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General Superannuation Plan Proposed Pension Changes – CUPE 2669

General Superannuation Plan Proposed Pension Changes – CUPE 2669. Background. December 31, 2012 Valuation Revealed a significant going-concern deficit due to: Poor investment returns People retiring earlier and living longer Decreases in interest rates Change in economic environment

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General Superannuation Plan Proposed Pension Changes – CUPE 2669

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  1. General Superannuation Plan Proposed Pension Changes – CUPE 2669

  2. Background • December 31, 2012 Valuation • Revealed a significant going-concern deficit due to: • Poor investment returns • People retiring earlier and living longer • Decreases in interest rates • Change in economic environment • Maturing of pension plan (less actives paying for retirees) • Deficit needed to be amortized (paid) over a period of no more than 10 years • Valuation needed to be filed by Trustees no later than Dec 31, 2013 • Trustees responsible for setting appropriate margin or “buffer” to include in the valuation based on advice from Superintendent of Pensions and actuary for the Plan

  3. Background • Late 2013, parties reviewed options to address shortfall as at December 31, 2012 • Considerations/Principles • Contribution rate affordability • Sustainability • Equity amongst all plan members • Human resource challenges • Compliance with regulatory authorities • No reduction in past service benefits

  4. Background • Various options and scenarios were reviewed trying to balance interests amongst all parties • December 19, 2013 - Tentative Agreement (subject to ratification) agreed to in principle resulting in the following changes to the pension plan: • Increase in contribution rates for Members and City • Reduction in future service benefits (i.e. no change in past service) • Remove and/or modify certain provisions that result in subsidization • Development of mechanism for dealing with possible future deficits that may be revealed

  5. Proposed Changes - Contribution Rates

  6. Proposed Changes to Contribution Rates • Current matching Member & City Contribution Rates • 7.5% of Earnings up to YMPE • 9.1% of Earnings in excess of YMPE • Average of 7.9% of Earnings • YMPE for 2014 = $52,500 • Proposed increase in contribution rates for both Member and City

  7. Proposed Changes - Early Retirement Provisions

  8. Proposed Changes to Early Retirement Provisions • Current Provisions • Members can retire from the Plan on the earlier of: • Age 55 • Date when age plus contributory service equals 80 (i.e. Rule of 80) • 35 years of contributory service • Members can retire with an unreduced pension at earlier of: • Age 60 • Date when age plus contributory service equals 80 (i.e. Rule of 80) • 35 years of contributory service • Members pensions reduced by 0.3% per month (3.6% per year) for retirement prior to unreduced retirement date

  9. Proposed Changes to Early Retirement Provisions • Example #1 – Current Provisions • Age at retirement = 55 • Contributory service at retirement = 23 years • Age + Service = 55 + 23 = 78 • Unreduced pension at retirement = $1,000 per month • Months prior to earlier of: • Age 60 = (60 – 55) x 12 = 60 months • Rule of 80 = (80 – 78) x 12 = 24 months • 35 years of service = (35 – 23) x 12 = 144 months • Reduction at retirement = 0.3% x 24 months = 7.2% • Reduced pension at retirement = $1,000 x (1 – 7.2%) = $928 per month

  10. Proposed Changes to Early Retirement Provisions • Proposed Changes Effective January 1, 2015 • Service accrued prior to 2015 • no change in early retirement eligibility or early retirement reduction • Service accrued after 2014 • No change in early retirement eligibility (i.e. members can still retire at earlier of age 55, rule of 80 or 35 years of service) • Unreduced retirement age increased to earlier of: • Age 62 • Rule of 85 • 35 years of service • Need to split into two separate calculations

  11. Proposed Changes to Early Retirement Provisions • Example #2 – Proposed Changes • Date of retirement = January 1, 2016 (i.e. 1 year under new rules) • Age at retirement = 55 • Contributory service at retirement • Pre-2015 = 29 years • Post-2014 = 1 year • Total = 30 years • Age + Service = 55 + 30 = 85 • Unreduced pension at retirement • Pre-2015 Unreduced Pension = $970 • Post-2014 Unreduced Pension = $30

  12. Proposed Changes to Early Retirement Provisions • Example #2 – Con’t • Pre-2015 Reduction = 0.3% x Months prior to earlier of: • Age 60 = (60 – 55) x 12 = 60 months • Rule of 80 = (80 – 85) x 12 = 0 months • 35 years of service = (35 – 30) x 12 = 60 months • Pre-2015 Reduction = 0.3% x 0 months = 0% • Post-2014 Reduction = 0.3% x Months prior to earlier of: • Age 60 = (62 – 55) x 12 = 84 months • Rule of 85 = (85 – 85) x 12 = 0 months • 35 years of service = (35 – 30) x 12 = 60 months • Post-2014 Reduction = 0.3% x 0 months = 0% • Reduced pension at retirement = $970 x (1 – 0%) + $30 x (1 – 0%) = $1000

  13. Proposed Changes to Early Retirement Provisions • Example #3 – Proposed Changes • Date of retirement = January 1, 2016 (i.e. 1 year under new rules) • Age at retirement = 55 • Contributory service at retirement • Pre-2015 = 27 years • Post-2014 = 1 year • Total = 28 years • Age + Service = 55 + 28 = 83 • Unreduced pension at retirement • Pre-2015 Unreduced Pension = $970 • Post-2014 Unreduced Pension = $30

  14. Proposed Changes to Early Retirement Provisions • Example #3 – Con’t • Pre-2015 Reduction = 0.3% x Months prior to earlier of: • Age 60 = (60 – 55) x 12 = 60 months • Rule of 80 = (80 – 83) x 12 = 0 months • 35 years of service = (35 – 30) x 12 = 60 months • Pre-2015 Reduction = 0.3% x 0 months = 0% • Post-2014 Reduction = 0.3% x Months prior to earlier of: • Age 60 = (62 – 55) x 12 = 84 months • Rule of 85 = (85 – 83) x 12 = 24 months • 35 years of service = (35 – 30) x 12 = 60 months • Post-2014 Reduction = 0.3% x 24 months = 7.2% • Reduced pension at retirement = $970 x (1 – 0%) + $30 x (1 – 7.2%) = $998

  15. Proposed Changes to Early Retirement Provisions • Things to Keep in Mind • Changes only impact service you accrue on or after January 1, 2015 • Will not impact what you have accrued to date • Full impact of change will not be realized until members change retirement behaviors and all members are under proposed provisions • Rationale for proposed changes to early retirement provisions: • Enhance sustainability of Plan • Reduce impact of members receiving a pension longer than they worked

  16. Proposed Changes - Normal Form of Pension

  17. Proposed Changes to Normal Form of Pension • Normal Form of Pension • Forms the baseline of how your pension will be payable • At a minimum, in a defined benefit plan, the normal form must at least provide for a lifetime pension to you until you die • Normal form must be defined for both married and single members • Current Provisions • Current normal form is a Subsidized Normal Form • Single Members = Life pension with a 10 year guarantee • Married Members = J&S 60%, with a 5 year guarantee • Considered subsidized, since married members and single members start out with the same pension, even though a married members pension is expected to paid longer since their spouse is included • Plan is picking up premium for married members when they retire

  18. Proposed Changes to Normal Form of Pension • Example #1 – Subsidized Normal Form • Formula Pension = $1,000 per month • Married member premium = Approx. $70 per month

  19. Proposed Changes to Normal Form of Pension • Proposed Changes Effective January 1, 2015 • Service accrued prior to 2015 • No change in normal form • Service accrued after 2014 • Removal of subsidization of normal form • Normal form • Single Members = Life Pension with a 10 year guarantee • Married Members = J&S 60%, with a 5 year guarantee, but will be actuarial equivalent to Single Life normal form • Need to split pension into two separate calculations

  20. Proposed Changes to Normal Form of Pension • Example #2 – Proposed Changes • Date of Retirement = January 1, 2016 • Service at retirement • Pre-2015 = 27 years • Post-2014 = 1 years • Total = 28 years • Formula Pension at retirement • Pre-2015 = $970 • Post-2014 = $30 • Total = $1,000 per month

  21. Proposed Changes to Normal Form of Pension • Example #2 – Calculation #1 • Pre-2015 Pension – Subsidized Normal Form

  22. Proposed Changes to Normal Form of Pension • Example #2 – Calculation #2 • Post-2014 Pension – Non-subsidized normal form

  23. Proposed Changes to Normal Form of Pension • Example #2 – Calculation #3 • Combine Pre-2015 and Post-2014 Pension • $2 per month reduction for married members due to changes

  24. Proposed Changes to Normal Form of Pension • Estimated Impact on married members at various service levels • Formula Pension $1,000 per month with 28 years of service

  25. Proposed Changes to Normal Form of Pension • Things to Keep in Mind • Changes only impact service you accrue on or after Jan 1, 2015 • Will not impact what you have accrued to date • Removal of subsidized normal form does not mean that your spouse will not be entitled to benefits • Optional forms will still be available to members • Full impact of change will not be realized until all members are under proposed provisions • Rationale for proposed changes to early retirement provisions: • Enhance sustainability of Plan • Remove subsidy which only benefited married members yet all members paid

  26. Proposed Changes Earnings and Best Average Earnings (BAE)

  27. Proposed Changes to Earnings and BAE • Current Provisions • Earnings currently includes all remuneration paid to a Member, including overtime • Formula pension based on Best Average Earnings (BAE) where BAE is based on the 48 consecutive months of employment with the City during which the Member’s Earnings (including overtime) were the highest (i.e. best average 4 years of Earnings) • Many, if not all, CUPE 2669 members are not eligible for overtime so overtime changes have been removed from this presentation

  28. Proposed Changes to Earnings and BAE • Example #1 – Current Provisions • Date of retirement = December 31, 2013 • Age at retirement = 58 • Service at retirement = 28 years

  29. Proposed Changes to Earnings and BAE BAE = $64,116

  30. Proposed Changes to Earnings and BAE • Proposed Changes effective January 1, 2015 • Change in definition of Earnings and BAE calculation for service accrued on or after January 1, 2015 • Change in treatment of overtime earnings (not applicable for all unions and/or associations) • BAE calculation split into two calculations

  31. Proposed Changes to Earnings and BAE • Proposed Changes – CUPE 2669 with no overtime • Pre-2015 BAE • No change in BAE (i.e. 48 consecutive months where Earnings were the highest, including overtime earnings) • Post-2014 BAE • Equal to the average “base earnings”, excluding overtime, for the 60 consecutive months of employment with the City during which the member’s earnings (excluding overtime) were the highest (Best Average 5 Years with no overtime)

  32. Proposed Changes to Earnings and BAE • Example #2 – Proposed Changes • Date of retirement = December 31, 2021 • Age at retirement = 58 • Service at retirement • Pre-2015 service = 21 years • Post-2014 service = 7 years

  33. Proposed Changes to Earnings and BAE

  34. Proposed Changes to Earnings and BAE • Example #2 – Calculate BAE for Pre-2015 Service • Pre-2015 BAE = BAE from Current Provisions (with overtime) • Pre-2015 BAE = ($61,761 + $63,305 + $64,888 + $66,510) / 4 = $64,116

  35. Proposed Changes to Earnings and BAE Pre-2015 BAE = $64,116

  36. Proposed Changes to Earnings and BAE • Example #2 – Calculate BAE for Post-2014 Service • Post-2014 BAE equal to Best 5 Year Average Base Earnings (no overtime); and

  37. Proposed Changes to Earnings and BAE Post-2014 Best 5 Year Average Base Earnings = $63,344

  38. Proposed Changes to Earnings and BAE • Example #2 – Calculate BAE for Post-2014 Service • Post-2014 BAE equal to: • Best 5 Year Average Base Earnings (no overtime) = $63,344

  39. Proposed Changes to Earnings and BAE • Things to Keep in Mind • Changes only impact service you accrue on or after Jan 1, 2015 • Will not impact what you have accrued to date • Full impact of change will not be realized until all members under proposed provisions • No impact for members whose overtime usage is consistent throughout the last 7 years of employment • Only overtime earnings earned on or after Jan 1, 2015 will be used in the calculation of Post-2014 BAE • Rationale for proposed changes to early retirement provisions: • Enhance sustainability of Plan • Reduce impact of overtime usage patterns for members who earned significantly more overtime near end of their career as compared to throughout their careers

  40. Other Proposed Changes

  41. Other Proposed Changes – January 1, 2014 • Removal of Commuted Value Option on Reduced Retirement • Current Provisions • Members who qualify for an reduced pension, but not an unreduced pension are currently eligible to transfer out the value of their pension on retirement rather than take a pension • Proposed Change • Remove the option for members to transfer out the value of their pension • Rationale for Proposed Change • Each transfer was costing the Plan approximately $100k to $150k due to low interest rate environment • Only eligible for certain subset of members • Plan viewed as a DB plan, not a DC plan

  42. Other Proposed Changes – January 1, 2014 • Administration Costs • Current Provisions • Plan covers certain administrative costs up to a certain prescribed level (based on plan membership), with the remaining expenses covered by the City • 2013 limit equal to approx. $130,000 • Proposed Change • Increase limit to $250,000, with remaining expenses covered by the City, with limit increasing with average GEI each year • Rationale for Proposed Change • City is covering certain administrative expenses for the Plan that would not exist if the Plan does not exist • Costs have increased over the years, yet provisions within the plan document have not • Common amongst other plans to cover all administrative expenses

  43. Other Proposed Changes – Future Funding Requirements • Mechanism to deal with future funding requirements for valuations on or after December 31, 2015 • Increase Member and City contribution rates by 0.2% each side (i.e. average contribution rate of 9.0% of Earnings) • If additional funding is needed, a one time temporary increase in Member and City contribution rates by 0.5% each side (i.e. average contribution rate of 9.5% of Earnings) • If temporary increase is activated, parties agree to make plan changes within 6 years that make the plan sustainable and that can be supported with an average contribution rate of 9.0% of Earnings • If within the 6 year window, a contribution rate greater than 9.5% of Earnings each side is required to meet minimum funding requirements, the parties agree to reduce future service benefits to address • If a decision to reduce benefits cannot to reached within 90 days, either party may refer the matter to an arbitrator for a binding arbitration

  44. Final Thoughts • No changes made to pension formula • Proposed changes were developed based on minimum acceptable level of margin • Superintendent likely to require Trustees and actuary to include higher levels of margin over time which could result in further contribution rate increases and/or benefit reductions • Changes to plan will be dependent on experience in plan and investment returns over the next few years

  45. Next Steps • Step 1 – Ratification of collective agreement by all Unions and Associations • Step 2 – Approval by Superintendent of Pensions • Step 3 – Trustees make official change to bylaw to reflect ratified changes

  46. How is my pension calculated? Before age 65 2.0% of BAE multiplied by Total Contributory Service After age 65 1.4% of BAE up to Avg. YMPE plus 2% of BAE over Avg. YMPE multiplied by Contributory Service before 1966, between Jan 1, 1990 and Dec 31, 1993, and after Dec 31, 2013 (Non 2% Service) plus 2.0% of BAE multiplied by Contributory Service between Jan 1, 1966 to Dec 31, 1989 and Jan 1, 1994 to Dec 31, 2013 (2%Service)

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