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General Conference May 7-10, 2012. Growth of the Pension Plan 2002-2011. Plan Fees. 2011 Total $765,843 Expense Ratio 0.98%. 2010 Total $702,611 Expense Ratio 0.86%. Pension Portfolio. Results of Plan Valuation at September 30 2011.

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General conference may 7 10 2012

General Conference

May 7-10, 2012



Plan fees
Plan Fees

2011

Total $765,843

Expense Ratio 0.98%

2010

Total $702,611

Expense Ratio 0.86%



Results of Plan Valuation at

September 30 2011

Solvency shortfall has increased from $4.0M to $10.6M.

The plan has moved from being 92% funded as at

Sept 30 2008 to being 75% funded as at Sept 30 2011.


What caused the shortfall?

  • Investments

  • Low interest rates on mortgages since the mid 1990’s that continued to decline to the present

  • Changes in government regulations requiring pension plans diversify their portfolios to include equities that suffered severe losses twice since 2008

  • Member Benefits

  • Longer life expectancy


What caused the shortfall?

  • Actuarial Interest Rates

  • 7-year and long term Canadian Bonds at record lows

  • Benefit Enhancements

  • 7.4 million of the 10.6 million deficit, or 70% of the shortfall can be explained by the benefit enhancements in previous years.

  • The remaining 30% is attributable to demographic and investment experience


Contribution shortfall allocation process
Contribution Shortfall Allocation Process

  • Individual member liabilities were determined in the Actuarial Valuation Report as at September 30, 2011.

  • Current employee and employer contributions were insufficient to satisfy the funding requirements of the Pension Benefits Act of Ontario (PBA). A funding shortfall of $2,156,565 was calculated.


Contribution shortfall allocation process1
Contribution Shortfall Allocation Process

  • In order to equitably allocate the contribution shortfall between the employers, employment histories of the Plan members were examined.

  • In situations where the employer was no longer in existence, these obligations were allocated linearly across all remaining active employers.

  • Employers are being invoiced a portion of the total contribution shortfall based on the percentage contributory service accrued at their workplace relative to all employers.


Contribution shortfall allocation example
Contribution Shortfall Allocation Example

  • A member worked for 5 employers over his career spanning 20 years as illustrated in the table. The members’ liability determined in the Actuarial Valuation Report was $10,000. This $10,000 liability is then split between employers based on the years of contributory service they had with each employer.


Contribution shortfall allocation example1
Contribution Shortfall Allocation Example

  • A member worked for 5 employers over his career spanning 20 years as illustrated in the table. The members’ liability determined in the Actuarial Valuation Report was $10,000. This $10,000 liability is then split between employers based on the years of contributory service they had with each employer.


What must we do?

  • Due to the solvency shortfall, additional employer special payments equal to $2.0 million annually for 5 years will be required to start from October 1, 2011. Employer accounts will be set up to maintain special payment account balances for possible future allocations of surplus.

  • Effective July 1, 2012 the benefit accrual for members will decrease from 12% to 10% on the employee and employer contributions. Contribution rate maximums will be increased from a combined 16 2/3 to 20% (upon approval from the regulators and the Pension Board of Trustees) to allow members to accumulate pension benefits up to the 12% level.


What must we do?

  • Plan members aged 55 and over will have a one time opportunity to increase their contribution rate by a combined 3 1/3 %. That window will take effect July 1 2012 and must be acted on or before June 30 2013.

  • No change to the current formula for pension inflation adjustments.


Defined Benefit or Defined Contribution?

  • DB plans better manage:

    • Investment risk

    • Demographic risk (longevity risk)

    • Expenses


Defined benefit or defined contribution
Defined Benefit or Defined Contribution?

  • Investment risk

    • Unlike the individuals in them, DB plans do not age, and they are able to take advantage of the enhanced investment returns that come from a balanced portfolio throughout an individual’s lifetime. Asset classes not available to individual accounts may be accessed through DB plans.

    • In a DC plan investment risk is borne entirely by the member and history has shown that 99% of the membership does not have the expertise to manage their investments better than the professionals who themselves face continuing challenges in the market place.


Defined benefit or defined contribution1
Defined Benefit or Defined Contribution?

  • Demographic (longevity) risk

    • Longevity risk is borne by the employee in a defined contribution plan. The size of each DC account will prove to be inadequate if the member outlives his account balance. In a DB plan, the member could choose a variety of post-retirement death options (protection) to ensure his estate is protected.


Defined benefit or defined contribution2
Defined Benefit or Defined Contribution?

  • Expenses

    • By pooling investments together, DB plans take advantage of economies of scale by reducing expenses while increasing investment returns through professional management. Management expense ratios (MERs) on DC accounts average 2.25% at most institutions which is an enormous hurdle to overcome over a 30 year period.


Future

  • Consider switching to a hybrid plan where 50% of the DB formula is entirely funded by the plan sponsor and employee contributions are invested in a separate DC money purchase account or some other variation.

  • Continue to use the current fixed income strategy of purchasing bonds to maturity to partially address longevity risk


Reflection
Reflection

  • “God is able to make all grace abound to you, so that always having all sufficiency in everything, you may have an abundance for every good deed.”

  • (2 Corinthians 9:8)


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