June 3, 1999
To:Administration Committee
From:Chief Financial Officer & Treasurer
Subject: REVIEW OF FORMER CITY OF YORK EMPLOYEES' PENSION PLAN FINANCIAL STATUS
Purpose:
To provide information into the financial position of the York Pension Plan.
Funding Sources, Financial Implications and Impact Statement:
None.
Recommendation:
That this report be received for information.
Background:
City Council at its meeting of December 16 and 17, 1998 had before it Clause 24 of Report 17 from the Corporate Services
Committee presenting the results of the January 1, 1998 valuation of the York Pension Plan. City Council adopted the
recommendation to amortize the solvency valuation deficit of $5,807,000 through five payments of $1,389,000 per year
from 1998 to 2002 inclusive as required by the Pension Benefits Act.
Council amended that report with the following recommendation:
"(2)the Chief Financial Officer & Treasurer be requested to submit a full report to the Corporate Services Committee on
how the City of York Employees' Pension Plan came to be in its current negative financial situation."
Discussion:
The City of York Employees' Pension Plan provides pension benefits for employees and retirees hired by the former City
of York prior to July 1, 1968. Employees hired after that date were required to join the OMERS plan. The plan, in
existence since 1945 has been improved a number of times over the years. These improvements for the most part arose
through the collective bargaining process, competitive pressures and legislative changes.
The plan is a defined benefit, final average plan similar to the former Metro Pension Plans, City of Toronto Pension Plans
and OMERS, as well as most public sector plans. The unique features of the York plan are:
1)the inclusion of lump sum vacation and sick leave credits in the final average earnings;
2) the payment of a death benefit of five times annual pension less pension benefits paid out in addition to any survivor
benefits;
3)the formal indexing of pension benefits.
4)early retirement upon attaining "80 Factor" with age 55 for regular members and "75 factor" with age 50 for fire fighter
members.
Appendix I provides a comparison with the other City of Toronto private pension plans.
At December 31, 1997 there were seven active members, 273 pensioners and 99 surviving spouses in the plan. The
actuarial valuations of the plan at January 1, 1998 placed the plan in a surplus position of $4,503,000 on a "going concern
basis" and a deficit position of ($5,807,000) on a "solvency basis".
Analysis:
The Ontario Pension Benefits Act requires actuarial valuations of all registered pension funds to be undertaken at least
every three years. The valuation must review the assets and liabilities of the plan under two scenarios:
i) on a "going concern basis" which assumes the ongoing operation of the plan; and,
ii) on a "solvency basis" which assumes the plan is discontinued and all pension benefits are funded by way of the
purchase of annuities from an insurance company.
If the plan is in an actuarial deficit (negative) position on either a "going concern" or "solvency" basis, the employer as plan
sponsor is required to fund the shortfall. This funding can be either as a lump sum payment or amortized in the case of a
"solvency deficit" over a period of up to five years or up to 15 years in the case of a "going concern deficit".
The reason for these rules is to ensure the payment of promised pension benefits. If sufficient assets are not available in the
pension plan to pay the promised benefits, the members pensions and retirement incomes may be compromised if the
employer through bankruptcy, sale or dissolution is unable to fund any shortfall.
The issue of whether public sector plans should be subject to the "solvency basis" rules was raised several years ago by the
Regional Municipality of Ottawa Carleton Pension Plan which found itself in a "solvency deficit position" and facing the
requirement to fund this shortfall despite the plan being in a surplus position on a "going concern basis". Ottawa-Carleton
requested the Province to exempt public sector plans from these rules on the basis that local governments were going to
exist in some form or other and that the ultimate responsibility to fund any shortfalls would pass to successor bodies. The
Province did not act on this request.
The "solvency basis" valuation requires the use of current interest rates and the GAM-83 mortality assumptions. During
prolonged periods of low interest rates, it is not unusual for a solvency deficiency to occur in plans which have been
minimally funded.
The theory of pension plan funding is relatively straightforward. A pension benefit is negotiated and the rate of
contribution required to fund that benefit is established taking into account estimated investment returns, inflation, salary
increases, retirement age and lifespan.
Employer and employee contributions are then collected, placed in a trust and invested. Upon retirement a pension benefit
is paid from the cumulative contributions and investment returns. Recent studies indicate that in the average plan,
investment returns provide 85 % of pension payout. In plans with few contributing members and many pensioners, this
percentage goes even higher.
Given the importance of investment returns, it is vital to select the right mix of investments and investment managers and
to ensure that assets are fully invested.
The York Pension Plan assets are managed by Perigee Investments, a well known investment management firm who has
performed reasonably well against balanced fund benchmarks. Perigee and its predecessor firm, Mu-Cana Investments,
have managed the account since 1983. During the three year period from January 1, 1995 to January 1, 1998, investment
returns exceeded the actuarial assumption by $9,146,000. The annual rates of return for the period 1983 to 1997 are shown
in Appendix II. Longer term investment data was not reviewed, however at present the assets are professionally managed
by Perigee Investments and are held in trust by an external custodian, CIBC Mellon.
The former City of York followed a minimum funding strategy with respect to its pension programs. Normally when
benefit improvements are approved, the additional liabilities are immediately funded by additional employer payments or
higher employee/employer contribution rates. The approach used by the former City of York Council was to wait until the
next triennial valuation and then to amortize unfunded liabilities over the maximum period permitted. Additionally, the
actuarial assumptions of the plan such as interest rates and mortality tables were set more aggressive than most public
sector plans. This funding strategy limited the assets available for the plan to invest and restricted the investment return on
the unfunded liability to the amortization interest rate.
In reviewing the York Plan actuarial report and financial situation as at January 1, 1998, the three items which stand out as
having the greatest negative impact upon the plan's funding since the last valuation on January 1, 1995 are:
i) cost of living adjustments($ 2,365,000)
ii) mortality experience($ 1,383,000)
iii) retirement experience($ 1,348,000)
These experience losses are directly correlated to the specific features of the plan and the actuarial assumptions adopted by
the former City of York.
i)The indexing provisions of the plan were implemented in 1984 without additional funding being provided and without
there being sufficient surplus in the plan to fund this improvement into the future. In comparison, when OMERS
implemented indexing in 1992, they funded the cost for existing pensioners from plan surplus and funded for future
retirements by increasing the employee and employer contribution rates by 1/2 % each.
ii)Mortality experience measures whether pensioners are living longer than expected or dying sooner which reflects upon
the length of time that pensions have to be paid. Actuaries base their assumptions on census data which has been
consolidated into Group Average Mortality (GAM) tables. While most plans have updated their actuarial tables to
GAM-1983 or the more recent GAM-1994, the York Plan continued to use the GAM -1971 table. There has been a
significant increase in life expectancy between 1971 and 1998 resulting in pensions being paid for longer durations. This
has resulted in ongoing experience deficiencies.
iii)Retirement experience losses arise when the actual pension benefits are greater than the projected benefits or pensions
commence earlier than projected. This situation normally occurs when salary increases are greater than the actuarial
assumptions or a member receives a significant promotion just prior to retirement. The York plan has an unusual definition
of pensionable salary which includes unused sick-leave and vacation paid to the member in the year of retirement which
increases the average annual salary at time of retirement. Although contributions are made on the sick-leave payout, they
are not sufficient to cover even a portion of the increased pension benefit they create. The Actuary projected the impact of
sick-leave payout to increase the final average earnings by 10% which corresponds with adding an additional six months
earnings to the best 60 consecutive months total (under the Municipal Act Sec 208||47 the maximum entitlement for unused
sick-leave on termination of employment is 1/2 the days to the employee's credit to a maximum of one-half year's
earnings). The former City of York in 1989 negotiated a payout of the cumulative sick-leave program which resulted in
employees receiving payment of the full amount of their cumulative sick credits which was then included in pensionable
earnings. In several files reviewed, the final average salary was increased by 30% as a result of this payout. As with other
benefit increases, the impact of this was noted in actuarial reports but not projected or properly funded.
When actuarial valuations are required to be filed only once every three years, the impacts of benefit improvements and
emerging trends or problems often do not become visible until they are quite large. If the trends which start appearing in
the interim valuations are not properly addressed at that time, the compounded effect at the next full valuation can be
substantial.
In reviewing correspondence from the Actuary, it would appear that former City of York officials faced considerable
pressure to keep the annual pension expense as low as possible. To do this they selected actuarial assumptions which
although within allowable ranges, produced results which had future consequences. As well, the linkages between
collective agreement negotiation issues which were not directly related to the pension plan such as the sick-pay program
changes and payout provisions, but which had a large impact on the plan did not appear to be fully appreciated during the
negotiation process. An example of this occurred when in 1975 the then Borough of York increased their Sick Pay Credit
Grant payout ceiling from the Municipal Act maximum of six months to six months plus two thirds of a day for every day
in excess of the maximum. This increased the size of Sick Pay Grants, some up to about a year and a half additional salary.
This was accomplished by the passing of a private members bill in the Provincial Legislature by then member Mr. Leluk.
This Bill was titled The Borough of York Act, 1975.
There are no records in our files on any costings or advice sought by the Pension Committee or the Borough of York
Council on the effect of this change.
The Pension Committee and Council, in 1974, also amended the application of the definition of Salary to include the
payment of Sick Pay Credit Grant in the pensionable earnings, if contributions were made, without the extension of service
for those age 65 or over. This was done retroactively to all previous retirees and again no costings were done to assess the
effect of this on the pension fund.
The solvency valuation requirements of the Pension Benefits Act, which became effective in 1992 were designed to ensure
full funding of promised pension benefits. The first solvency valuation at December 31, 1992 showed a surplus of
$337,648. At December 31, 1994 this had declined to $0.00. By December 1997 a solvency deficit of $5,807,000 had
emerged. Interim valuations, done in 1995 and 1996 indicated that this situation existed but no action was taken.
Amalgamation:
The York Pension Plan is administered by a joint pension committee made up of employee, employer and Council
representatives. The function of the Committee is primarily to oversee the investment management of the Fund and to
approve benefit entitlements. During 1998 the Committee did not formally meet. Oversight of the plan in 1998 and early
1999 has continued under the direction of the Chief Financial Officer & Treasurer of the City of Toronto. The Committee
will be convened in early July 1999 now that elected officials have been appointed by Council.
Day to day operations of the Plan such as pension payrolls, accounting, banking, benefit calculations and liaison with
external agents such as the actuary and investment manager are carried out by staff. These functions were transferred from
the Payroll Section of the former City of York into the City of Toronto, Finance Department, Pension Section in July 1998
where they have been combined with the daily operations of the former Metro Toronto and City of Toronto plans.
Due to loss of staff resources at York through early 1998, the transfer of the York pension functions into the Pension
Section was undertaken in a relatively rapid manner. The City Auditor has expressed concerns with the transfer process and
the manner in which data was constructed and input into the Metro pension payroll system. The Pension Section is in the
process of checking and validating the information transferred against source documents to satisfy the Auditor's concerns.
The Finance Department is currently addressing the concerns of the Auditor, in regards to current administration, reporting
and controls in the City of York pension plan and will be discussing them with him shortly.
Conclusion:
The current financial situation of the York Pension Plan can in large part be traced to the minimum funding strategy
adopted by the former City of York. Pension and benefit improvements which substantially increased the liabilities of the
Plan were not funded or provided for at the time they were granted. It appears that there was an expectation that benefit
improvements would be funded by future plan surpluses which did not materialize. In effect, the former City of York
followed a pay as you go practice.
The York Pension Plan is now virtually fully retired with only five active members remaining. Future actuarial gains or
losses will arise primarily through investment performance, pensioner increases and pensioner mortality. The actuarial
assumptions of the plan should be reviewed and updated to reflect plan provisions and current economic conditions.
Recommendations in this regard will be brought forward with the results of the December 31, 1998 actuarial review.
Contact Name:
Ivana Zanardo
Director
Pension, Payroll and Employee Benefits
397-4143
Chief Financial Officer & Treasurer
APPENDIX I
COMPARISON OF PLAN PROVISIONS
City of Toronto Private Plans
|
Metro Toronto
Pension Plan |
Metro Police
Pension Plan |
Toronto Fire
Superannuation
& Benefit Fund |
Toronto Civic
Employees
Pension Fund |
York
Employee
Pension Fund |
| Normal
Retirement Age |
65
60 (Fire) |
60 |
65 |
65 |
65
60 (Fire) |
| Sick
Pay/Lump Sum
vacation in
Pensionable
Earnings |
No |
No |
No |
No |
Yes |
| Overtime
Included in
pensionable
earnings |
No |
No |
Yes |
Yes |
No |
| Early
Retirement
Factor |
85 Factor |
25 Years of
Service |
30 years
service |
85 factor
30 years service |
80 Factor
75 Factor (Fire)
30 years
service |
| Indexing |
Ad-hoc when
surplus exists |
Ad-hoc when
surplus exists |
Contractual
when surplus
exists |
Contractual
when surplus
exists |
Contractual
where excess
returns |
| Death Benefits
(in addition to
survivor
pension) |
None |
None |
none |
none |
5 times annual
pension less
pension paid
out |
APPENDIX II
CITY OF YORK EMPLOYEE PENSION PLAN
SUMMARY OF ASSET AND ACTUARIAL DATA
1983-1997
