterloo Pension Plan to maintain the long-term health of the Plan  This session is designed to achieve 2 goals: 1)Describe the changes proposed by the Pension & Benefits Committee 2)Respond to your questions and hear your perspectives  Following the Pension Information Sessions –Finalize the recommendations and take them to the next meeting of the Board of Governors in October 2012

6. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 6 Consulting Actuary to the Pension & Benefits Committee  Introduction: –Allan Shapira, Aon Hewitt, Consulting Actuary  Today’s presentation will include: – Description of the proposed changes – Reasons for these changes; and – Details of the proposed changes and transition

7. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 7 The Key Questions We Are Going To Address  What is the pension promise under the UW Pension Plan?  How is that pension promise funded?  Is there enough money to pay the pension promise?  What are we doing to manage the long-term health of the UW Pension Plan?  What is happening with other pension plans?  What changes are being proposed to the UW Pension Plan?

8. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 8 The Big Picture Answers to These Questions  What is the pension promise under the UW Pension Plan? –A defined benefit with the pension based on years of membership in the Pension Plan and salary near retirement, and with the pension benefit adjusted for inflation after retirement  How is the pension promise funded? –By contributions from members and the University and from investment return on pension fund assets  Is there enough money to pay the pension promise? –Pension Plan has a significant funding shortfall as a result of unfavourable markets, low interest rates and longer pension payment periods  What are we doing to manage the long-term health of the UW Pension Plan? –Pension and Benefits Committee is constantly monitoring the three levers that can be used to maintain the long-term health of the Pension Plan—contributions, investment earnings and benefit levels

9. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 9 The Big Picture Answers to These Questions (continued)  What is happening with other pension plans? –Also facing significant funding shortfalls, resulting in increases in contributions and decreases in benefits for plan sustainability  What changes are being proposed to the UW Pension Plan? –Adjustments to both contributions (members and University) and benefits to try to shorten the timeframe over which the shortfall is funded Details on the Responses to These Questions Presented on the Following Pages

10. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 10 What is the Pension Promise?

11. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 11 Plan Structure  Key Plan Provisions Averaging Period for Earnings:Highest 36 consecutive months in last 120 months (subject to plan cap) Benefit Rate for Each Year of Pensionable Service:Below CPP Wage Base:1.4% Above CPP Wage Base:2.0% Cap on Pension Benefits:$3,200 per year of pensionable service Standard Form of Payment:Lifetime pension with a 10-year guarantee Earliest Age for Unreduced Early Retirement Pension:Age 62 Automatic Indexation of Pension Benefits After Retirement:100% of increase in CPI up to 5% (each May 1st); P & B Committee decides above that

12. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 12 How is the Pension Promise Funded?

13. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 13 Funding the Pension Promise Funding Sources Member Contributions University Contributions Benefits paid to members, as determined by plan provisions + Costs to administer pension plan Investment Earnings Cost of Pension Plan

14. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 14 Benefits paid to members, as determined by plan provisions + Costs to administer pension plan Benefits paid to members, as determined by plan provisions + Costs to administer pension plan Funding Choices Cost of Pension Plan Take Less Investment Risk Target Lower Expected Returns Target Higher Expected Contributions Portion Funded From Contributions Portion Funded From Investment Earnings Portion Funded From Contributions Take More Investment Risk Target Higher Expected Returns Target Lower Expected Contributions Cost of Pension Plan

15. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 15 The Impact of Investment Return  Chart on the following page shows for an individual hired at age 30 and retiring at age 65, the breakdown between contributions and investment return based on different levels of investment return above inflation (real investment return): –3.85% per year (current valuation assumption), 3.00% per year, and 2.00% per year  Other assumptions are as per the actuarial valuation

16. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 16 The Impact of Investment Return (continued) 3.85%3.00% 2.00%

17. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 17 Is There Enough Money to Pay the Pension Promise?

18. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 18 Funded Status of Pension Plan Deteriorating Funded Status Despite Increase In Member and University Contributions Past Service Liabilities as of January 1, 2012 reflect increase from change in assumption for pensioner longevity and change in assumption for salary increases to reflect next three years of across-the-board increases under agreements

19. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 19 Annual Cost of Benefits Being Earned

20. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 20 Contributions Increases in Member and University Contribution Rates Effective July 1, 2007, July 1, 2008 and May 1, 2009

21. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 21 Investment Returns—Market Indices

22. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 22 What Are We Doing to Manage the Long-Term Health of the UW Pension Plan?

23. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 23 Managing Long-Term Health of Pension Plan Contributions Investment Earnings Benefits

24. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 24 Managing Long-Term Health of Pension Plan (continued)  Member and University contributions have been increased  Additional increases are necessary Contributions

25. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 25 Managing Long-Term Health of Pension Plan (continued)  Investment returns have been lower than anticipated in setting contribution levels  Continued uncertainty around future investment returns, particularly in short term  UW pension fund has implemented currency hedging to reduce investment volatility and started investing in infrastructure and looking at other asset classes such as real estate to try to generate additional investment returns at a reasonable level of risk Investment Earnings

26. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 26 Managing Long-Term Health of Pension Plan (continued) Core Benefit PromiseOther Benefits  Pension formula  Indexation after retirement  Early retirement  Survivor benefits  Termination benefits  Indexation before pension start date for terminated members with shorter service  Interest credit on member contributions beyond statutory requirement  Excess refund under 50% cost-sharing rule beyond statutory requirement  Commuted value option after member eligible for an immediate pension To ensure long-term sustainability of UW Pension Plan, core benefit provisions need to be addressed Changes have already been made to these provisions Benefits

27. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 27 What Is Happening With Other Pension Plans?

28. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 28 Ontario University Pension Plans  Significant funding shortfalls across the university sector in Ontario and across Canada  Most of the Ontario University pension plans have increased member contribution rates: –Increases have typically been in the range of 2.0% to 2.5% of salary  Other changes to pension plans have included: –Lowering early retirement subsidies –Introducing different provisions for new hires –Reducing guarantees/controlling risk under hybrid pension plans –Changing non-core benefits  Ontario Budget in March set expectation of 50/50 sharing of current service cost within next five years

29. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 29 Other Large Ontario Public Sector Pension Plans  Significant funding shortfalls in most of the pension plans  Significant increases in member and matching employer contribution rates  Lowering or eliminating guaranteed indexation  Changes to non-core benefits  Ontario Budget in March set expectation that any further increase in funding shortfalls should be met by reducing future service benefits rather than increasing contributions

30. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 30 What Changes Are Being Proposed to the UW Pension Plan?

31. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 31 Proposed Changes to Pension Plan ContributionsBenefits For Active Members  Increase University contributions by approximately 0.7% of salary effective May 1, 2012 (approved at June Board meeting)  Increase member contribution rates by approximately 0.5% of salary effective November 2012  Extend the averaging period for calculating highest average earnings from three years to five years, with a transition starting from January 1, 2014  Lower automatic indexation provision from 100% of CPI to 75% of CPI effective January 1, 2014, subject to transition provisions  Increase cap from $3,200 to $3,300 effective January 1, 2014 and $3,400 effective January 1, 2015 Details Provided on Following Pages

32. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 32 Financial Impact of Proposed Changes to Pension Plan  The following financial analysis is based on the January 1, 2012 actuarial valuation: 1 Will increase each year by increase in salaries

33. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 33 Details on Proposed Changes to Pension Plan Member Contribution Rates  Increase member contribution rates by approximately 0.5% of pensionable earnings: Pensionable EarningsCurrent ProvisionProposed Provision Up to 1x YMPE 1 5.80%6.25% Between 1x YMPE and 2x YMPE 2 8.30%8.95% Over 2x YMPE9.65%9.95% 1 $50,100 in 2012 2 $100,200 in 2012

34. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 34 Details on Proposed Changes to Pension Plan (continued) Comparison of Member Contribution Rates Salary Current Provision 5.80% / 8.30% / 9.65% Proposed Provision 6.25% / 8.95% / 9.95% Increase in Annual Contributions $40,0005.80%6.25%$180 $50,0005.80%6.25%$225 $60,0006.21%6.70%$290 $70,0006.51%7.02%$355 $80,0006.73%7.26%$420 $90,0006.91%7.45%$485 $100,0007.05%7.60%$550 $110,0007.28%7.81%$581 $120,0007.48%7.99%$611 $130,0007.65%8.14%$641 $140,0007.79%8.27%$671 $150,0007.91%8.38%$701 $160,0008.02%8.48%$731 Member contributions to Pension Plan are tax-deductible

35. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 35 Details on Proposed Changes to Pension Plan (continued) Final Average Earnings  Starting January 1, 2014, final average earnings will be transitioned from a 3-year to a 5-year average  Final average earnings will not decrease below the final 3-year average earnings as of December 31, 2013  Example of how transition would work: –At December 31, 2013, final average earnings based on 2011, 2012, 2013 –At December 31, 2014, final average earnings based on 2011, 2012, 2013, and 2014 –At December 31, 2015, final average earnings based on 2011, 2012, 2013, 2014, and 2015 –At December 31, 2016, final average earnings based on 2012, 2013, 2014, 2015, and 2016

36. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 36 Details on Proposed Changes to Pension Plan (continued) Examples of Impact of Change to Final Average Earnings

37. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 37 Details on Proposed Changes to Pension Plan (continued) Inflation Protection (Indexation of Pension Benefits)  Maintain 100% of CPI indexation on pension benefit earned up to December 31, 2013, with balance of pension benefit indexed at 75% of CPI  Maximum increase in CPI covered under guaranteed indexation provision continues to be 5%  Results in a transition from guaranteed indexation at 100% of CPI to guaranteed indexation at 75% of CPI (example of transition shown on following page)  If pension plan funded status improves, P&B Committee would consider top-up of indexation to 100% of CPI as part of its annual review process

38. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 38 Details on Proposed Changes to Pension Plan (continued) Examples of Indexation Transition 1 Based on assumed future salary increase of 4.25% per year 2 Based on increase in CPI of 2.25% per year

39. Pension Information Sessions - June 12 and 26, 2012.ppt 06/2012 39 Q&A