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General Conference May 7-10, 2012

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

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  1. General Conference May 7-10, 2012

  2. Growth of the Pension Plan 2002-2011

  3. Plan Fees 2011 Total $765,843 Expense Ratio 0.98% 2010 Total $702,611 Expense Ratio 0.86%

  4. Pension Portfolio

  5. 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.

  6. 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

  7. 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

  8. 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.

  9. 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.

  10. 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.

  11. 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.

  12. 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.

  13. 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.

  14. Defined Benefit or Defined Contribution? • DB plans better manage: • Investment risk • Demographic risk (longevity risk) • Expenses

  15. 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.

  16. 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.

  17. 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.

  18. 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

  19. 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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