Pension Fund Presentation Deborah McCallum – Vice President (Administration)

Pension Fund Presentation
Deborah McCallum – Vice President (Administration)
Barbara Hanchard – Director, Staff Benefits
ONE UNIVERSITY. MANY FUTURES.
Overview of the Pension Plan
All pension plans basically work the same way:
• Regular
Regular contributions are made to the pension plan
contributions are made to the pension plan
• The contributions are allocated to your personal pension plan account
• These contributions are held in a trust fund and invested by professional money managers to generate income
• Pension benefits provide for:
• retirement income • termination benefits if you leave the university termination benefits if you leave the university
before retirement, and
• death benefits
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Contributions
• Employee and the university contribute matching amounts to the pension plan.
• Matching contributions are currently 7% of your basic salary (subject to current tax limits) less an offset for CPP.
CPP
• Contributions are directed to your individual member account.
• Contributions
Contributions are fully tax deductible until you receive are fully tax deductible until you receive
the money as income.
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Types of Pension Plans
Defined Contribution (DC) –
employee and employer contributions and investment returns are used to purchase pension benefit
–
amount of pension depends on market
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i d
d
k t
–
no minimum guarantee
Defined Benefit (DB)
–
pension benefit is based on a formula
Hybrid Plan
–
offers several options
offers several options
–
the formula pension (DB) is a minimum guarantee at retirement
–
formula pension is compared with the Plan Annuity and you get the better of the two options
–
you can transfer your funds out of the plan after retirement to purchase a LIRA (life income retirement account) or LIF (life income fund)
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Retirement Benefits – calculated using 2 methods:
1.
Example
Formula – You earn a pension equal to:
Age
2% of your highest average annual salary
multiplied by
Your years of credited service
less
0.7% of your highest average annual salary under the
Year’s Maximum Pensionable Earnings (YMPE) in the
years you retire
multiplied by
Y years off C
Your
Credited
dit d Services
S i
(To a maximum permitted by CRA)
2.
Average Salary
Account Balance
Service
Reduction for early
retirement (96 months )
Using formula
monthly pension
57
$45,000
$297,500
32.5 years
24%
=$1,204
(1,584 x .76)
Plan Annuity
Series of monthly payments calculated using your
contribution amounts (employee & employer) and an
annuity factor determined by the actuary.
Plan annuity rate for 57
year old is $525 per
$100,000 contributions
Monthly Annuity
The monthly benefit from each method is compared – you
get the larger of the two benefits
Larger benefit =
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= $1,562
$1,562
Termination Benefits – If you leave the University before you retire
•
You have a full vested right of the full value of your contribution accounts (employee and employer matching contributions plus investment
(employee and employer matching contributions plus investment earnings).
•
Differs from Defined Benefit (DB) plans where the termination benefit is the actuarial commuted value of your deferred pension at your retirement date (ie. the current lump sum value of the promised benefit).
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Registration
•
Pension Plan registered with Manitoba Pension Commission and Canada Revenue Agency.
Revenue Agency.
•
Must comply with strict provisions of Manitoba Pension Benefits Act and Canadian Income Tax Act.
•
Both acts require:
o That the plan be properly funded
o That information be communicated to members
o That funds be kept separate from assets of University
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Governance
Pension Committee
• Appointed by Board of Governors, Staff Benefits Committee, the Trustees and the Province of Manitoba
Trustees and the Province of Manitoba.
•
Oversees the investment of the pension funds.
•
Approves asset mix and hires/fires specialty investment managers
•
Pension Funds are invested 55% equities and 45% fixed income.
•
Nine specialty managers invest the funds and meet regularly with Pension Committee to review performance.
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Governance
•
The fund is audited annually by the office of the Auditor General
•
RBC Dexia Investor Services reports quarterly on investment manager performance
•
Eckler Ltd. conducts regular actuarial reviews/valuations
•
An annual report plus quarterly reports are sent to plan members (transparent)
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Financial Position of the Pension Plan
Despite sound governance and investment practices, the funded status of the University of Manitoba Pension Plan has deteriorated due largely to four factors:
1.
Lower than expected investment returns
2.
Low interest rates
3.
Improved mortality rates (life expectancy)
4.
Insufficient ongoing contribution levels
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Financial Position of the Pension Plan
Investment Performance
•
As at December 31, 2008 the fund investment return was ‐15.34% (gross).
(‐15.72% net of expenses)
•
RBC Dexia reports Canadian pension plans lost an average of ‐15.9% (gross) in 2008.
•
Many fared much worse in 2008:
‐ University of Toronto pension fund lost ‐29.5%.
‐ Ontario Teachers Pension fund lost ‐18%.
‐ Quebec’s Caisse
Quebec’s Caisse de depot et placement lost ‐25%.
de depot et placement lost 25%
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Actuarial Valuations
•
•
•
Detailed valuation of plan’s assets vs. liabilities (promised benefit)
D
t il d l ti
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t
li biliti (
i db
fit)
Legally required every 3 years
Includes assumptions on investment return, interest rate, salary increases etc
increases, etc.
1.
Going Concern Valuation
• Determines whether assets are sufficient to fund benefits on an on‐
ee
es e e asse s a e su c e o u d be e s o a o
going basis
• Assesses whether the contribution rate is adequate to finance the long‐term benefits (current service cost)
2.
Solvency Valuation
• Assumes the plan is “wound up” at the date of valuation
• Is not an appropriate test for a University
f
• Province passed Regulation 141/2007 allowing Manitoba universities to elect exemption from solvency payments
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Financial Position of the Pension Plan – 2003‐2008
December 31,
2003 (filed)
December 31,
2005
(not filed)
December 31,
2006 (filed)
December 31,
2007
(not filed)
December 31,
2008
(estimates)
$9.8M
$11.993M
$23.701M
2.149M
($80.508M)
Solvency
$1.405M
($10.065M)
$9.269M
($9.169M)
($108 M)
Current Service
Cost in excess of
matching
$798,000
$1.805M
$2.544M
$3.748M
$4.168M
Going Concern
•
•
•
Current Service cost – cost of additional benefit in following year.
Current Service cost in excess of matching – indication that contributions should be increased.
The pension legislation requires these excess current service costs to be funded without delay if either the going concern accrued surplus or the solvency surplus is insufficient to fund for 3 years.
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Financial Position of the Plan
•
The next funding valuation must be completed for December 31, 2009.
•
This valuation will be filed with the Pension Commission and Canada Revenue Agency and will determine the exact going concern special payments.
•
Using the December 31, 2007 valuation, and factoring in the 2008 investment return of ‐15.72%
return of 15.72% the following are the estimated
the following are the estimated special payments legally special payments legally
required commencing in 2010.
o
o
$8.128 million a year for 15 years to fund the going‐concern deficit, plus
$4 168 illi
$4.168 million per year for current service cost
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i
t
•
This is in addition to regular matching contributions made by the University of $15 million.
•
Without the Solvency Exemption Regulation, solvency payments would be an additional $20 million for 5 years.
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What does University Pension Plans Exemption Regulation 141/2007 Mean?
•
Solvency valuation assumes pension plan is terminated and benefits are paid out.
•
S l
Solvency deficit is estimated at $108 M.
d fi i i
i
d $108 M
•
Annual solvency payments would be approximately $20M for 5 years.
•
Regulation 141/2007 gives Manitoba universities opportunity to elect exemption from special solvency payments.
•
University has decided to elect solvency exemption eliminating requirement to pay solvency payments of $20 M for 5 years.
•
Going concern and current service payments estimated at $12.3 million for 15 years are still required.
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What is the Purpose of the March 27, 2009 Notice to Members?
•
Notice to members is required by the regulation.
•
Provides members 30 days to comment on University’s decision to exercise solvency relief.
•
Comments will be sent to Board of Governors in May.
•
Q and A document plus this presentation will be posted on Q
and A document plus this presentation will be posted on
web site.
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Impact on Members of Funding Shortfall
•
The University is legally obligated to fund the going concern and current service shortfall and will do so.
•
The shortfall will be paid from the University’s operating budget.
g
•
The Solvency Exemption has NO impact on; o pensions earned by plan members, or
pensions earned by plan members or
o Pensions paid to retirees
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Summary and Next Steps
•
Pensioners and active members received the letter regarding the funding status Pensioners
and active members received the letter regarding the funding status
of the pension plan because it was a requirement of the solvency exemption regulation.
•
The Solvency Exemption will provide University relief from solvency payments of $20 M per year for 5 years.
•
The Going Concern special payments plus excess service cost estimated at $12.3 The
Going Concern special payments plus excess service cost estimated at $12 3
Million annually will be paid as required by Pension Benefits Act – from the operating budget.
•
The Staff Benefits Committee is meeting monthly to discuss these issues and explore options to ensure the pension plan remains both meaningful to plan members and affordable to the University over the long term.
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Questions ?
Contact
Deborah McCallum
Phone: 474-9777
E-mail : [email protected]
or
Barbara Hanchard
Phone: 474-6639
E-mail: [email protected]
@
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