Health of Defined Benefit Plans / Bilan de santé des régimes à prestations déterminées

1. Health of Defined Benefit Plans / Bilan de santé des régimes à prestations déterminées Louise Pagé-Valin, Associate Vice-President, Human Resources/ Vice-recteure associée, ressources humaines University of Ottawa/ Université d’Ottawa

2. CONTENT • Description • Membership • First review of plan design • Second review of plan design • Current situation

3. DESCRIPTION • Defined Benefit Pension Plan • Assets of more than $1 B • Normal retirement age is 65 • No penalty at age + service = 90 • Earliest retirement age is 55

4. MEMBERSHIP • Regular academic staff • Regular support staff • Grant-paid staff • Average retirement ages are: -61 for support staff -63 for academic staff

5. 2800 2750 2700 2650 2600 2550 2500 2450 2400 2350 2001 2002 2003 2004 2005 Active members as of December 31, 2005

6. 1600 1400 1200 1000 800 600 400 200 0 2001 2002 2003 2004 2005 Retired members as of December 31 2005

7. GOVERNANCE • Pension Plan Committee composition, as negotiated with the faculty Association: -13 members on the PPC -management representation assured by : -two members appointed by the Board (currently): -Vice-president, Resources -Secretary of the University -Associate vice-president, Human Resources

8. 1993-1996: -Social contract in the province of Ontario -Broader public sector employers subjected to major cuts in their provincial subsidies -Pension Plan Committee agreed to allow the University to have a contribution holiday of $8M to help offset the operational costs in these years.

9. FIRST REVIEW OF PLAN DESIGN • -1996: -pension fund grew to a substantial portfolio -funded ratio was becoming very high -members of the PPC wished to consider a review of the plan design -needed to explore plan governance, particularly as it related to the monitoring and decisions regarding investments

10. Historical ratios

11. MEMBER PERSPECTIVE • faculty representatives on the PPC were very interested in pursuing a DC option • frustrated that their colleagues in universities with DC plans were faced with very high returns • felt their own retirement pensions were limited by the pension formula and CRA limits • support staff representatives were uncomfortable with the potential risk associated with a DC plan design

12. EMPLOYER PERSPECTIVE • University was interested in reviewing the pan design: its prime consideration was that improvements in benefits would not increase employer cost to a level that was more than the contribution of the time • While on-going funding was an issue, solvency was not relevant at the time • DC option was considered in a context of member benefits rather than financial considerations (apart from the maximum contribution as above)

13. 1997 -Surplus reached a funding ratio over and above CRA limits -ER contributions stopped in July 1997 -Faculty association filed a grievance against the unilateral contribution holiday -Member contributions eventually stopped as well

14. -agreements with employee groups on a pension reform that included: - a substantial reimbursement of contributions to members -contribution holidays -some reimbursements to retired members -driven by PPC employee representatives -faculty association representatives still wished for a DC plan, but support staff representatives were not interested

15. initial proposal not approved by the Board of Governors: -it drained the surplus in one payment -did not provide a protective level of surplus (markets had experienced a substantial drop in the fall of 1998

16. Pension reform re-initiated and agreed upon by all parties in 2000, but subject to CRA approval: • decision to maintain DB but improved formula for members (frozen YMPE) • creation of a supplemental plan to 120% of maximum of rank of full professor; ER contributions to be through reduced contributions to basic plan • reimbursement of contributions to members in three phases, to be tested each time against a level of surplus (2000, 2002, 2004)

17. protection of contribution levels for Employer, higher levels of contributions to be paid from the pension fun • establishment of reserves for surplus payments and ER contributions • member contributions reinstated, but at a reduced level

18. -satisfied, somewhat, the desire of faculty members to have a DC plan: -better benefits -reimbursement of surplus amounts -benefited from reduced contributions and had received contribution holidays -again, not driven by solvency concerns, but guaranteed ER contribution levels

19. SECOND REVIEW OF PLAN DESIGN • 2002: • as approvals had just been obtained from CRA, two first payments had to be made against a very different market • annual valuation uses a smoothing of assets, reducing the effects of the drop in the markets

20. 2003 • new negotiations with employee associations to deal with pension issues and the reform recently approved • ER contributions were resumed • accumulation of service within the supplemental plan was ended as of December 31, 2002 • new pension formula devised • approval of CRA in the fall of 2004 to resume contributions at a higher level despite previous decision to tax shelter some reimbursements

21. CURRENT SITUATION • small funding deficit as of January 1, 2004 and January 1, 2005 • no solvency deficit as of January 1, 2005 • valuation filed as of January 1, 2005 • latest valuation calculated as of January 1, 2006 shows a substantial solvency deficit

22. Historical ratios

23. CONCLUSION • pension discussions and negotiations have been quite divisive among the employee groups, with particular angst from retirees who still feel they have not benefited from surplus distributions as much as active members • employer contributions levels are protected, providing some measure of security (although current funding deficit does not allow this to be applied immediately) • unlikely to change the plan design at this time unless one of the employee groups were to decide to divide the fund (and accept new funding arrangements with ER given the higher cost that would be generated.