May 19, 1998

 TO:Corporate Services Committee

 FROM:Chief Financial Officer and Treasurer

 SUBJECT:ACTUARIAL VALUATION RESULTS - METROPOLITAN TORONTO

PENSION PLAN AND THE METROPOLITAN TORONTO POLICE

BENEFIT FUND

Purpose:

 To comment on the recommendations of the Actuary relating to the actuarial valuation as at December 31, 1997 of the Metropolitan Toronto Pension Plan and the Metropolitan Toronto Police Benefit Fund and to submit recommendations for a course of action for consultation with stakeholders on the topic of the allocation of on-going actuarial surpluses pertaining to all City-sponsored pension plans including the transfer of the administrative costs now borne by the employer to the pension funds.

Source of Funds:

Not applicable.

Recommendations:

It is recommended that: (1)the Corporate Services Committee endorse that the Chief Financial Officer and Treasurer approach the Boards of Trustees of the Metropolitan Toronto Pension Plan and the Metropolitan Toronto Police Benefit Fund and to the governing bodies of the City of Toronto Civic Employees= Pension and Benefit Fund, the City of Toronto Fire Department Superannuation and Benefit Fund and the City of York Employees= Pension and Benefit Fund with the view that the pension funds should bear the total administration costs of the plans in order to allocate actuarial gains more equitably; and (2)the Chief Financial Officer and Treasurer, in conjunction with the Executive Director of Human Resources, be requested to report on the cost and funding of benefit improvements, similar to those proposed by the Boards of Trustees of the Metropolitan Toronto Pension Plan and the Metropolitan Toronto Police Benefit Fund, for the City of Toronto Civic Employees= Pension and Benefit Fund, the City of Toronto Fire Department Superannuation and Benefit Fund and the City of York Employees= Pension and Benefit Fund.

Background:

At their respective meetings on April 24, 1998, the Boards of Trustees of the Metropolitan Toronto Pension Plan and the Metropolitan Toronto Police Benefit Fund considered recommendations made by the plans= Actuary arising out of the plans= annual actuarial valuations.

The two pension plans experienced actuarial gains in 1997 which contributed to an increase in their respective AIndexation Reserves@. The Reserves represent the difference between actuarial liabilities and actuarial assets. These gains were generated by variations from actuarial assumptions in three areas:

(i)lower wage growth;

(ii)lower inflation; and

(iii)higher investment returns.

The Actuary=s recommendations relating to this actuarial gain are common to both plans and are:

(a)Active Members (i)a reduction in current member and employer contributions by 2% of contributory earnings for 5 years;

(ii)a 5-year early retirement window (reducing the 85 factor to 80 and reducing the 4% early retirement penalty to 22% per year);

(iii)an increase in pensions for future surviving spouses from 60% to 66b% of the member=s normal pension.

 (b)Retired Members (i)an increase in pensions to match the cost-of-living index (0.7% for 1997);

(ii)an increase in pensions for current and future surviving spouses from 60% to 66b% of the member=s normal pension.

 The following is a summary of the Indexation Reserve Accounts= activity contained in the Actuary=s reports of the two Metro plans showing the balance remaining after the proposed benefit improvements:

   The amount remaining in the Indexation Reserve of the Metro Toronto Pension Plan of $133,433,000 as at January 1, 1998, is up from $93,483,000 a year earlier and results in the average per member increasing from $21,860 to $31,780. For the Metro Toronto Police Benefit Fund, the amount of $48,146,000 as at January 1, 1998, is up from $24,228,000 a year earlier and results in the average per member increasing from $9,740 to $19,590.

 The Boards of Trustees also had before them a report dated April 21, 1998, from the Chief Financial Officer and Treasurer submitting comments on the actuarial reports and advising that the Actuary=s recommendations require consultation with and endorsement by employers and employee groups and recommending that: A(i)a consultation process be commenced by means of the recommendations of the Actuary relating to changes to the Metropolitan Toronto Pension Plan and the Metropolitan Toronto Police Benefit Fund, other than the cost-of-living increase to pensions, being referred to the Corporate Services Committee and the Toronto Police Services Board respectively and to the appropriate corresponding employee bargaining units for comment.@

 Both Boards of Trustees received the report; in addition, the Board of Trustees of the Metropolitan Toronto Pension Plan requested the Chief Financial Officer and Treasurer to submit a report to the Board of Trustees for its next meeting to be held on May 22, 1998, on the costs of administering the plan.

  Comments:

 There are a number of ramifications relating to benefit improvements to City-sponsored pension plans.

 (a)Metro Toronto Pension Plans In the valuation report for the year 1990, the Actuary cited the impending likelihood of mandatory indexing and recommended that an Indexation Reserve Account be created to hold all monies not required to meet specific current pension liabilities, to a maximum of 30% of the non-indexed reserves, and that no allocation of surplus be considered until attainment of such maximum. Minor improvements in pension benefits and increases in pensions due to cost-of-living inflation should be restricted to the extent that the Indexation Reserve Account can cover the cost. The Boards of Trustees forwarded that recommendation to Metropolitan Council, which adopted it. In subsequent valuations, all of which have been adopted by Metropolitan Toronto Council, the Actuary has recommended cost-of-living increases and indicated continued placement of unallocated funds in the Reserve and confirmed the suggested 30% ceiling.

 The recommendations made by the Actuary in its most recent report dated April 1998 would provide material benefit improvements for plan members similar to those implemented recently in the Ontario Municipal Employees= Retirement System (OMERS) plan. The OMERS changes, which were proposed only after an extensive analysis of options and broad consultation with employer and trade union representatives, were intended to distribute surplus assets not required to be retained in the OMERS fund for future contingencies fairly among all System participants by making improvements for the benefit of members, pensioners and employers equitably.

 As with the OMERS plan, the Metro plans= proposals significantly improve benefits. For example, the spousal benefit level increase is 11 per cent and its actuarial cost of $29,132,000 is the major element of the total recommendations. This cost includes the increase from 60% to 66b% for the basic spousal pension and also the increase in the maximum survivor pension when there are dependent children from a maximum of 85% to a maximum of 94.44% of the member=s pension: in the OMERS plan the maximum of 75% was not changed. A further difference from the OMERS plan is that in the proposals for the Metro plans, early retirement without penalty may occur at the 80 factor rather than the 85 factor in OMERS.

 The total actuarial cost for the two plans of each element of the Actuary=s recommendations analyzed as to the benefit value to plan participants is:

The total actuarial cost to the plans of the above benefit improvements is $41,561,000. The present value accruing to the plan members would be $39,687,000 with $1,874,000 accruing to the employers, the City of Toronto and the Toronto Police Services Board. The recommendation relating to an increase to pensions to offset the increase in the cost of living is made each year and falls within the purpose of the Indexation Reserve but, even after disregarding its cost of $7,875,000, there remains an amount of $31,812,000 to the benefit of plan members compared with $1,874,000 to the benefit of the employers.

 As may be seen, there is a weighting toward the plans= members and pensioners under the benefit improvement proposals and the employers gain little advantage from the plans= favourable actuarial position. There is no such imbalance in the case of OMERS, which has many active members, making the 2% reduction in contributions for 5 years a significant cost-saving for the System=s employers. The Metro plans, on the other hand, have comparatively few active members and therefore the contribution reduction is proportionately negligible from the point of view of the City. Consequently, it is recommended that a more equitable allocation of recent actuarial gains be pursued by means of an approach by the Chief Financial Officer and Treasurer to the Boards of Trustees to seek concurrence for the pension funds to bear the total cost of the administration of the pension plans now borne by the City. The approximate annual administrative cost of the two Metro plans is currently $600,000 with the actuarial present value cost estimated at $6,000,000.

(b)Other City-sponsored Pension Plans There are three other City-sponsored pension plans; the City of Toronto Civic Employees= Pension and Benefit Fund, the City of Toronto Fire Department Superannuation and Benefit Fund and the City of York Employees= Pension and Benefit Fund.

The Toronto Civic Pensioners Protective Association (TCPPA) and the Toronto Fire Department. Pensioners Association (TFDPA) representing the retired members of the old City of Toronto plans have both made representations for similar benefit improvements to give them parity with OMERS members.

Like the Metro plans, both the Civic and Fire plans have enjoyed excellent investment returns over the past several years. The excess returns are allocated towards the indexing provisions of these plans which provide for cost of living increases if there are surpluses in the plans. New plan improvements would potentially decrease the amount available for future indexing.

 During the past decade, in addition to matching employee current service contributions, the City of Toronto has made significant special payments to both the Civic and Fire plans for unfunded liabilities arising from benefit improvements and experience losses as well as paying the full internal administration costs for the plans. Unlike the OMERS plan where experience losses and administration costs are shared equally by the employees and the employers, the City as plan sponsor has paid the full cost of these increased liabilities and expenses. The administration costs paid by the employer are estimated at $250,000 annually.

 The old City of York plan has a total membership of less than 400 and is composed mostly of pensioners. Administration costs are estimated at $30,000 per annum and paid by the plan.

 As it may be desirable to maintain similar pension benefits levels for all City employees, conditional upon sufficient actuarial surpluses being available in the pension funds, it is recommended that a report be presented to the Corporate Services Committee on the costs and funding of benefit improvements to the three plans which would correspond to the changes proposed to be made to the OMERS and Metro plans. Also, the governing bodies of the aforementioned plans should be approached by the Chief Financial Officer with the proposal that all administrative expenses should be borne by the pension funds. These expenses are estimated at $250,000 annually; the actuarial cost would approximate $2,500,000.

Conclusions:

The Actuary=s recommendations to improve significantly the benefits of the Metro pension plans require endorsement by employers and employee groups. The recommendations in this report would initiate a process with objectives of a more equitable allocation of the actuarial gains of all City-sponsored pension plans among employers and pension plan members and, subject to sufficient actuarial surpluses, benefit improvements to the pension plans of the old Cities of Toronto and York similar to those proposed for the OMERS and Metro plans.

A separate report on this matter has been submitted to the Toronto Police Services Board respecting the Metropolitan Toronto Police Benefit Fund.

The Executive Director of Human Resources concurs with the content of this report.

Contact Name:

Tony Brooks

Phone No. 392-8066

Fax No. 392-3649

E-Mail address: tony_brooks@metrodesk.metrotor.on.ca

Wanda A. Liczyk

Chief Financial Officer

and Treasurer

 :et