Atlantic Connection Conference New Brunswick’s Shared Risk Plan

1. Atlantic Connection ConferenceNew Brunswick’s Shared Risk Plan • July 9, 2014

2. Challenges facing traditional pension plans Confidential – Not for Distribution

3. DB plans are proving to be costly • Falling interest rates • Increasing life expectancy • Investment losses and volatility • Earlier retirements Confidential – Not for Distribution

4. NB asked: are DB benefits secure? • Most believe DB plans are guarantees • The DB promise is only as good as the sponsor’s willingness and ability to pay • When there is no longer an ability to pay, plans close and benefits are cut (Fraser Papers, Nackawick, etc.) • When there is no longer a willingness to pay, benefits are curtailed or changed Confidential – Not for Distribution

5. DB plans create inequity across generations • Current DB legislation does not allow for reductions in accrued benefits • Only corrective pension actions are • Increasing active member contributions • Reducing future active member benefit accruals • Increasing employer contribution Confidential – Not for Distribution

6. DB plans create inequity across generations • Increasing employer contributions • Revenue base relatively fixed • If more of this money is diverted to the pension plan then • Maybe wage freezes • Maybe fewer jobs • Maybe reductions in other employee benefits • Maybe new equipment desperately needed isn’t purchased • The net impact of all of these actions is felt by active members only Confidential – Not for Distribution

7. The New Brunswick Journey Confidential – Not for Distribution

8. How NB approached these problems • Appointed an independent Task Force • The mandate of the Task Force was to achieve • Security • Sustainability • Affordability • Transparency • Equity Confidential – Not for Distribution

9. How NB approached these problems • Public consultation • Conducted research on best pension systems in the world • Process was consultative among the Province, Unions and the Task Force • Unions played a large part in the final design • New Brunswick Nurses Union • CUPE • New Brunswick Union of Public and Private Employees Confidential – Not for Distribution

10. The Shared Risk Plan is created • Process resulted in the creation of the Shared Risk Plan (SRP) • Draws inspiration from both DB and DC designs • On a high level • Introduces benefit flexibility • Introduces strong stable funding requirements • Introduces rigorous risk management requirements • Introduces independent governance • Legislation introduced on July 1, 2012 allowing any plan sponsor in the Province to adopt an SRP Confidential – Not for Distribution

11. SRP has high security but no guarantees • Two levels of benefits are defined:Base benefits and Benefit Intention • Contribution rates set to provide very high security for base benefits and reasonable probability of achieving the benefit intention • However, accrued base benefits can be reduced in very poor economic scenarios • There are no absolute guarantees benefits Intention Base Confidential – Not for Distribution

12. SRP benefits absorb volatility • Benefits fluctuate based on plan performance • Typically conditional pre and post retirement indexing varies and absorbs a lot of the plan volatility • Surpluses to be used on member benefits • Sponsor has no right to surplus • Sponsor has minimal opportunity for contribution holidays benefits Confidential – Not for Distribution

13. SRP has strong legislated governance • Funding policy • Gives Trustees a set of benefit and contribution instructions agreeable to both parties under which they are to operate • Investment policy • Sets out target asset mix and investment goals • Rigorous risk management • Annual monitoring and compliance • At least 1,000 20-year scenarios tested each year Confidential – Not for Distribution

14. SRP governance requirements work together • All aspects of these requirements work together • Together they must satisfy benefit security tests set out in the Regulations • 97.5% probability of not reducing base benefits over a 20 year period • At least a 75% probability of providing benefit intention • Typical best estimate DB contributions have about a 50% chance of providing fixed DB Funding Policy Investment Policy Risk Management Annual Monitoring Confidential – Not for Distribution

15. SRP has certain employer advantages • Employer commitment is only the contributions in the funding policy • Employer has no responsibility to backstop deficits if they arise • Cost stability • Essentially works like DC (with a narrow range of contribution levels) for the employer + + + Confidential – Not for Distribution

16. SRP has employer trade-offs • Contribution holidays are not permitted unless required by the Income Tax Act • Such holidays are expected to be very rare • Large majority of generated surplus spent on member benefits + + + + + + Confidential – Not for Distribution

17. SRP has certain advantages for the member • Employer can’t take contribution holiday • Large majority of generated excess funding spent on member benefits • Governed by Arm’s length Trust • Upside potential to participate in plan gains for both active members and retirees • Stable contributions within a narrow range + + + Confidential – Not for Distribution

18. SRP has certain advantages for the member • Very high benefit security • Intergenerational equity • All members participate in surpluses and deficits, not just active members • Still providing DB-like benefit to members • Still pooling longevity risk • Base benefit based on salary / service history + + + Confidential – Not for Distribution

19. SRP has member trade-offs • Base benefit likely less than current DB “promises” to meet security targets • Base benefit not guaranteed • Ultimate benefit difficult to predict • Contributions may be higher than current + + + + + + Confidential – Not for Distribution

20. Why consider SRP? • Cost stability for sponsors and members • High benefit security • Rigorous governance and risk management • Investment and longevity risk pooling • Benefit aligns with what the plan can afford to pay • Contributions + Investment income = ultimate level of benefits Confidential – Not for Distribution

21. What lessons did we learn • Be collaborative and transparent • Be realistic about the problems • State outcome goals up front • Take a long term approach • Think differently! Confidential – Not for Distribution

22. Appendix: Progress made Confidential – Not for Distribution

23. What’s happened since SRPs were introduced • SRP legislation was effective July 1, 2012 • We know of at least 10 plans that have converted or have announced their intent to convert including: • Certain Bargaining Employees of NB Hospitals • City of Fredericton • City of Saint John • Public Service Superannuation Act (Province of NB) • University of New Brunswick • Saint John Energy Confidential – Not for Distribution

24. What’s happened since SRPs were introduced • On April 24, 2014 Canada’s Federal Department of Finance issued a consultation on target benefit plans • Many proposed concepts similar to NB SRP • Would allow SRP-like plan design for federally regulated pension plans such as • Airlines • Telecommunications • Railways Confidential – Not for Distribution

25. What’s happened since SRPs were introduced • Province of Prince Edward Island recently made similar changes • Flexible benefits pre and post retirement to reduce cost volatility • Expropriation of vested indexing rights to improve intergenerational inequity • Stochastic measurement and communication of risks • Funding policy to manage contributions and benefits • Thesechanges were made to their two largest public sector pension plans Confidential – Not for Distribution

26. What’s happened since SRPs were introduced • Government of NB successfully negotiated a pension deal with Teachers’ union • In the fall, op-ed in the paper from three union presidents supporting the design • National and international attention • An entire chapter in Jim Leech’s book “The Third Rail” • A large Ontario plan worked with us to explore SRP • Multiple industry speaking engagements all over Canada and the US • Multiple articles in Benefits Canada • We’re here talking to you today! Confidential – Not for Distribution

27. Thank You • Paul T. Lai Fatt, FSA, FCIA • Partner • plaifatt@morneaushepell.com • (902) 474-3236