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IP-35 The Challenges of the Public Sector – Marcia Gillespie

Canadian Institute of Actuaries. L’Institut canadien des actuaires. IP-35 The Challenges of the Public Sector – Marcia Gillespie 2007 Annual Meeting ● Assemblée annuelle 2007 Vancouver. Governance Funding Investment Service and Communication Plan members Pensioners Employers

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IP-35 The Challenges of the Public Sector – Marcia Gillespie

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  1. Canadian Institute of Actuaries L’Institut canadien des actuaires IP-35 The Challenges of the Public Sector– Marcia Gillespie 2007 Annual Meeting ●Assemblée annuelle 2007 Vancouver

  2. Governance Funding Investment Service and Communication Plan members Pensioners Employers Settlors/Sponsors 2007 Annual Meeting Assemblée annuelle 2007 Public Sector Pension Plans Major Issues

  3. Pensions for Ontario health care sector 4th largest occupational pension plan in Canada Hospitals plus: Clinics Laundry services Food providers Community Care Access Centres 2007 Annual Meeting Assemblée annuelle 2007 HOOPP: One example

  4. HOOPP is a jointly sponsored pension plan Trustees appointed by: Ontario Hospital Association (OHA) The 4 health care unions Ontario Nurses’ Association (ONA) Canadian Union of Public Employees (CUPE) Service Employees International Union (SEIU) Ontario Public Service Employees Union (OPSEU) 2007 Annual Meeting Assemblée annuelle 2007 1. Governance

  5. Unpaid, volunteer, lay board Variable pension & finance experience & knowledge Recognition of transferable skills Place high value on trustee education Seek out staff & advisors with: Technical skills & toolkits Ability to communicate 2007 Annual Meeting Assemblée annuelle 2007 HOOPP Board

  6. Different perspectives Consensus building Common goal – the pension promise Fiduciary responsibility to the whole plan Relationship with staff Functioning and effectiveness 2007 Annual Meeting Assemblée annuelle 2007 The HOOPP Experience

  7. Some defined benefit pension plans have unfunded liabilities into the billions Good investment returns are not always enough Some plans have: Changed contributions Removing early retirement subsidies; and/or Increasing contributions Decreased benefits paid Maturing of plans 2007 Annual Meeting Assemblée annuelle 2007 2. Funding Challenges

  8. Mary: Retires at age 59 Best 5 year average salary is $53,000 18 Years of service credit What Mary gets: Basic life-time monthly pension . . .$1240 Bridge benefit monthly to age 65 . . .$290 If she lives to age 81. . . . . . . . . $348,240 Possibly the biggest asset she acquires in her lifetime 2007 Annual Meeting Assemblée annuelle 2007 The Typical HOOPP Pensioner

  9. Regularly assess financial exposures. Mandated reviews relative to specified thresholds Thresholds are 2-sided & asymmetric The size of a surplus triggering a “good news review” is larger than the size of a deficit triggering a “bad news review”. 2007 Annual Meeting Assemblée annuelle 2007 HOOPP Funding Principle 1

  10. Carefully manage what gets promised. Need high confidence in ability to deliver promised benefits “Rainy day money” Clear communication with members 2007 Annual Meeting Assemblée annuelle 2007 HOOPP Funding Principle 2

  11. HOOPP: 2006 investment fund return of 12.79% Strong returns in 2006 from: Real estate Canadian equities Private equities Today fund close to $30B 2007 Annual Meeting Assemblée annuelle 2007 3. Investment

  12. Move to liability-linked approach Importance of knowing your risk tolerance Need effective Board oversight Suitable level of risk HOOPP funding picture is good 99% funded at end of 2006 May be fully funded now given recent capital market events Keeps contributions stable Provide COLA at 75% of CPI 2007 Annual Meeting Assemblée annuelle 2007 The Investment Liability Link

  13. With lower-than-expected investment returns post 9/11, in 2003 HOOPP: Ended contribution subsidies earlier than planned Ended a temporary benefit that had been funded from surplus Limited the indexation guarantee to benefits earned for service prior to January 1, 2006 Result: To date, no further changes to benefits or contributions Have provided indexation adjustments on all pension service including ad hoc increases 2007 Annual Meeting Assemblée annuelle 2007 What came before?

  14. Clear communication Connection to members’ work environment Research Understanding stakeholder needs Role of technology & Web-based options Direct access for plan members Ease administrative work of employers 2007 Annual Meeting Assemblée annuelle 2007 4. Service & Communication

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