Pension Trends in the Public Sector. Prepared by Aon Hewitt

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1 Pension Trends in the Public Sector Prepared by

2 Agenda Introduction Drivers of change What s changing What s next Questions Proprietary & Confidential May

3 Introduction Proprietary & Confidential May

4 Life School Work Retirement 20 years 40 years 30 years Proprietary & Confidential May

5 Delivering Retirement Income Defined Benefit Low Cost Certainty Defined Contribution High High Benefit Certainty Low Defined Benefit Defined Contribution Defined Benefit: Government Programs, DB Employer Plans Defined Contribution: DC Employer Plans, Personal Savings Proprietary & Confidential May

6 Saving for Retirement Defined Contribution: The current value is easy = total contributions (with investments) Defined Benefit: Benefit straightforward based on service, earnings and formula Current value is harder to determine Impacted by salary growth, retirement timing, lifespan and investment returns Proprietary & Confidential May

7 The Public Sector Pension Landscape Wide Definition Teachers, government employees, health care, crown corporations, universities Differences in where revenue to fund comes from Pension Coverage High levels of pension coverage vs. private sector Majority defined benefit plans Cost-of-living protection common Proprietary & Confidential May

8 Drivers of Change Proprietary & Confidential May

9 Drivers of Change Easy Times Consistent investment returns High interest rates Shorter life expectancies Younger plans Risks masked Surpluses spent followed by. Challenging Times Volatile investment returns Low interest rates Longer life expectancies More mature plans Risks revealed Surpluses replaced by deficits Increased contributions and/or decreased benefits Proprietary & Confidential May

10 Total Pension Fund Returns Rolling 3-year Average vs. a 7% Assumption 27% 22% 17% 12% 7% 2% -3% -8% -13% -18% Proprietary & Confidential May

11 Life Expectancy has Improved Life expectancy at birth for Canada, US and UK: 85 Canada a healthier place to live? 20 year increase in life expectancy in a lifetime! Canada US UK Source: The Human Mortality Database Proprietary & Confidential May

12 Yields are Declining Proprietary & Confidential May

13 Pensions are More Expensive Cost of $1,000/month annuity for a 60-year old (combined effect of interest rates and lifespan) $250,000 $200,000 $150,000 $100,000 $50,000 $ Proprietary & Confidential May

14 Maturity Affects Risk-Bearing Capacity Actives Retirees Plan s Risk-Bearing Capacity 1950 Very High 1970 High 1990 Moderate 2010 Low Proprietary & Confidential May

15 Contributions in the Public Sector are Rising 10 Percentage of Salary* Member Employer *Estimate based on Municipal Pension Plan Proprietary & Confidential May

16 Current Public Perception Current public perception is that many public sector plans are overly generous, expensive and not sustainable Context of this perception: Many in the private sector don t have any pension Benefit "deals" that have little or no flexibility to change Past service benefits cannot be reduced Changes to future service benefits involve employment contract changes Contribution rates that must adjust to meet changing circumstances Sensitivity towards intergenerational equity Proprietary & Confidential May

17 What s Changing? Proprietary & Confidential May

18 What s Changing? All this has led plan sponsors and governments to consider Changing how risks and costs are shared Changing the delivery model Re-evaluating benefits: Reduce cost level and volatility Redistribute benefits differently Proprietary & Confidential May

19 Changing the Delivery Model Defined Benefit Defined Contribution Target Benefit Low Cost Certainty High High Benefit Certainty Low Defined Benefit Target Benefit Defined Contribution Target Benefit: Fixed cost, adjustable but predictable benefit Target Benefit Solution was adopted by New Brunswick via legislation and Regina Police Force via negotiation. Proprietary & Confidential May

20 Trends Across the Country Alberta: Alberta s four largest public sector pension plans have a combined funding deficit of $7.4 billion Concerned that the plans are on an unsustainable path Changes for service after 2015 include a scaling back of early retirement benefits and cost-of-living protection, and a transition to joint governance Saskatchewan: New funding rules for most public sector plans have been introduced, generally reducing minimum funding requirements Quebec: New rules for municipal defined benefit pension plans: Must be restructured with a view to improving their financial health and ensuring their sustainability Plans must be amended from January 1, 2014 to provide for the costs and risk sharing for service after December 31, 2013 Proprietary & Confidential May

21 Trends Across the Country Ontario: Ontario Teachers Plan reduced cost-of-living increases, Province moving forward with ORPP British Columbia: 4 large public plans ahead of the curve: Already jointly-sponsored with employee / employer risk sharing Conditional indexing based on the availability of funds College Plan has tweaked benefits to include long term indexing sustainability test; also removed CPP integration, bridge, and increased early retirement reductions (cost neutral) for future service Proprietary & Confidential May

22 What s Next Proprietary & Confidential May

23 What s Next? Canada Private Sector Closed to new entrants Frozen to all members 72% Freeze plans Close Plan Switch to DC 22% 0% Reduce ancillary benefits 10% 20% 30% 40% 50% Reduce Indexing Increase member contributions Canada Public Sector 38% Freeze plans Switch to DC Close Plan 12% 0% 0% 10% 20% 30% 40% 50% 60% Closed to new entrants Frozen to all members Reduce Indexing Reduce ancillary benefits Increase member contributions Proprietary & Confidential May

24 Questions Proprietary & Confidential May

25 Contact Glen Oikawa Associate Partner, Retirement Proprietary & Confidential May

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