Lakehead University Faculty Association January 4 , 2019

1. Professional Pension Plan CPP Enhancement Issues + Options Lakehead University Faculty AssociationJanuary 4 , 2019

2. In this presentation you will learn that Lakehead University- • Has the lowest pension contribution rates in the province • Has the only pension plan among Ontario Universities that reduces contributions to the plan by Canada Pension Plan contributions • Commencing on January 1 2019, the enhanced CPP contributions SHALL reduce NET pension contribution rates even further Executive Summary

3. To ‘set the stage’ for the next round of bargaining & prior to the expiry of the current Collective Agreement • LUFA Pension Committee recommends removal of ‘Less CPP’ language from the Pension Text and the Collective Agreement for member contributions • LUFA Members must unite and endorse recommendations to improve the Professional Pension Plan Executive Summary

4. Agenda • Lakehead University’s Pension Plans – basic metrics • ‘Less CPP’ Language and Lakehead’s Pension Plans • Lakehead Rates of Contribution Compared • Understanding the Canada Pension Plan • Forecast Financial Impacts of ‘Less CPP’ Language • Summary • Recommendations • Discussion • Sources of Information • Pension Contributions – A Conceptual Illustration Today’s Agenda

5. Every Pension Plan has… • A system to accumulate capital over the beneficiary’s working life time. • A system to de-cumulate (provide retirement income)

6. Retirement Savings – Life-Phases Retirement Savings + 0 - Retirement Asset Accumulation Phase Retirement Asset De-cumulationPhase 20 30 40 50 60 70 80 90 Age Chosen Retirement Date End of life Working Years (25 … 30 … 40 +) Retirement Years (25- 30 – 40 +)

7. Lakehead University’s Pension Plans Professional Plan + LUEPP Plan

8. 2 Pension Plans at Lakehead University Professional Plan • Retirement Annuity Option • 6.5% Less CPP employee contribution • 8.05% Less CPP employer LUEPP • No Retirement Annuity Option • 7.9% Less CPP employee contribution • 7.9% Less CPP employer • Both Share • Employer - LU • Plan administrator – LU Pension Services Office • Pension Consultant – Proteus • Actuary – Eckler • Custodian – Northern Trust • Investment Managers

9. Lakehead University Pension Plans - Basic Metrics

10. NOTE: Membership data is fluid. Depending upon the date of the Actuarial reports by Eckler, the numbers vary to reflect deaths, retirements, etc. The most recent report by Eckler dated November 12, 2018 noted 473 active members; 161 inactive & deferred; 157 pensioners & survivors for a Total of 791. Lakehead University Pension Plans - Basic Metrics

11. Going concern solvency deficiency for the whole plan fell to $3.9 million as at December 31, 2017. • (Going concern valuation assumes the plan will be on-going (not wound up).) Lakehead University Pension Plans - Basic Metrics

12. ‘Less CPP’ Language is embedded in Lakehead University’s Pension Plan Text + Collective Agreements

13. Pension Text – Article 3Member Contributions ‘Less CPP’ is embedded in the pension text. ‘Less CPP’ language is embedded in Pension Text + Collective Agreement.

14. LUFA Collective Agreement – page 113Employer Contributions Maximum Annual Board Contributions to CPP $2,593.80 Maximum Annual LUFA Member Contributions to CPP 2,593.80 TOTAL DIVERTED FROM PENSION (2018) per member$5,187.60 ‘Less CPP’ is embedded in the Collective Agreement. ‘Less CPP’ language is embedded in Pension Text + Collective Agreement.

15. Board of Governors’ Contribution RatesPension Text – Appendix A – page 63 Board Contribution Rates to the Pension Plan have increased for both LUFA & Non-LUFA members ‘Less CPP’ language is embedded in Pension Text + Collective Agreement.

16. LUFA Member Contribution RatesPension Text – Appendix A – page 63 LUFA member contribution rates have remained static since 1990 LU Staff + Administrators contribute 8.05% Less CPP To the Professional Plan ‘Less CPP’ language is embedded in Pension Text + Collective Agreement.

17. Contribution Rates ‘Normalized’ Taking away the impact of ‘Less CPP’

18. ‘Less CPP’ Impacts on Net Rates of Contribution by LUFA Members • Observations • LUFA member’s gross rate of ‘pension-related contribution’ is 6.5% • Contribution rates net of CPP vary depending on the member’s employment income • Plan members with the lowest salaries receive the lowest rates of employer contribution • Income Range $70,000 $180,000 • Net Contribution Rates 2.8% 5.0% ‘Less CPP’ language is embedded in Pension Text + Collective Agreement.

19. LakeheadEmployer Rates of Contribution to the Professional Pension Plan • Observations • Lakehead’s gross rate of ‘pension-related contribution’ is 8.05% • Contribution rates net of CPP vary depending on the member’s employment income • Plan members with the lowest salaries receive the lowest rates of employer contribution • Income Range $70,000 $180,000 • Net Contribution Rates 4.3% 6.6% ‘Less CPP’ language is embedded in Pension Text + Collective Agreement.

20. ‘Less CPP’ Language in Lakehead’s PlansFacts About ‘Less CPP’ Language • Used in both the Pension Plan Text, as well as in the LUFA Collective Agreement. • Language has been used since 1966. • No other Ontario university pension plan uses this language. • No major Ontario Public sector pension plan uses this language including • Ontario Colleges • OMERS • Ontario Teacher’s Pension Plan ‘Less CPP’ language is NOT found in any other major Ontario Public Sector Pension Plan.

21. Contribution Rates Compared Lakehead’s ‘Normalized Rates’ Compared to Other Ontario Pension Plans

22. Selected Pension Contribution RatesOntario Public-Sector Pension Plans Lowest contribution rates in the Province are found at Lakehead University. ‘Normalized Rates of Pension Contribution Compared to other Provincial Pension Plans

23. Canada Pension Plan CPP Basics

24. Canada Pension PlanWho Participates? • A public retirement plan for all working Canadians • Participation is mandatory • For all employed Canadians • Until age 65 • From age 65 to age 70, if still employed, participation is optional Understanding the Canada Pension Plan and its ‘enhancement’

25. Canada Pension PlanHow much can I expect to receive from CPP when I retire? • Maximum in 2018 = $1,134 per month • ($13,488 per annum) • Average retiree receives $650 per month • ($7,800 per annum) According to the Government of Canada website the average amount new beneficiaries received at age 65 was $642.92 in 2017. Benefits adjusted annually for cost-of-living increases. Understanding the Canada Pension Plan and its ‘enhancement’

26. Canada Pension PlanWhy do so few Canadians receive maximum CPP? • To receive maximum CPP you must • Contribute maximum amounts for 39 years • You must apply to receive CPP benefits no earlier than age 65 The monthly CPP amount will increase by 0.7% for each month after age 65 if you delay it, up to age 70 ( 8.4% per year). If you start receiving the pension at age 70, you will receive 42% more than if you had taken it at 65. If you DO NOT apply to receive benefits, and continue to work and make CPP contributions, you are NOT entitled to earn ‘post-retirement’ benefits. A useful source on these questions is: https://www.myownadvisor.ca/when-to-take-your-canada-pension-plan-benefit/ If you take the CPP retirement pension EARLY, it is reduced by 0.6% for each month you receive it before age 65 (7.2% per year). This means that, an individual who starts receiving their CPP retirement pension at the age of 60 will receive 36%less than if they had taken it at 65. If you apply to receive benefits, and continue to work and make CPP contributions, you are entitled to earn ‘post-retirement’ benefits. Understanding the Canada Pension Plan and its ‘enhancement’

27. ‘Enhanced’ Canada Pension PlanWhat is the Enhanced Canada Pension? • Goal – to increase ‘insured pensionable earnings’ from ¼ to 1/3 of the ‘average industrial wage’(YMPE) • ‘Enhanced contributions’ start – January, 2019 • You will get the full increase in ‘enhanced benefits’ if you contribute to the enhanced CPP for 40 years. SOURCE - https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-enhancement.html Understanding the Canada Pension Plan and its ‘enhancement’

28. In 1966, Yearly Maximum Pensionable Earnings were $5,000 Basic Exemption was $600 ‘Pensionable earnings’ = $5,000 - $600 = $4,400 Maximum CPP Premiums paid = $4,400 × 0.018 = $79.20

29. Since 1966 Rates of Contribution have risen from 1.8% of pensionable earnings (YMPE) to 4.95% in 2018. And shall rise to 5.95% of YMPE by 2023 In 2024, for those earning more than YMPE, an additional 4% will be added in 2024 and again in 2025 based on YAMPE

30. Rapidly rising CPP contributions shall divert a significant proportion of ‘retirement’ savings from the Lakehead Pension Plans to CPP. If nothing is done Amounts diverted away from the pension plan shall rise by 63% in 8 years

31. Impact of Rising CPP ContributionsAssuming an Hypothetical LUFA Member earning $100,000 In the 8 years from 2018 to 2026, maximum CPP contributions are expected to rise by $1,697.20 An increase of 65% Understanding the Canada Pension Plan and its ‘enhancement’

32. Impact of Rising CPP ContributionsAssuming an Hypothetical LUFA Member earning $100,000 In the 8 years from 2018 to 2026, net contributions to the Professional Pension Plan for this hypothetical faculty member will fall to 2.2% A 43% decrease in their personal rate of contribution to the LU Pension Plan. Understanding the Canada Pension Plan and its ‘enhancement’

33. Forecast Financial Impacts of ‘Less CPP’ Language Lakehead University Professional Pension Plan

34. ‘Less CPP’ Language in Lakehead’s PlansWhat is the Cumulative effect of ‘Less CPP’ on pension accumulations? • Removal of ‘Less CPP’ would affect both employer and employee contributions in the follow ways: • Increase annual pension-related contributions by more than $5,200 annually. • Materially increase pension accumulations within the Professional Pension Plan Forecast Financial Impact of Removing ‘Less CPP’ language

35. Removal of ‘Less CPP’ LanguageThis forecast assumes a 5.4% ‘real return’ on assets in the plan • red line is forecast pension accumulations with ‘less CPP’ removed from both employee + employer contributions • blue line is the status quo Forecast Financial Impact of Removing ‘Less CPP’ language

36. Removal of ‘Less CPP’ LanguageThis forecast uses historical ‘real returns’ on assets that were earned in the plan • red line is forecast pension accumulations with ‘less CPP’ removed from both employee + employer contributions using historical rates of return actually earned on the pension plan • blue line forecasts the status quo Forecast Financial Impact of Removing ‘Less CPP’ language

37. Over a 40 year career, removal of ‘Less CPP’ language is expected to add an additional $550,000 to this professor’s accumulated pension balance. Forecast Financial Impact of Removing ‘Less CPP’ language

38. Alternative Contribution ScenariosIncreasing Member Rates of Contribution is Not the Answer Increasing member and employer rates of contribution can make further improvements in expected pension accumulations. The greatest impact is from removal of ‘Less CPP’ language. The effect of ‘less CPP’ is obvious Forecast Financial Impact of Removing ‘Less CPP’ language

39. After-tax Financial Impact on LUFA members Removing ‘Less CPP’ from Pension Text & Collective Agreement

40. Observations • Paying CPP premiums on top of your 6.5% pension contribution reduces your taxable income • Assuming a CPP contribution rate of $2,564…after-tax cost per pay cheque varies with your marginal tax rate • Income Range $70,000 $180,000 • Drop in After-Tax Income • per Pay Cheque $75.16 $55.59 After-tax impact on LUFA members take home pay if ‘Less CPP’ is removed and CPP premiums are paid on top of 6.5% going in to the Pension Plan.

41. Summary A Simple Solution to a Serious Problem

42. What Have We Learned? • $5,187.60 was diverted from your Pension Plan to Canada Pension Plan in 2018. • $8,436 is forecast to be diverted (annually) from your Pension Plan to Canada Pension Plan by 2026 if no action is taken. Summary

43. What Have We Learned? • Removing ‘Less CPP’ will mean LUFA members will have to contribute CPP premiums on top of their pension contributions. Just like every other pension plan member in the province. Summary

44. A Structural Problem • ‘Less CPP’ is a structural problem • Failure to remove it shall perpetuate a problem – that problem will grow • The language impairs our ability to compare Lakehead contribution rates with any other pension plan • Has the potential to threaten the sustainability of the Professional Plan1 ___________________________________________________ 1Pension plans are known to enjoy ‘economies of scale.’ Under the Pension Benefits Act of Ontario and CAPSA guidelines, pension plans must incur relatively fixed costs in their day-to-day administration including custodial fees, actuarial fees, etc. The greater the pool of assets managed in the plan, the lower the percentage that these costs represent; giving advantages to larger plans. The size of the pension plan not only affects the net returns on the plan, but can also affect the relevance of actuarial estimates on plan experience. The converse is also true. A small plan can experience large deviations from actuarial estimates due to the ‘law of small numbers.’ This can ‘threaten’ the sustainability (self-sufficiency) of the plan itself. Summary

45. Sources of InformationS Lakehead Pension Plans Canada Pension Plan Government of Canada Bond Yields Ontario University Pension Plan Your Annual Personal Pension Statement from the Actuary

46. Sources of Information for LUFA Members LAKEHEAD UNIVERSITY PENSION SERVICES WEBSITE • https://www.lakeheadu.ca/faculty-and-staff/departments/services/finance/pension • There are links to the Pension Plan Text and a ‘Handbook’ that summarizes the professional plan. • Rates of return earned on both the Professional Plan and the Short-term account are also available. • The SIPP (Statement of Investment Policies and Procedures) is also posted. Sources of Information

48. Sources of Information for LUFA Members LAKEHEAD PROFESSIONAL PLAN ADVISORY BOARD MEETING MATERIAL Dates, times and locations for meetings of the Professional Plan Advisory Board are found on the LU Pension Services website: https://www.lakeheadu.ca/faculty-and-staff/departments/services/finance/pension/pension-meeting-information • Link to the Proteus Portal Pension Meeting Information may be found by choosing the ‘PENSION MEETING INFORMATION’ hyperlink found on the Lakehead University Pension Services Website. https://www.proteusperformance.com/member Username: “lakehead” Password” “learning” Remember, members of the pension plans are welcome to attend the meetings of the Professional Plan Advisory Board as visitors. Sources of Information

49. Sources of Information for LUFA Members THE ENHANCEMENT PLAN FOR CANADA PENSION PLAN CPP enhancement introduced: https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-enhancement.html An indepth backgrounder on the CPP enhancement : https://www.fin.gc.ca/n16/data/16-113_3-eng.asp A recent article from the ‘Investment Executive’ that provides financial planning insights offered through a recent report of the Canadian Institute of Acutaries: https://www.investmentexecutive.com/newspaper_/building-your-business-newspaper/enhanced-cpp-to-have-big-impact/ Sources of Information

50. Sources of Information for LUFA Members GOVERNMENT OF CANADA BOND YIELDS The key benchmark rate of interest used in the determination of the NORMAL FORM PENSION FACTOR is based on the Bank of Canada 10-year Bond Yields (Choose Monthly V122487) at: https://www.bankofcanada.ca/rates/interest-rates/lookup-bond-yields/ Yields change monthly based on market rates for Government of Canada bonds. Sources of Information