Local 615

Koskie Minsky Facts About Pension Plan

DATE: October 9, 2014 TO: Jim Yakubowski, ATU Local 615 FROM: Koskie Minsky LLP SUBJECT: General Superannuation Plan For City of Saskatoon Employees (the “Plan”) – Discussion of Matters Arising in Bargaining You asked for our comments and analysis on several questions relating to the Plan and the Plan’s actuarial valuation as at December 31, 2012 as revised June 2014. Please note we are experts in pension law, but are not qualified actuaries, and the stakeholders to the Plan should confirm our comments and analysis below by requiring an updated valuation of the Plan by an independent actuarial firm. Question 1: Is the Plan, as unilaterally amended by the City, still a defined benefit plan in the same type as prior to those amendments? Answer: No. The changes imposed by the City change the nature of the Plan from a contributory defined benefit plan, in which the employer is liable for any plan costs not negotiated and paid by plan members to a negotiated fixed cost plan with target benefit features. It becomes a fundamentally different form of plan without an employer “guarantee” behind it. Apart from benefit reductions on future service imposed by the City, the key changes are a fixed cap on Plan contributions and a requirement to pay any future deficits in excess of the fixed contributions through future benefit reductions, which is subject to binding dispute resolution. Put another way, where a plan’s costs are fixed, there must be, under Saskatchewan pension legislation, another method to reduce plan costs, and that is by reducing future benefit accruals. The City is misleading in calling the amended Plan the same type of defined benefit plan it had in place before the amendments. A typical defined benefit plan (particularly in the public sector) has fixed defined benefits and no caps on contributions, so that contributions can increase and decrease as the minimum funding requirements may dictate. The new terms the City imposed impose caps on contributions and would require cuts to future benefits in some cases. It is true that, under current legislation (which is expected to change in the future) the City cannot reduce past or accrued benefits. Retirees’ pensions and active members’ past service (also called accrued benefits) cannot be reduced under current legislation or Plan terms. Instead, any future funding problem in the plan will require proportionately deeper reductions to future benefits. This creates an inter-generational inequity in which future Plan members may be paying larger contributions and receiving lower benefits than current Plan members. In contrast, before these amendments were unilaterally imposed, the City was responsible for paying any extra cost over and above negotiated contributions, and no benefit reductions were required in order to meet Plan deficits (although they could be negotiated if the parties desired). The City has shifted this burden onto employees, particularly younger employees who have yet to accrue many pension benefits. Question 2: Does the City have any responsibility or power over contributions to the Plan as determined by actuarial valuations? Answer: yes in some direct and indirect respects. The Plan is sponsored by the City, and the City negotiates contributions to the Pension Plan, as well as negotiating benefits paid under the Plan. It has the ability to negotiate and to agree to pay the costs necessary to maintain the contributory, defined benefit pension plan it has always provided to employees. However, the Pension Plan is administered by a Board of Trustees. The Board of Trustees is responsible for preparing actuarial valuations (with the advice of an actuary). It is critical here to note that, in accordance with actuarial professional standards, an actuary prepares a valuation, but only recommends certain key assumptions, such as the long-term discount rate or the margins for conservatism. The Board of Trustees actually makes the final decision as to those assumptions, and is responsible for those decisions. At least half the Trustees on the Board of Trustees are appointed by the City. The City has, indirectly and through its appointees to the Board of Trustees, significant influence over the actuarial valuations of the Plan, to the extent there is discretion in preparing those valuations as noted above. At present, there is at least one vacancy on the Board of Trustees of the Pension Plan. We have not had an opportunity to review its governance arrangements in detail, but we understand that the City has a majority of representatives on the Board of Trustees today. Question 3: The City claims the ATU caused an additional $6.7 million deficit in the Plan. Is this accurate? Answer: No. According to the actuarial valuation approved by the Board of Trustees as at December 31, 2012, the Plan showed a $68 million deficit. This actuarial valuation included a “margin” or reserve fund equal to 10% of all liabilities, or about $70 million. If no margin were employed, there would have been (likely, all other things being equal) no going concern deficit as at December 31, 2012. When the Board of Trustees “updated” the actuarial valuation in June, 2014 following negotiations with the other bargain units, the new valuation only used a 5.4% margin. To the best of our knowledge at present, no explanation was given as to why this assumption was changed. In addition, and equally as problematic, the June, 2014 update did not reflect positive investment gains during 2013 and 2014, but did reflect the significant concessions made by other bargaining units. If the positive investment gains had been reflected, we believe that it is likely that the Plan would be fully funded, even including a 10% margin. Reflecting Plan experience to date would have eliminated the City’s main reason for its bargaining position. The City is therefore misleading when it states that the ATU “caused” the pension deficit and equally misleading in claiming that significant changes are today needed to address the pension deficit. Question 4: Section 4.03 of the Plan in Bylaw 8226 remains in place following the unilateral amendments, and it requires that the City is liable for deficits arising in the Plan. Is it accurate to say the City is and continues to be liable for Plan deficits? Answer. No, it is not accurate, and highly misleading. Although s. 4.03 remains part of the terms of the Plan under the By-Law, payments by the City for plan deficits arising in the future will now never be triggered. This is because the changes made by the City (in By-Law 9224) ensure that no pension plan deficits will ever emerge. That is because, if projected required contributions are determined to exceed those set out in the By-law, the By-Law now provides that future benefit accruals must be reduced to pay any future deficiency. The City is being quite misleading if it says it is liable for pension plan deficits, because they will never be required to pay a deficit (that exceeds negotiated contributions) under the new plan terms. Question 5: Are the changes imposed by the City permanent? Answer. Not necessarily, but likely intended to be. As a matter of law, pensions can always be bargained by employees, as can any other terms and condition of employment. In this sense, no change is permanent. However, from the position the City has taken in imposing these terms and conditions during a lockout, and the way the new terms of the Plan function to automatically require benefit reductions in the future to pay for any future deficits arising, it appears that the City intends the changes to be permanent. The City could have proposed and agreed to negotiated temporary increases in contributions and temporary cuts to future benefit accruals, but elected not to. In retrospect, some form of temporary change would have been adequate, given the experience of the Plan’s funded status since 2012, which would now, we believe, be fully funded on a going concern basis including a 10% reserve margin.

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