Subject: Funding of the Pension Plan for Non-Academic Employees Policy
Approved by: The Executive Committee
Approval date: April 4, 2003
Effective date: January 1, 2016
Revised: November 12, 2015
Administered by: Vice-President, Finance and Administration
This policy is intended to facilitate future decisions regarding the funding of the Pension Plan. Any change to this policy requires the agreement of both the Pension Advisory Committee and the University.
This policy was updated effective January 1, 2016 to reflect the following:
- Plan's exemption from solvency deficit funding requirements;
- An increase to the target cumulative ratio of employer contributions to employee contributions from 105% to 125% and to clarify that this target is based on current service contributions (i.e. excluding special payments towards deficiencies);
- The introduction of mechanisms to adjust employee contribution rates up and down when the cumulative target ratio is expected to significantly depart from the target; and
- Clarification on how and when a funding excess might be used to reduce funding cost or improve benefits.
2.0 ACTUARIAL METHOD
For purposes of the going concern valuation, liabilities will be valued using the projected unit credit actuarial cost method. Under this method, liabilities are determined as the actuarial present value of benefits accrued in respect of service prior to the valuation date, including ancillary benefits, based on projected final average earnings. No explicit provision is to be made for possible future benefit improvements (including for example ad-hoc improvements of retiree benefits).
Under this actuarial method, the current service cost with respect to an individual member will increase as the member approaches retirement. However, the current service cost of the entire group, expressed as a percentage of the members' required contributions, can be expected to remain stable assuming the plan rules remain unchanged adn the average age of the group remains fairly constant in the future.
For purposes of the going concern valuation, assets may be valued using an adjusted market value method under which the excesses (or deficiencies) of the actual investment return over a reference return (as recommended by the actuary) during a given year are spread on a straight line basis over no more than five years. The asset values produced by this method are related to the market value of the assets, but, over time, the market-related asset values will tend to be more stable than market values.
3.0 ACTUARIAL ASSUMPTIONS
For purposes of the going concern valuation, the actuary shall determine the best estimate economic and demographic assumptions giving due consideration to the Plan's investment policy, the Plan terms, the Plan membership and any other factors that may impact on the setting of assumptions.
Member contributions are as specified in the Plan text and are not directly affected by the funded position of the Plan.
Every three years (or more often as may be requested by the University or the regulators) the actuary will complete a valuation that includes valuations both on a going concern basis, using the method and assumptions described above, and on a solvency basis, using the assumptions required by the provincial regulator. The valuation results will be reviewed with the Pension Advisory Committee prior to filing the report with the regulators. The valuation report provides recommendations on the range of employer contributions acceptable under applicable legislation.
5.0 TARGET COST SHARING
To appropriately share the cost of benefits accruing under
the Plan, a target cost sharing ratio has been established. The target is for the employer to contribute
for current service, on a cumulative basis from January 1, 2015, 125% of what
employees contribute towards current service costs. The employer is also responsible for making
contributions towards unfunded liability deficits, transfer deficiencies and,
where required, solvency deficiencies.
The Pension Advisory Committee shall review the expected employer contribution requirements towards current service cost and the resulting ratios of cumulative current service contributions and compare these with the target ratio of 125% at least once every three years. If the cumulative ratio is expected to deviate from the target by more than 5%, it shall recommend changes to the employee contribution rates in order to bring the ratio closer to target. The implementation of any such recommendation shall require the approval of the Unions and the Employer. The plan document will be amended as necessary to reflect changes to employee contribution rates.
6.0 FUNDING PRINCIPLES
The funding of the pension plan shall follow three broad funding principles:
- The requirements of the Pension Benefits Act, New Brunswick and Income Tax Act (Canada) shall be respected.
- A target Provision for Adverse Deviation has been set at 5% of going-concern liabilities. Should the funded ratio (ratio of assets to going-concern liabilities) be less than 105%, the employer shall contribute, as a minimum, the employer current service cost as determined by the actuary.
- The cumulative ratio of employer current service contributions to employee contributions of 125% will be pursued in accordance with the provisions of this policy.
Using these broad principles, the expected pattern of contributions is as follows:
- Once unfunded liabilities (and, to the extent required by applicable legislation, the solvency deficiencies) are eliminated, the employer would cease making scheduled special payments;
- If the 105% going-concern funded ratio is achieved, the employer will contribute 100% of employee contributions (provided it is a permissible contribution under the Income Tax Act (Canada) until the 125% cumulative employer current service contribution ratio target is achieved;
- Once the 125% cumulative employer current service contribution ratio is achieved, the employer will contribute at the rate of 125% of employee contributions (provided it is a permissible contribution under the Income Tax Act (Canada));
- If the cumulative employer current service contributions become less than 125%, then the Pension Advisory Committee may recommend a reduction in employee contribution rates as referenced in Section 5.0 of this policy.
- Special payments required towards unfunded liabilities, transfer deficiencies (and to the extent required, solvency deficiencies) as specified in the actuarial reports shall be made by the employer;
- The maximum funding excess permitted under the Income Tax Act (Canada) (125% of the going-concern liabilities) must be respected.
7.0 PLAN EXPENSES
Expenses incurred in the general operation of the Pension Plan will be paid from the Pension Plan (but not limited to) the following expenses:
- Expenses incurred in the general operation of the Pension Plan will be paid from the Pension Plan including (but not limited to) the following expenses:
- Education of Pension Advisory Committee members that relates directly to their duties as Committee members;
- Consulting related to Plan compliance, Plan design, and investment policy;
- Investment management and custody fees;
- Preparation of actuarial valuations for funding and solvency purposes;
- Preparation of audited financial statements for the Plan;
- Administration of all benefits;
- Any fees associated with filing amendments and government required forms;
- Performance monitoring and search services related to investment management and custody; and
- Member communication and education that is related to the Plan benefits and options.
Examples of expenses that will not be paid from the Plan include expenses related to the following:
- Pension expense calculations prepared for reporting within the University's financial statements;
- Design, actuarial calculations and compliance related to early retirement programs that have been undertaken primarily to achieve goals of the University to make changes in its workforce;
- Retirement counselling provided to members as part of an out-placement package; and
- University staff and internal administration costs.
It is recognised that some expenses may be eligible to be partially paid from the Plan. An example of such an expense could be that associated with the preparation of comprehensive booklets or statements that include non-pension benefits. In such a case the portion of the expense that may be paid from the Plan must fairly reflect the "pension portion".
8.0 ATTRIBUTION OF FUNDING EXCESS
A funding excess identified in an actuarial report is a result of contributions made by both employees and the employer and net investment returns and other experience deviating from actuarial assumptions over time.
The attribution of funding excess between employee and employer shall be based on the ratio of each of total employer contributions and total employee contributions to the grand total of cumulative employee and employer contributions made to the the Plan from January 1, 1992. For example, if cumulative employee contributions made to the Plan from January 1, 1992 were $20,000,000 and the employer total cumulative contributions from January 1, 1992 were $40,000,000, then the one-third ($20M/$60M) of the funding excess would be considered to be attributed to employee contributions. Employer contributions for the purposes of this section shall include all contributions made by the employer including special payments towards unfunded liabilities, transfer deficiencies and solvency deficiencies.
The attribution method shall be used in the following scenarios:
- A plan wind-up, but after the settlement of all obligations of the plan; and
- In the case where the employer is required by the Income Tax Act (Canada) in taking a contribution holiday.
9.0 PLAN IMPROVEMENTS
It is recognised that a moderate level of funding excess can provide a prudent buffer against adverse Plan experience. Accordingly, amendments to improve benefits will generally not be considered unless funding excess on both a going concern and solvency basis would remain at or above 5% of respective liabilities after the amendment is effective, including the expected impact of any adverse experience that has occurred subsequent to the most recent valuation.
If the going concern funding excess and solvency excess both exceed 5% of the respective liabilities, including the expected impact of any adverse experience that has occurred subsequent to the most recent valuation, then the Pension Advisory Committee may recommend an amendment to improve Plan benefits. In developing any recommended benefit improvement, the Pension Advisory Committee shall consider all the Pension Plan stakeholders, including active members, the University, the inactive members, the pensioners and their survivors. The Pension Advisory Committee shall also consider the guidelines as specified in the Ad hoc Pension Increases policy of the Finance and Administration Committee of the Board when considering increases to pensioners' and survivors' benefits.
If the following three conditions are satisfied, the University will amend the Pension Plan to provide any benefit improvements recommended by the Pension Advisory Committee:
- The actuarial cost of the improvements shall not cause the going concern and solvency funding excesses to be reduced to less than 5% of the liabilities taking into account the expected impact of any adverse experience that has occurred subsequent to the most recent valuation; and
- The amendment shall not adversely affect the target cost sharing ratio in this policy. This criteria shall be deemed to be satisfied if the University's contributions over the next three years under this policy are unaffected by the plan amendment; and
- The recommended benefit improvements shall comply with the Pension Benefits Act and the Income Tax Act.