general superannuation plan proposed pension changes – cupe 2669
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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 - PowerPoint PPT PresentationTRANSCRIPT
Prepared by Aon Hewitt
Aon Hewitt | © 2014 Aon Hewitt Inc. All Rights Reserved
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
Prior to 2014 Jan 1, 2014 Jan 1, 2015 Jan 1, 2016
Earnings up to YMPE 7.5% 7.8% 8.1% 8.4%
Earnings in excess of YMPE 9.1% 9.4% 9.7% 10.0%
Average 7.9% 8.2% 8.5% 8.8%
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:
1. Age 55
2. Date when age plus contributory service equals 80 (i.e. Rule of 80)
3. 35 years of contributory service
– Members can retire with an unreduced pension at earlier of:1. Age 60
2. Date when age plus contributory service equals 80 (i.e. Rule of 80)
3. 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
Guaranteed Period (Years)5 10 15
Single Life Options
N/A $1,000 $983
Joint Life Options- J&S 60% $1,000 $996 $989- J&S 75% $980 $977 $973- J&S 100% $948 $948 $947
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
Guaranteed Period (Years)5 10 15
Single Life Options N/A $970 $954
Joint Life Options- J&S 60% $970 $966 $959- J&S 75% $951 $948 $944- J&S 100% $920 $920 $919
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Proposed Changes to Normal Form of Pension
Example #2 – Calculation #2– Post-2014 Pension – Non-subsidized normal form
Guaranteed Period (Years)5 10 15
Single Life Options N/A $30 $29
Joint Life Options- J&S 60% $28 $28 $28- J&S 75% $27 $27 $27- J&S 100% $26 $26 $26
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
Guaranteed Period (Years)5 10 15
Single Life Options N/A = $970+$30 = $1,000 = $954 + $29 = $983
Joint Life Options
- J&S 60% = $970 + $28 = $998 = $966 + $28 = $994 = $959 + $28 = $987 - J&S 75% = $951 + $27 = $978 = $948 + $27 = $975 = $944 + $27 = $971- J&S 100% = $920 + $26 = $946 = $920 + $26 = $946 = $919 + $26 = $945
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
Pre-2015 Service
Post-2014 Service
Estimated Reduction in Total Pension for
Married Members
27 1 $2 per month
23 5 $12 per month
28 10 $25 per month
13 15 $38 per month
8 20 $51 per month
3 25 $63 per month
0 28 $70 per month
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
Year
Base Earnings(no overtime)
(A)
Overtime Earnings
(B)Earnings
(C = A + B)
2002 50,690 0 50,690
2003 51,958 0 51,958
2004 53,257 0 53,257
2005 54,588 0 54,588
2006 55,953 0 55,953
2007 57,352 0 57,352
2008 58,785 0 58,785
2009 60,255 0 60,255
2010 61,761 0 61,761
2011 63,305 0 63,305
2012 64,888 0 64,888
2013 66,510 0 66,510
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
Year
Base Earnings(no overtime)
(A)
Overtime Earnings
(B)
Pre-2015 Earnings
(C = A + B)
Post-2014 Base Earnings
(A)
2010 50,690 0 50,690 50,690
2011 51,958 0 51,958 51,958
2012 53,257 0 53,257 53,257
2013 54,588 0 54,588 54,588
2014 55,953 0 55,953 55,953
2015 57,352 0 57,352 57,352
2016 58,785 0 58,785 58,785
2017 60,255 0 60,255 60,255
2018 61,761 0 61,761 61,761
2019 63,305 0 63,305 63,305
2020 64,888 0 64,888 64,888
2021 66,510 0 66,510 66,510
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
Year
Base Earnings(no overtime)
(A)
Overtime Earnings
(B)
Pre-2015 Earnings
(C = A + B)
2010 50,690 0 50,690
2011 51,958 0 51,958
2012 53,257 0 53,257
2013 54,588 0 54,588
2014 55,953 0 55,953
2015 57,352 0 57,352
2016 58,785 0 58,785
2017 60,255 0 60,255
2018 61,761 0 61,761
2019 63,305 0 63,305
2020 64,888 0 64,888
2021 66,510 0 66,510
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
Year
Base Earnings(no overtime)
(A)
Overtime Earnings
(B)
Post-2014 Base Earnings
(A)
2010 50,690 5,000 50,690
2011 51,958 5,000 51,958
2012 53,257 5,000 53,257
2013 54,588 5,000 54,588
2014 55,953 5,000 55,953
2015 57,352 5,000 57,352
2016 58,785 5,000 58,785
2017 60,255 5,000 60,255
2018 61,761 20,000 61,761
2019 63,305 20,000 63,305
2020 64,888 20,000 64,888
2021 66,510 20,000 66,510
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:1. 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
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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, 20151. Increase Member and City contribution rates by 0.2% each side (i.e.
average contribution rate of 9.0% of Earnings)
2. 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
Aon Hewitt | © 2012 Aon Consulting Inc./Hewitt Associates Corp. (Aon Hewitt). All Rights Reserved 46
How is my pension calculated?
Before age 652.0% of BAE
multiplied by
Total Contributory Service
After age 651.4% 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)