2011 Funding Webinar - Q&A Session

No. As a result of these changes the Plan becomes more secure. That’s because by recognizing improvements in life expectancy in its actuarial assumptions the Plan ensures that sufficient contributions are being collected and invested today to pay for those future benefits.

If we had waited to make any changes – to benefits or contribution rates – the changes would have needed to be bigger. We think members appreciate the value of having a secure, stable plan and will be prepared to pay these rates that keep the Plan healthy.

Plan membership is growing and our investments are performing well.

After the changes are factored in we are in funding level three. In funding level three we have a small reserve for interest rate changes, members and colleges will continue to pay 3% in stability contributions, and we are able to pay inflation protection on all service.

Pension plan forecasts are always estimates, based on all the information we have today and we do make many assumptions. Regular monitoring of what actually happens compared to the assumptions ensures forecasts are kept updated. This ensures variances from what we expected are identified in advance.

A good example of this is the creation of the Funding Task Force which was set up when the Plan foresaw there would be a deficit if no action was taken. The Plan is managing the deficit and is secure over the long term. Some fine tuning may be needed at some point in the future. Long-term interest rates are unlikely to go much lower than they are today and they are one of the biggest factors driving up liabilities and contribution rates. Life expectancy is the other major factor driving liabilities. The changes to reflect life expectancy increases today make the Plan more secure for tomorrow.

The additional contributions (3%) that were introduced in 2008 are needed to ensure the Plan has sufficient funding to manage through the investment market volatility the world has been experiencing. The 2012 increase is needed to help fund the additional cost associated with increased life expectancy.

There are many actuarial assumptions used in estimating the Plan’s liabilities and assets. The task force’s comprehensive review of these assumptions led to several assumptions being updated, including the change in life expectancy. Only when the net effect of these updates to assumptions had been analyzed could the Plan determine the total impact on ongoing costs. We did not want to underestimate or overestimate the funding issues.

Under the Plan’s funding policy, basic and stability contributions are treated differently in terms of what they are used for and when they will be adjusted according to when the Plan has a surplus or a deficit. Basic contributions really reflect the ongoing long-term cost of the benefits being earned and stability contributions are used to manage the Plan through periods of volatility.

We understand you are facing wage pressures. We also understand that you want a comfortable, secure retirement that you can count on. Securing those benefits requires adequate funding and even more now that members are living longer. The extra contributions today will pay off in a secure, lifetime benefit when you retire.

The Plan’s funding projections are regularly monitored to ensure rates are at appropriate levels to keep the Plan financially healthy. The Plan’s governors are attuned to budget constraints in the college system and they listen to feedback from members. So far, what we’ve heard is that members are prepared to pay a bit more to secure the benefits that they value highly, rather than have future benefits reduced. (Future benefits are those not yet earned.)

We know the colleges sector and employees are facing a wage freeze and that you may be taking home less. We also know that college budgets are under pressure. The Funding Task Force thought that a small incremental increase over three years would make it easier for everyone.

We cannot promise that rates will never rise again because we cannot be certain of what might happen in the future. At this point, projections show the Plan is secure over the long term with the contribution rate change and updates to actuarial assumptions such as longevity. The Plan has tools such as actuarial smoothing methods and investment strategies that help manage through investment market volatility and other events that might negatively affect its funding position.

Our funding policy sets out the decisions that the Plan governors will make. As reserves get up into the level five or level six range, contribution rates will return to their basic levels.

In addition, at levels five and six fairly substantial reserves will have been built up lowering the likelihood of contribution rates needing to rise again in the future. There will be a lot more protection from volatility in the Plan once reserves have returned to those levels.

With the increase we just announced, our contribution rates are higher than some other pension plans. Every plan has its own liability profile based on benefits and member demographics. We have very valuable benefits that are appropriate for the college system. Plans also vary in terms of their desired level of security, or how much risk they are prepared to take on. We can only say that our rates and actuarial assumptions have been set to ensure our Plan is secure. For example, we have already recognized and projected continuing improvements in life expectancy over time. Recognizing those increases now ensures that our future benefits are better protected.

Compared to most pension plans we are in good shape.

We do not recommend that the contribution rate increase be a factor in your decision to retire. The additional service and thus pension that you will build while making contributions will provide you with more pension income than the contributions you pay.

Pensions will continue to receive the inflation protection increases that were granted in the past. There will be no reductions in pensions.

Future ad hoc inflation protection increases beyond 2014 are not part of the Plan’s defined benefits. They are instead considered benefit enhancements that can be granted when the Plan has surplus funds as shown in the funding policy.

The contribution increases announced in March 2011 are needed to fund the benefits members are earning now, not for improvements on benefits already earned. Contributions paid by pensioners when they were working reflected the cost of benefits earned at that time. Current active members are not earning guaranteed inflation protection on their current service even with the current contribution rates. Only the portion of the pension that includes 1992-2007 service receives guaranteed inflation protection. For service before 1992 and after 2007 the Plan will only make inflation protection increases to pensions when it has sufficient surplus to do so, in accordance with the Plan’s funding policy.

The Plan’s governors follow the funding policy every time we submit a valuation to the regulators, typically every three years. So far we have been paying inflation protection on post-2007 service each year and that becomes our first priority even if we have just one dollar of surplus in the Plan.

Overall, each generation receives good value from the Plan in terms of what they contribute compared to the benefits they will receive. Retired members have benefited from past Plan surpluses in the form of ad hoc inflation increases. Active members are expected to live longer and therefore collect more pension payments. No defined pension plan can achieve perfect equity but the advantages of being in this type of plan far outweigh any disadvantages for the vast majority of members. Members benefit from being part of a very large group where mortality and investment risk and rewards are shared.

We look back over 25 years and since intergenerational equity is an important principal we will continue to review this moving forward.

The funding task force considered more than 40 changes to the Plan, including increasing the retirement age, and decided that members use and value the benefits and would prefer to pay more to secure their benefits than see any benefits reduced.

In short, the Plan’s retirement provisions and ages are not changing.

The Plan is jointly governed by equal numbers of member and employer representatives. OPSEU and OCASA (Ontario Colleges Administrative Staff Association) appoint half of the Board of Trustees and Sponsors’ Committee members, while Colleges Ontario appoints the other half of these representatives.

The views of retired members and all members were considered by the Funding Task Force and are considered by the Plan’s governors on an ongoing basis.

Four of the eight members of the task force are retired and two of them are CAAT Plan pensioners.

On the current Board of Trustees, 7 of the 12 members are retired persons. Two of these are receiving CAAT Plan pensions. All Trustees work under a legal requirement to represent the interest of all Plan members, including those who are retired.

The task force’s focus was on managing the deficit and not making benefit improvements.

The task force did consider a request by some pensioners to extend ad hoc inflation protection increases beyond 2014. The task force concluded that under the terms of the Plan and its funding policy this benefit improvement is not possible at this time given the Plan’s current funded status.

In 2010 the investment fund earned a 12.6% return after recognizing all expenses and fees paid.  This performance exceeded all of the fund’s benchmarks.

Although, we manage our plan for our risks and our members it is important to make sure that we are competitive overall in the industry. Relative to the seven plans that we compared ourselves to in 2010 we are right in the middle of that group. There some very large plans that earned below what we earned last year and there are other plans that had returns slightly above ours.  In general our investment returns are very competitive and last year we beat all of our investment benchmarks.

Real estate investments are used in our liability hedging category. They are very much aligned to the type and structure of the pensions we pay to our members. Real estate markets have their challenges right now and we are gradually increasing our allocation to real estate investments when the right opportunities present themselves.

There are many different CPP changes being discussed that would affect the Plan differently. For example, there are changes under consideration that would expand the earnings covered by CPP. Our members already contribute and build pension benefits on all of their earnings. So, our contribution rates are already partially integrated with the CPP, meaning that members contribute at a lower rate on the earnings on which they also contribute to the CPP.

It’s too early to really understand the impact on the Plan and its benefit structure. We are monitoring what is being considered very closely. We also expect that if any changes are made to CPP there will be a long advance period before they take effect. This will allow time to determine what, if any, changes might need to be made to our plan. Members and employers will be kept well informed of any developments. Be sure to continue to read your newsletter or our website.