Pension Information Sessions

1. Pension Information Sessions University of Waterloo Pension & Benefits Committee June 12/26, 2012

2. Agenda for Pension Information Sessions • Welcome • Pension and Benefits Committee Membership and Role • Purpose of Pension Information Session • Presentation • Q&A

3. Pension & Benefits Committee Membership

4. Terms of Reference of Pension & Benefits Committee • Pension & Benefits Committee is a Committee of the Board of Governors. The Committee is accountable to the Board for the administration of employee pension and benefits plans • Terms of Reference include “recommending changes in pension and benefits plans to keep them current with respect to other universities and major employers, being mindful of the financial context within which the University operates” • The Pension & Benefits Committee plays a key role in the stewardship of the University of Waterloo Pension Plan

5. Purpose of Pension Information Session • In the context of its stewardship role, the Pension & Benefits Committee will be recommending to the Board of Governors changes to the University of Waterloo Pension Plan to maintain the long-term health of the Plan • This session is designed to achieve 2 goals: 1) Describe the changes proposed by the Pension & Benefits Committee 2) Respond to your questions and hear your perspectives • Following the Pension Information Sessions • Finalize the recommendations and take them to the next meeting of the Board of Governors in October 2012

6. Consulting Actuary to the Pension & Benefits Committee Introduction: Allan Shapira, Aon Hewitt, Consulting Actuary Today’s presentation will include: Description of the proposed changes Reasons for these changes; and Details of the proposed changes and transition

7. The Key Questions We Are Going To Address • What is the pension promise under the UW Pension Plan? • How is that pension promise funded? • Is there enough money to pay the pension promise? • What are we doing to manage the long-term health of the UW Pension Plan? • What is happening with other pension plans? • What changes are being proposed to the UW Pension Plan?

8. The Big Picture Answers to These Questions • What is the pension promise under the UW Pension Plan? • A defined benefit with the pension based on years of membership in the Pension Plan and salary near retirement, and with the pension benefit adjusted for inflation after retirement • How is the pension promise funded? • By contributions from members and the University and from investment return on pension fund assets • Is there enough money to pay the pension promise? • Pension Plan has a significant funding shortfall as a result of unfavourable markets, low interest rates and longer pension payment periods • What are we doing to manage the long-term health of the UW Pension Plan? • Pension and Benefits Committee is constantly monitoring the three levers that can be used to maintain the long-term health of the Pension Plan—contributions, investment earnings and benefit levels

9. The Big Picture Answers to These Questions (continued) • What is happening with other pension plans? • Also facing significant funding shortfalls, resulting in increases in contributions and decreases in benefits for plan sustainability • What changes are being proposed to the UW Pension Plan? • Adjustments to both contributions (members and University) and benefits to try to shorten the timeframe over which the shortfall is funded Details on the Responses to These Questions Presented on the Following Pages

10. What is the Pension Promise?

11. Plan Structure • Key Plan Provisions

12. How is the Pension Promise Funded?

13. Member Contributions University Contributions Investment Earnings Funding the Pension Promise Funding Sources Cost of Pension Plan Benefits paid to members, as determined by plan provisions + Costs to administer pension plan

14. Funding Choices Take Less Investment Risk Target Lower Expected ReturnsTarget Higher Expected Contributions Take More Investment Risk Target Higher Expected Returns Target Lower Expected Contributions Cost of Pension Plan Cost of Pension Plan Portion Funded From Contributions Benefits paid to members, as determined by plan provisions + Costs to administer pension plan Benefits paid to members, as determined by plan provisions + Costs to administer pension plan Portion Funded From Contributions Portion Funded From Investment Earnings Portion Funded From Investment Earnings

15. The Impact of Investment Return • Chart on the following page shows for an individual hired at age 30 and retiring at age 65, the breakdown between contributions and investment return based on different levels of investment return above inflation (real investment return): • 3.85% per year (current valuation assumption), 3.00% per year, and 2.00% per year • Other assumptions are as per the actuarial valuation

16. The Impact of Investment Return (continued) 3.85% 3.00% 2.00%

17. Is There Enough Money to Pay the Pension Promise?

18. Funded Status of Pension Plan Deteriorating Funded Status Despite Increase In Member and University Contributions Past Service Liabilities as of January 1, 2012 reflect increase from change in assumption for pensioner longevity and change in assumption for salary increases to reflect next three years of across-the-board increases under agreements

19. Annual Cost of Benefits Being Earned

20. Contributions Increases in Member and University Contribution Rates Effective July 1, 2007, July 1, 2008 and May 1, 2009

21. Investment Returns—Market Indices

22. What Are We Doing to Manage the Long-Term Health of the UW Pension Plan?

23. Managing Long-Term Health of Pension Plan Contributions Investment Earnings Benefits

24. Managing Long-Term Health of Pension Plan (continued) • Member and University contributions have been increased • Additional increases are necessary Contributions

25. Managing Long-Term Health of Pension Plan (continued) • Investment returns have been lower than anticipated in setting contribution levels • Continued uncertainty around future investment returns, particularly in short term • UW pension fund has implemented currency hedging to reduce investment volatility and started investing in infrastructure and looking at other asset classes such as real estate to try to generate additional investment returns at a reasonable level of risk Investment Earnings

26. Managing Long-Term Health of Pension Plan (continued) Benefits To ensure long-term sustainability of UW Pension Plan, core benefit provisions need to be addressed Changes have already been made to these provisions

27. What Is Happening With Other Pension Plans?

28. Ontario University Pension Plans • Significant funding shortfalls across the university sector in Ontario and across Canada • Most of the Ontario University pension plans have increased member contribution rates: • Increases have typically been in the range of 2.0% to 2.5% of salary • Other changes to pension plans have included: • Lowering early retirement subsidies • Introducing different provisions for new hires • Reducing guarantees/controlling risk under hybrid pension plans • Changing non-core benefits • Ontario Budget in March set expectation of 50/50 sharing of current service cost within next five years

29. Other Large Ontario Public Sector Pension Plans • Significant funding shortfalls in most of the pension plans • Significant increases in member and matching employer contribution rates • Lowering or eliminating guaranteed indexation • Changes to non-core benefits • Ontario Budget in March set expectation that any further increase in funding shortfalls should be met by reducing future service benefits rather than increasing contributions

30. What Changes Are Being Proposed to the UW Pension Plan?

31. Proposed Changes to Pension Plan Details Provided on Following Pages

32. Financial Impact of Proposed Changes to Pension Plan The following financial analysis is based on the January 1, 2012 actuarial valuation: 1 Will increase each year by increase in salaries

33. Details on Proposed Changes to Pension Plan Member Contribution Rates • Increase member contribution rates by approximately 0.5% of pensionable earnings: 1 $50,100 in 2012 2 $100,200 in 2012

34. Details on Proposed Changes to Pension Plan (continued) Comparison of Member Contribution Rates Member contributions to Pension Plan are tax-deductible

35. Details on Proposed Changes to Pension Plan (continued) Final Average Earnings • Starting January 1, 2014, final average earnings will be transitioned from a 3-year to a 5-year average • Final average earnings will not decrease below the final 3-year average earnings as ofDecember 31, 2013 • Example of how transition would work: • At December 31, 2013, final average earnings based on 2011, 2012, 2013 • At December 31, 2014, final average earnings based on 2011, 2012, 2013, and 2014 • At December 31, 2015, final average earnings based on 2011, 2012, 2013, 2014, and 2015 • At December 31, 2016, final average earnings based on 2012, 2013, 2014, 2015, and 2016

36. Details on Proposed Changes to Pension Plan (continued) Examples of Impact of Change to Final Average Earnings

37. Details on Proposed Changes to Pension Plan (continued) Inflation Protection (Indexation of Pension Benefits) • Maintain 100% of CPI indexation on pension benefit earned up to December 31, 2013, with balance of pension benefit indexed at 75% of CPI • Maximum increase in CPI covered under guaranteed indexation provision continues to be 5% • Results in a transition from guaranteed indexation at 100% of CPI to guaranteed indexation at 75% of CPI (example of transition shown on following page) • If pension plan funded status improves, P&B Committee would consider top-up of indexation to 100% of CPI as part of its annual review process

38. Details on Proposed Changes to Pension Plan (continued) Examples of Indexation Transition 1 Based on assumed future salary increase of 4.25% per year 2 Based on increase in CPI of 2.25% per year

39. Q&A