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4. CITY OF OTTAWA SUPERANNUATION FUND PENSION CONTRIBUTIONS
Cotisations au fonds de pension de la ville d’OTTAWA
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That Council approve:
1. That the Vested Employee Sick Leave Reserve funds be used to finance the special payments required to fund a Going Concern Deficit for the COSF for amounts required in 2012 and 2013.
2. That the City Treasurer be authorized to work with OMERS to explore opportunities and options regarding the potential merger of the City’s pension fund with OMERS or the investment management of the pension with an authorized subsidiary of OMERS.
3. That City’s costs for legal and actuarial services required to perform the review of pension options, be funded from the Vested Employee Sick Leave Reserve.
Que Conseil approuve ce qui suit:
1. Que le fonds de réserve des congés de maladie des employés soit utilisé pour financer le paiement spécial du déficit de continuité de l’exploitation du FPVO, pour les exercices 2012 et 2013.
2. Que le trésorier municipal soit autorisé à utiliser OMERS pour rechercher diverses possibilités et options visant le fusionnement du fonds de pension de la Ville avec OMERS, ou la gestion des investissements du fonds de pension avec une filiale autorisée d’OMERS.
3. Que les coûts que doit verser la Ville pour les services juridiques et actuariels nécessaires à l’examen des options d’administration de pension soient financés par le fonds de réserve des congés de maladie des employés.
DOCUMENTATION
1. City Treasurer’s report dated 26 September 2011 (ACS2011-CMR-FIN-0050).
Finance and Economic Development Committee
Comité des finances et du développement économique
and Council / et au Conseil
26 September 2011 / le 26 septembre 2011
Submitted by/Soumis par : Marian Simulik, City Treasurer/Trésorière municipale
Contact Person/Personne ressource : Mona Monkman, Deputy Treasurer, Corporate Finance/ Trésorière municipale adjointe-Finances municipales
Finance Department/Service des finances
613-580-2424 ext./poste 41723,Mona.Monkman@ottawa.ca
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Ref N°: ACS2011-CMR-FIN-0050 |
SUBJECT: |
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OBJET : |
That the Finance and Economic Development Committee recommend that Council approve:
1. That the Vested Employee Sick Leave Reserve funds be used to finance the special payments required to fund a Going Concern Deficit for the COSF for amounts required in 2012 and 2013.
2. That the City Treasurer be authorized to work with OMERS to explore opportunities and options regarding the potential merger of the City’s pension fund with OMERS or the investment management of the pension with an authorized subsidiary of OMERS.
3. That City’s costs for legal and actuarial services required to perform the review of pension options, be funded from the Vested Employee Sick Leave Reserve.
Que le Comité des finances et du développement économique recommande Conseil d’approuver ce qui suit :
1. Que le fonds de réserve des congés de maladie des employés soit utilisé pour financer le paiement spécial du déficit de continuité de l’exploitation du FPVO, pour les exercices 2012 et 2013.
2. Que le trésorier municipal soit autorisé à utiliser OMERS pour rechercher diverses possibilités et options visant le fusionnement du fonds de pension de la Ville avec OMERS, ou la gestion des investissements du fonds de pension avec une filiale autorisée d’OMERS.
3. Que les coûts que doit verser la Ville pour les services juridiques et actuariels nécessaires à l’examen des options d’administration de pension soient financés par le fonds de réserve des congés de maladie des employés.
The City of Ottawa Superannuation Fund is the municipal pension plan, which provides pensions to former employees of the City of Ottawa who began their careers with the former municipality before June 30, 1965. Municipal employees hired after that date are enrolled in the Ontario Municipal Employees Retirement System (“OMERS”). The COSF has a long history with the City of Ottawa and was originally established on September 8, 1931. Prior to the establishment of OMERS, the COSF was merged with the Ottawa Firemen’s Superannuation Fund on January 1, 1964 and with the Ottawa Police Benefit Fund Association on January 1, 1965. The resulting combined membership, together with the City, opted to remain as a separate fund and did not join OMERS. After the Regional Municipality of Ottawa-Carleton (RMOC) was created in 1969, employees who transferred from the City of Ottawa, and who were members of the COSF, remained with the COSF in order to maintain their seniority and continuous service record.
COSF By-law 7200 contains the plan text, which details the procedures for the Fund and establishes a Board of Trustees as the legal administrator for the Fund. Currently, the eleven member Board of Trustees consists of the Mayor, one Councillor, the City Treasurer, three senior City staff members, and one representative each from the Civic Institute of Professional Personnel, the Canadian Union of Public Employees (Local 503), the Ottawa Professional Fire Fighters Association, the Ottawa Police Association and the Ottawa-Carleton Pensioners Association. As of December 1st, 2010, the Fund provides pension benefits to a total of 786 retirees, spouses and eligible dependents.
The indexing provisions of the COSF plan require that there be an annual indexing of the benefits equal to 55% of the change in CPI. In addition, the City of Ottawa currently “tops up” that indexing provision to 100% of CPI. This is funded through the City’s annual operating budget provision. The “top-up” was approved by Council on April 27, 2005, upon the receipt of the Chief Corporate Services Officer's report dated 12 April 2005 (ACS2005-CRS-EMP-0004). Council approved the following Committee recommendation as amended:
1. The provision of the notice By-law (By-law No. 2002-522) requiring that requests for funding outside of the budget process be advertised in advance of consideration at the Corporate Services And Economic Development Committee, be waived for this item; and,
2. WHEREAS neither the employee nor the employer share of the contribution rates to the COSF included any provision for future indexation;
THEREFORE BE IT RESOLVED that Council accept Funding Option C to provide for an increase in indexation from 55% of inflation to 75% in 2005 and increases of 5% for each of the next five years;
AND FURTHER that in any year in which an actuarial surplus position is shown, the additional indexing benefit be covered within the COSF.
On May 13, 2005 the Board of the COSF approved authorizing the (City of Ottawa) Treasurer to reimburse the City for actual costs of providing the indexation, in any year where an actuarial valuation reveals a surplus in the Fund, which is in excess of all contracted funding requirements.
DISCUSSION
COSF – Requirement for funding of a Going Concern Deficit
As required by the governing legislation, an actuarial valuation is carried out by the COSF’s actuaries every three years. Largely as a result of the financial crisis of 2008, the resulting declines in equity markets and the prevailing low interest rate environment, the most recent actuarial valuations indicate that the COSF Plan has a going concern deficit.
There are 786 retirees/survivors eligible to receive benefits under the plan, but with no active members, the City is solely responsible for funding any plan deficits. The actuarial valuation completed in August shows that the plan has a funding deficit of $32 million which under the rules of the Ontario Pension Benefit Act, must be paid by the City over a period of 15 years at the rate of $3.258 million per year.
The legislation requires that the City start making these payments in 2011; however the legislation also provides an option for the plan administrator to elect to defer the start of the special payments by one year. The Board of COSF, as the plan administrator, agreed to defer the payments to the start of 2012. The Board of COSF will be sending a notice to these members (required by legislation) that the Board has elected to defer the start of these required special payments by one year. The notice is going out with October 1st pension cheques.
The Plan will have another valuation undertaken each year and the special payment amount will be adjusted as required in each subsequent budget.
Funding Source for the Annual Special Payments
The $3.258 million funding requirement will be included in the draft 2012 City budget. It is recommended that the 2012 special payment, and the 2013 payment, if required, be funded from the Vested Employee Benefit Reserve which has a balance of $6 million.
The Vested Employee Benefit Reserve was set up at amalgamation from balances carried forward from former municipalities. As the City expenses accumulated sick leave benefits as incurred the fund is no longer being used, unless there is a deficit at year end in the Human Resource Provision account. The by-law allows the reserve to be used for other purposes as approved by Council. As per the Vested Employee Benefits Reserve Fund by-law it shall be used for the following purposes:
(a) for the payment of accumulated sick leave to those employees with these vested benefits as the employees leave the City of Ottawa; and
(b) for such other purposes as may be approved by the Council of the City of Ottawa.
Under the COSF plan, pensions are indexed at 55% of inflation. In 2005 City Council agreed to assist with full indexation by providing for the remaining 45% of inflation indexing from the City budget. The COSF Board approved that if in any year the COSF plan is in a surplus, that the City be reimbursed for the costs of providing the indexation.
The 2011 budget currently contains $1 million to fund this inflation top-up. Projections for 2012 are that the inflationary provision will require $1.3 million. As the additional indexing provision was a Council policy decision, Council has the ability to stop funding the provision, as a means of providing budget room to fund deficit payments. Staff are not recommending this as an option. The total cost to the City of continuing this 45% top-up in indexing for future years is $26 million in net present value terms. If the City stops the top up after the 2011 indexation, the future cost is $9 million.
Managing Pension Plan Obligations in the Municipal Sector (OMERS)
As previously stated, the City currently has an annual funding obligation of $3.258 million toward the COSF pension deficit. While this report recommends that funding for this payment in 2012 and 2013 be funded from a reserve, a longer term solution is required.
OMERS staff are in discussions with several municipalities who have legacy pension plans, including the City of Ottawa, in order to discuss opportunities for synergies. The City of Toronto recently approved that staff work with OMERS to develop a plan to merge their five legacy funds.
The OMERS Plan is a large multi-employer defined benefit plan with more than 400,000 members from about 930 employers. OMERS is a large, experienced pension fund investor pursuing a global investment mandate with total assets of $53 billion as of December 2010, and is a direct investor of over $25 billion in the Ontario and other regional Canadian economies through major infrastructure, real estate and energy assets.
The provincial budget issued in spring 2011 noted there are more than 70 broader sector pension plans and the need to consolidate them – this is consistent with the Expert Commission on Pensions’ call for plans to merge together in many ways to promote more efficient and effective pension plans. For this reason OMERS is interested in pursuing discussions around COSF.
City staff are recommending that the City work with OMERS to explore two options for changes in how the City administers COSF. The options are:
1. Full Merger with the OMERS Plan;
2. Investment Management by OMERS Investment Management (“OIM”), an authorized subsidiary of OMERS Administration Corporation.
OMERS and City staff have had initial discussions on these options. Preliminary modelling of the option to merge the COSF with OMERS shows that the City could eliminate its future special payment obligation of $3.258 million per year. OMERS is exempt from having to make special payments for solvency deficiencies and OMERS is able to use a different set of actuarial assumptions when determining pension liabilities. The modelling is based on financial reports at the end of 2010 and recent financial market changes could impact the analysis. Under a merger, all of the assets and liabilities of COSF would be transferred to the OMERS Plan.
It is important to note that the financial modelling looks at the cost of what the COSF pension plan provides for in terms of indexing, which is the 55%. Any additional indexing to the 100% level would need to be reviewed and a determination made as to how to proceed.
Under Bill 236 there are new provisions of the Pension Benefits Act which could make completing any merger more efficient. Bill 236 has received royal assent but the corresponding regulations have not been released. Any merger would take at least 12 to 24 months to complete as the regulations provide the details needed to complete a merger.
Short of a full merger, there may also be opportunities for the transfer of investment assets in order to achieve possible efficiencies and higher investment returns by participating in a substantially larger and more diversified investment pool. The COSF engages external fund managers to administer the investments. The City plan and OMERS have different investment profiles and there may be opportunities to achieve lower costs and/or greater returns by having OIM perform the investment function. The recommended review would analyse the costs, risks and benefits of such an option.
The preliminary analysis has been conducted in an effort to narrow the options with the intent of undertaking further analysis on options that are most likely to improve the City's financial position by minimizing or eliminating special payment requirements, while continuing to protect the interest of the Pension Plans and its members.
Should Council approve the recommendation in this report, OMERS staff will begin an in depth analysis of the options. At the same time, City staff would begin its own due diligence process to identify potential obstacles or issues under relevant municipal legislation which could prevent a merger; and establish the necessary plan amendments, changes to by-laws, resolutions and actuarial certifications to effect the merger.
The City will be required to engage the services of the plan’s actuaries and legal advisors for this in depth review of pension administration options. This report recommends that funding for this work be provided from the Vested Employee Benefits Reserve Fund. Staff estimates that these costs will not exceed $200,000.
There are no rural implications to implementing the proposed recommendations in this report.
The Board of the City of Ottawa Superannuation Fund is aware of requirement for the City, as plan sponsor, to fund the required annual special payments. The Board has also been advised of the discussions with OMERS and will continue to be consulted, where necessary, on this item.
This is a City Wide item.
As noted in the discussion above, with no remaining active members, the City of Ottawa is legally obliged to fund any plan deficits. Any change in the status of the City of Ottawa Superannuation Fund will require concurrence from the Board of Trustees of the Fund, and to the extent additional funding is required, Council.
RISK MANAGEMENT IMPLICATIONS
There are no technical implications.
The current required funding is $3.258 million for the COSF special payment will be included in the draft 2012 budget. Should Council approve the recommendations in this report, the 2012 requirement will be funded from the Vested Employee Benefits Reserve.
The 2011 base budget includes $1 million to top-up the inflationary indexing to 100% for COSF members. The 2012 estimate is $1.3 million. The additional amount of $300,000 will be included as a 2012 budget pressure.
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If the recommendations are approved, this report will be submitted to City Council for its consideration at the next available Council meeting.