2012-11-29_Supplemental Agenda Packet--Dossier de l'ordre du jour supplémentaireCity of Saint John
Common Council Meeting
Thursday, November 29, 2012
Location: Common Council Chamber
Supplemental to Agenda
8.1 City of Saint John Pension Plan - Presentation from the NB Pension Task Force to Common
Council
City of Saint John
Seance du conseil communal
Le Lundi 30 janvier, 2012
Lieu : Salle du conseil communal
Ordre du jour supplementaire
8.1 City of Saint John plan de retraite - presentation de la force de travail du Nouveau -
Brunswick pension commune du Conseil
City of Saint John
Pension Plan
Meeting on November 26, 2012
Presentation from the NB Pension
Task Force to Common Council
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DISCLAIMER
• The information contained in this presentation is
based on December 31, 2011 demographics
updated to reflect published mortality trends and
investment results
• The material presented may therefore change
significantly based on future information
• The attached is for discussion purposes only
and is invalid without commentary
z
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AGENDA
• Brief Synopsis of Recent Plan History
• SRP Conversion Proposal
• Possible Employee and City Risk and
Reward Sharing
• Summary and Next Steps
• Discussion of SRP Proposal
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Brief Synopsis of Recent Plan History
• The following is a brief history of deficits from December 31,
2006 reflecting investment market declines together with a
steady improvement in underlying mortality assumptions and
decreases in discount rates (used to value future dollars in
today's dollars):
- 31/12/06 Deficit $31.0 million
• GAM83 /UP94 to 2015 Mortality
• 6.75% Discount Rate
- 31/12/09 Deficit $129.2 million
- 31/12/10 Deficit $131.4 million
• U P94 Gen with 10% Load
• 6.5% Discount Rate
- 31/12/11 Deficit $195.9 million
• UP94 Gen without Load
• 6% Discount Rate 4
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Brief Synopsis of Recent Plan History
• The December 31, 2011 deficit of $195.9 million (as filed)
becomes even more onerous if further adjustments are
made to the discount rate and mortality to reflect recent data:
- 31112/11 Deficit $208.7 million
• Improved Mortality
6% Discount Rate
- 31/12/11 Deficit $231.0 million
Improved Mortality
• 5.75% Discount Rate
- 31/12/11 Deficit $342.5 million
• Improved Mortality
• 4.5% SRP Discount Rate
• If measured on a "wind -up basis ", the deficit would have
been approximately $384.4 million as at December 31, 2011.
This is relevant under a Plan curtailment 5
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Brief Synopsis of Recent Plan History
• While the immediate funding crisis is in large part a p roduct
of recent investment market declines, the inherent maturity
of the Plan (payments exceed contributions) limits the ability
to manage exposure to this volatility
• The current funding crisis has forced the Plan's stakeholders
to take the opportunity to deal with the Plan's sustainability
so that the tools needed to effectively limit future volatility will
be in place
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Brief Synopsis of Recent Plan History
There were three options that were considered in order to
deal with the current funding crisis:
— Continue with the Current Plan unchanged (Status Quo)
— Close Current Plan and implement a new DC option for future service
(DC Option)
— Convert the Current Plan into an SRP as recently allowed by changes
to the New Brunswick Pennon Benefits Act (SRP)
• In analyzing the SRP Option, many decisions had to be
weighed to balance goals of being equitable, affordable and
sustainable
— For example, the magic unreduced retirement age based on 85
points were removed and replaced in order to comply with equity
goals (as well as make the Plan more affordable and, hence,
sustainable)
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SRP Conversion Proposal
Alternative Options for Future Benefits
Item AN
Benefit level
Salary base
Indexing
Unreduced
Retirement Age
2% Flat
Best three
year average
with overtime
2% per year
Age 65 or Age
and Service
equal 85
Assumed City
pays 8% of
salary
Current year
without
overtime
1.8% Flat
Current year without
overtime
N/A Conditional on Plan
performance
N/A 65 for regular staff
60 for police &
firefighters
NOTE: Please note that SRP pensionable salary is limited to
$120,000 excluding overtime 8
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SRP Conversion Proposal
Potential Impact of Debt Repayment
Or-- -p- : WIN
Current
WL
�f
Amount of Debt At $195.9 M* $283.2 M (15 Years) to $161.1 M*
December 31, 2011 $384.4 M (5 Years)*
Interest on Debt 6% Varies by basis 4.5%
Potential for Yes Yes No (limited to
increase in Debt changes up to the
SRP Conversion
Date)
Debt repayment in $19.1 M $25.0 M (15 Years) to $12.0 M
2012$ $78.5 M (5 Years)
* The Debt figures above are in addition to $8.7 M due and owed at December 31, 2011
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SRP Conversion Proposal
Estimated Annual Total City Costs
Current DC Option SRP
Past Debt $ 19.1 M $25.0 M (15 Years) to $ 12.0 M
$78.5 M (5 Years)*
Future $ 7.1 M $ 4.4 M $ 4.4 M **
Benefits
Total $ 26.2 M $ 29.4 M (15 Years) to $ 16.4 M
$82.9 M (5 Years)
* 15 -year amortization of debt possible IF going concern basis is allowed. However,
Superintendent of pensions may require solvency funding over a shorter period than
15 years. Solvency funding over 5 years (worst case scenario) is estimated at $78.5 M
in 2012 dollars (assuming no payroll growth).
** Includes additional funding as required by SRP risk management goals. 10
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100%
90%
I
80%
i
70%
60%
50%
40%
30% _.
20%
10% 4
0%
SRP Conversion Proposal
Overall SRP Impact Graph
Contribution Levels by Year
3
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Benefit Reductions Contribution Increase
■ Normal Contribution Contribution Reduction
I
i
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SRP Conversion Proposal
Overall SRP Impact Graph
Probability of aettina 50 % of CPI or more over next 20 nears
100%
90%
t
a
70%
60% - --
50%
40%
30% —
20%
10%
0%
1 2 3 4 5 6 7 8 9 10111213141516'17181920
■ 75% or more of GPI 50% to 74% of CPI
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SRP Conversion Proposal
Cost Sharing Summary
If SRP Conversion Proposal is adopted:
• Employees will pay about 3 /'s of the cost of future base benefits:
— Police and firefighters (retirement at age 60): 12% of 14.3% of pay (excluding
overtime)
— Others (retirement at age 65): 9% of 11.9% of pay (excluding overtime)
• City contributions of 30% of pay (excluding overtime):
— About %'s of this contribution is being used to retire the deficit and improve the security
of the benefits
— About % of this contribution is going towards enhanced career average and contingent
indexing once funding permits
• Both employees and the City share in covering short term risks and
benefitting from potential long term rewards (within boundaries)
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SRP Conversion Proposal
Reconciliation of Differences in Estimated Annual Total City Costs
Amounts in Millions of 2012 S
Current total required City contributions
45.7% of payroll including overtime/
47.9% of payroll excluding overtime
Increase in Employee Contributions (Average 10.3% of pay
excluding overtime less 9% of pay including overtime)
Reduction of value future benefits
Deficit amortization for change to DC Plan / Revised risk sharing of
SRP
DC Option contributions from City (assumed 8% matching plan)
Revised total required City contributions
For SRP: 30% of payroll excluding overtime
Compared to revised total required employee contributions
if DC Plan: 8% of pay for all members excluding overtime
if SRP: 12% of pay excluding overtime for police &
firefighters, 9% of pay excluding overtime for others
Close Current SRP
Plan with a DC
option for future
26.2 26.2
n/a (0 5)
(7.1) (2.7)
5.9 to 59 4 (6 6)
4.4 n/a
29.4 to 82.9 16.4
4,4 5.6
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Possible Employee and City Risk and Reward Sharing
City Contribution Rates
• Projected benefit payments for the next 20 years running 2,000 economic
scenarios
• The resulting stress testing was based on benefit recommendations as
discussed at our November 5, 2012 meeting
• As a result of this stress testing, the following City contribution rates were
determined:
— Temporary contributions of 17% of payroll (excluding overtime) that would cease in 15
years (or earlier, if certain funding goals are met, but not before 10 years)
— Regular contributions of 13% of payroll (excluding overtime), which is approximately
25% above the required contribution from members (which, overall under the SRP,
would currently be 10.3% of payroll excluding overtime)
• IMPORTANT: All of the costs illustrated assume the City will pay its
outstanding contributions in accordance with AON report to Conversion
Date
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Possible Employee and City Risk and Reward Sharing
Potential Contribution Increases
• Both employee contribution rates AND City contribution rates are subject
to equivalent potential increases and decreases depending on future
experience
• The policy on potential contribution rate increases for both members and
the City is summarized as follows:
- Contribution rates to increase should two future valuations in succession reveal funding
ratios of less than 100%
- Should this occur, employee contribution rates will be increased by 25 %, with this
increase being capped at no more than 2.75% of pay excluding overtime
- Any such increase will be 100% matched by the City
- Furthermore, any such increases will be eliminated once a future valuation reveals a
funding ratio of greater than 105% (no indexing until then)
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Possible Employee and City Risk and Reward Sharing
Potential Reward Sharing
• 1st Priority: Contingent indexing of career average and pension benefits
for current year
2nd Priority: Contingent indexing of career average and pension benefits
for any past years that were missed
• 3rd Priority: Possible improvements in ancillary benefits (as specified in
funding policy)
• 4t" Priority: Potential contribution rate decreases for both members and
the City is summarized as follows:
Contribution rates to decrease should a future valuation reveal a funding ratio of 150%
or over
— Should this occur, employee contribution rates will be decreased by 1.5% of pay
— Any such decrease will be 100% matched by the City
Furthermore, any such decreases will be eliminated once a future valuation reveals a
funding ratio of less than 140%
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Possible Employee and City Risk and Reward Sharing
Contribution Rate Summary
Contribution Rate Summa
City for the first 15 years (min 10)
City after first 15 years (min 10)
Police & firefighters - permanent
Other employees - permanent
Minimum Regular Maximum
28.5%
30%
32.50%
11.5%
13%
15.50%
10.5%
12%
14.75%
7.5%
9%
11.25%
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Possible Employee and City Risk and Reward Sharing
SRP Impact on the City
• Reduces annual pension plan costs to the City by an estimated $9.8
million relative to current plan
— This is due to a mixture of increased employee contributions, reduction in
future benefits and the revised risk sharing nature of SRPs
• Establishes contribution rates for the City that can only vary within a
narrow range, based on a % of payroll (excluding overtime), summarized
as follows:
— 28.5% to 32.5% for a maximum of the first 15 years (minimum of first 10 years)
— 11.5% to 15.5% thereafter
-- In comparison, the AON report as at December 31, 2011 outlines a contribution
requirement for the City of 45.7% of payroll INCLUDING overtime for the current plan
• Based on a regular permanent contribution of 13% of payroll (excluding
overtime), the City can expect to continue to offer a competitive pension
plan to employees of the City
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Possible Employee and City Risk and Reward Sharing
SRP Risk Impact on Members
• Accept lower future benefit accrual rate and no overtime
• Change in unreduced retirement rules to age 65 (60 for police officers and
firefighters)
• Accept risk the Plan may not fully meet escalation goals to Career Average
Earnings and Pension Indexation
• Goal of at least 75% of CPI on Career Average Earnings and 75% of 2% per annum
goal (may be 1 % or 0% on past service as per the existing DB Plan) on Pension
Indexation
— NOTE: The stress testing actually indicated that this goal will be met
approximately 90% of the time.
— Accept risk that in very bad economic scenarios (not to exceed 2.5% of the
time), the Plan benefits may be reduced to a level even lower than outlined
— NOTE: The stress testing actually indicated that these reductions are only
expected to occur 2.2% of the time, which exceeds the minimum requirements
by 12%
• Increased contributions for police officers and firefighters due to earlier unreduced
retirement rule than other members 20
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Possible Employee and City Risk and Reward Sharing
SRP Reward Impact on Members
• In favorable stochastic projection scenarios, potential benefits to members and
former members are substantial
• In the current DB plan, if the funding ratio was to become overly favorable,
contribution holidays by the employer would be allowed, while the employees could
continue to contribute at their regular rates
• However, under the SRP, employee contribution rates could now potentially
decrease by 1.5% of pay (excluding overtime)
• Not only that, but City contributions cannot be reduced to under 11.5% of pay
(excluding overtime), meaning that benefits, and the security of such benefits, would
continue to be improved to a greater extent during favorable periods
• Regular contributions of 13% of pay (excluding overtime) by the City is expected to
provide competitive pension benefits to members
• The SRP as outlined is expected to not only meet, but to exceed, the minimum
requirements of stress testing outlined by legislation, increasing the probability of
pension benefits being provided at the desired levels
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Summary and Next Steps
• High deterioration of financial position of the Plan has resulted in significant
financial challenges for both the City and members requiring consideration
of corrective measures
• Next up: Finalization and signing of memorandum of understanding
outlining an October 1, 2012 SRP conversion date, with such memo
outlining major SRP parameters
• Reallocation of asset portfolio (asset optimization indicates a mix of 50%
fixed income securities and 50% equities and other strategic investment
securities are to be used)
• Once finalized, need to file a SRP Plan Text, a Funding Policy and a
Statement of Investment Policies
• Administrative systems and SRP governance structure will also need to be
updated to reflect new requirements
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Discussion of SRP Proposal
• New benefit structure
• Risk and rewards
• Consensus on SRP Proposal?
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