1. Atlantic Connection 2013, Miami, Florida Public Pensions & Pension Deficits New Ideas New Solutions? Presented by: Marcia Tam-Marks, FSA

2. Morneau Shepell 2 Confidential – Not for Distribution Introduction and Outline Public pensions? -Pensions for Government Employees (Public Servants) -Social Security Financing options Funded levels of public sector plans in Canada Benefit design / contribution levels - Caribbean Liability profile and gain and loss analysis of sample plan

3. Morneau Shepell 3 Confidential – Not for Distribution Financing Options Pay As You Go -Benefit payments are part of annual expenditure -It is usually not pre-funded -Vulnerable to increase in pensioner / active ratio -As plan matures cost increases -Unless the return on investments exceeds the GDP growth rate pre-funding does not reduce the fiscal burden (applies to public sector plans)

4. Morneau Shepell 4 Confidential – Not for Distribution Financing Options Funded plans -Relies on a pension fund, productively invested, to pay for the benefits of retired members. -Vulnerable to low interest rates, disappointing stock market performance, increasing inflation, longevity, etc. -Contribution rates must be increased to sustain benefits or investment earnings must fund the balance of the cost. Some public sector plans are partially funded by design. Initial unfunded liability at start of plan which continues unless there is a plan to eliminate the deficit – lump sum payments, increasing contributions

5. Morneau Shepell 5 Confidential – Not for Distribution Global Financing Source: Civil-service Pension Schemes around the World, Robert Palacios & Edward Whitehouse, World Bank May 2006.

6. Morneau Shepell 6 Confidential – Not for Distribution Conclusion of a World Bank Discussion Paper “The civil service pension schemes tend to be more generous and less financially viable than those covering the rest of the formal sector. Taking the scope of coverage into account, they are also more expensive. Costs have spiraled in many countries as the schemes have matured and past promises have come due. Most projections show that the situation will worsen without reform, raising concerns about possible crowding out of important social programmes.” Civil Service Pension Schemes Around the World, World Bank Discussion Paper, May 2006.

7. Morneau Shepell 7 Confidential – Not for Distribution Funding Level of 85 Public Sector Plans (84 Canadian and one Caribbean) Source: Morneau Shepell Limited Pensions Database

8. Morneau Shepell 8 Confidential – Not for Distribution Statutory retirement age (Current Law)* Early retirement age * Minimum Vesting Period * Canada6560r United States676210 Antigua and Barbuda60-10 Barbados656010 Bolivia65-- Dominica60-10 Grenada60-10 Guyana60-15 Jamaica60/65-28.86 St. Kitts and Nevis62-10 St. Lucia636013 St. Vincent and the Grenadines60-10 Suriname.. Trinidad and Tobago60-15 Notes: Not available:.. Not applicable: - r: Qualifying conditions require a certain number of year of residence p: Qualifying condition are measured in terms of points which are gained through accruing years of contribution. Qualifying Conditions (Source: World Bank pension database at http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTSOCIALPROTECTION/EXTPENSIONS/0,,contentMDK:23231994~menuPK:8874064~pa gePK:148956~piPK:216618~theSitePK:396253,00.html) http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTSOCIALPROTECTION/EXTPENSIONS/0,,contentMDK:23231994~menuPK:8874064~pa gePK:148956~piPK:216618~theSitePK:396253,00.html

9. Morneau Shepell 9 Confidential – Not for Distribution Contribution Rates and Scheme Design (Source: World Bank pension database at http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTSOCIALPROTECTION/EXTPENSIONS/0,,contentMDK:23231994~menuPK:8874064~pa gePK:148956~piPK:216618~theSitePK:396253,00.html) http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTSOCIALPROTECTION/EXTPENSIONS/0,,contentMDK:23231994~menuPK:8874064~pa gePK:148956~piPK:216618~theSitePK:396253,00.html

10. Morneau Shepell 10 Confidential – Not for Distribution Dependency Ratios (Source: World Bank pension database at http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTSOCIALPROTECTION/EXTPENSIONS/0,,contentMDK:23231994~menuPK:8874064~pa gePK:148956~piPK:216618~theSitePK:396253,00.html) http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTSOCIALPROTECTION/EXTPENSIONS/0,,contentMDK:23231994~menuPK:8874064~pa gePK:148956~piPK:216618~theSitePK:396253,00.html

11. Morneau Shepell 11 Confidential – Not for Distribution Pension Spending to GDP (World) (Source: World Bank pension database at http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTSOCIALPROTECTION/EXTPENSIONS/0,,contentMDK:23231994~menuPK:8874064~pa gePK:148956~piPK:216618~theSitePK:396253,00.html) http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTSOCIALPROTECTION/EXTPENSIONS/0,,contentMDK:23231994~menuPK:8874064~pa gePK:148956~piPK:216618~theSitePK:396253,00.html

12. Morneau Shepell 12 Confidential – Not for Distribution Situation of Schemes and Focus Many public pension schemes face difficulties due to demographic and economic factors. For civil service pension the focus should be on sustainability since most are unfunded. Contributory social security schemes are mainly partially funded so the focus should be on contribution stability.

13. Morneau Shepell 13 Confidential – Not for Distribution Some Causes of Unfunded Liabilities Low than expected investment returns Lower than expected post-retirement mortality Non-compliance Original unfunded or partially funded design Government Fiscal Deficits Administrative Inefficiencies Disconnect between benefit improvements and contribution rate increases Maturing plan profile Reciprocal agreements

14. Morneau Shepell 14 Confidential – Not for Distribution Range of Caribbean NIS Pension Benefits / Contributions Source: International Social Security Association (ISSA) Country Profiles at http://www.issa.int/Observatory/Country-Profiles http://www.issa.int/Observatory/Country-Profiles

15. Morneau Shepell 15 Confidential – Not for Distribution Liability Profile of a Sample Pension Plan

16. Morneau Shepell 16 Confidential – Not for Distribution Funded Position of the Sample Pension Plan

17. Morneau Shepell 17 Confidential – Not for Distribution Sample Pension Plan Gain and Loss

18. Morneau Shepell 18 Confidential – Not for Distribution Sensitivity Analysis for Sample Pension Plan AssumptionChangeImpact on Total Liability (%) Interest rate1.0% increase(11.7) 1.0% decrease14.6 Salary increase rate1.0% increase4.0 1.0% decrease(3.6) Inflation1.0% increase9.7 1.0% decrease(8.3) Life Expectancy1.0% increase2.6 1.0% decrease(2.4)

19. Morneau Shepell 19 Confidential – Not for Distribution New Entrant Cost Example Salary$70,000 Accrual Rate2%1.50%1.25% Interest Rate6.50% Salary increase4.25% Form of benefitLife and 5 yr Guarantee COLA3% every 2 years NRA65 Lump Sum11.5 x 25% Annual Pension MortalityGAM 94 Male AgeContribution Rate % Salary 3012%9%8% 3514%10%8% 4015%11%9% 4517%13%10% 5019%14%12%

20. Morneau Shepell 20 Confidential – Not for Distribution Conclusions Plan design – be careful when increasing benefits and contributions – consider relationship and impact on funded position – do actuarial costing instead of doing it in isolation Consider new entrant (n/e) profile – typically contribution rate more than cost of benefits for younger n/e Longevity risk is real and significant In addition to interest rates, other plan experience should be consistently monitored to determine sources of gains and losses – early retirement incidence and benefits, increase in longevity, new entrant profile, salary and merit increases, level of indexation etc.

21. Thank You Contact person mtammarks@morneaushepell.com