uwaterloo.ca · 2021. 1. 19. · Board of Governors PENSION & BENEFITS COMMITTEE Friday 11 November 2016 9:30 a.m. to 12:00 noon NH 3318 OPEN SESSION ACTION 9:30 1. Welcome to new

Board of Governors PENSION & BENEFITS COMMITTEE

Friday 11 November 2016 9:30 a.m. to 12:00 noon

NH 3318

OPEN SESSION

ACTION

9:30 1. Welcome to new member

9:35 2. Approval of the 7 October 2016 Minutes* and Business Arising

Decision

9:40 3. Execution Against the Work Plan*

Information

9:45

4. Update on Government Pension Plan Initiatives [Shapira] Information

10:05 5. Q3 Dashboard – Funded status at Sept 30* [Shapira]

Information

10:40 6. Asset Liability Study – Risk Diagnosis* [Byron]

Information

11:00 7. Moment of silence

11:02 8. Break

11:15 9. Request for Credit for Past Service* [Thompson/Hornberger]

Information

11:30

10. Indexation of Benefits Maxima* [Hornberger]

Decision

11:45 11. Report from RPPI Subcommittee*[Hardy/Stewart]

11:50 12. Other business Discussion

11:55 13. Proceed into Confidential Session

11:55

CONFIDENTIAL SESSION

14. Approval of the 7 October 2016 Minutes (Confidential)* and Business Arising

Next Meeting: Friday 9 December 2016, 9:30 a.m. – 12:00 noon, NH 3318

*attached ** to be distributed

10 November 2016 Sian Williams

Senior Legal Counsel

Future Agenda Items: • Report to the Community

Please convey regrets to Terri Rau at 519-888-4567 x37549 or [email protected]

P&B 11 Novemer 2016 Page 1 of 125

mailto:[email protected]

University of Waterloo Board of Governors

PENSION & BENEFITS COMMITTEE Minutes of the 7 October 2016 Meeting

Present: Monika Bothwell, Lori Curtis, Stewart Forrest, Peter Forsyth, Mary Hardy, Dennis Huber, David Kibble, Ramesh Kumar, Ian Orchard, Michael Steinmann, Marilyn Thompson, Christine Wagner, Karen Wilkinson

Regrets: Marta Witer

Administration: Lee Hornberger Guests: Linda Byron, Allan Shapira

Secretariat: Sian Williams, Terri Rau

Organization of Meeting: Karen Wilkinson took the chair and Sian Williams acted as secretary. The secretary advised that a quorum was present. The agenda was approved without formal motion. 1. MINUTES OF THE 9 SEPTEMBER 2016 MEETING AND BUSINESS ARISING A motion was heard to approve the minutes as distributed. Wagner and Kibble. Carried. There was no business arising from the minutes. 2. EXECUTION AGAINST THE WORK PLAN The report was received for information. Wilkinson advised that the committee was on schedule.

3. PENSION ADMINISTRATION SYSTEM IMPLEMENTATION Hornberger provided a verbal update. It was explained that the one week lag between the pension administration system being deemed functional and the system going live was due to the requirement to have the most accurate data available. A robust communication plan is in place for the launch of the system through lunch and learn sessions, the Daily Bulletin, and a letter to plan members. Wilkinson commented that any delay has been very minimal and that the process followed has been very good. 4. UPDATE ON GOVERNMENT PENSION PLAN INITIATIVES Shapira reminded the committee that at the last meeting on 9 September 2016 he had provided an in depth update on the Government Pension Plan Initiatives, and that he had presented the Aon Hewitt report entitled “Review of Ontario’s Solvency Funding Framework for Defined Benefit Plans (Consultation Paper) (the “Report”). Shapira reminded members that therefore two possible approaches to solvency which the government is currently considering. These were outlined in the Report: Approach A - Modify Solvency Funding Rules, and Approach B - Eliminate Solvency Funding and Strengthen Going Concern Funding. At the last meeting various options had been discussed, including the possibility of paying for a customizable template to make submission to the Ontario government in regard to the proposed solvency framework. Shapira informed the committee that since the last meeting he was now of the opinion that no formal submissions to the Ontario government is required at this time. Members agreed that no action was required. No decision was therefore taken by the committee in regard to this item.

5. ESTIMATED CURRENT SERVICE COSTS ASSUMING ACTUARIAL ASSUMPTION

CHANGES IN 2017 Byron presented the Aon Hewitt report entitled “Update on Current Discount Rate Environment and Possible Impact on University of Waterloo Pension Plan Actuarial Valuation as at January 1, 2017”. Byron noted that the next actuarial valuation of the Pension Plan at January 1, 2017 is required to be filed with the regulators. This valuation will establish the minimum required University contributions for the next three years of 2017 through 2019, or until a new valuation is filed with the regulators. Bryon took the committee through a discussion of the discount rate and the impact of a 0.20% reduction in the discount rate. Byron indicated that based on current economic conditions, it is likely that the discount rate used for the 2017 valuation will be lower than the January 1, 2014 filed valuation and the January 1, 2016 valuation prepared for plan management purposes. Byron referred to the going concern funded status and going concern liability on page 8 of the distributed materials, and indicated that a 0.20% reduction in


discount rate would result in an increase in liability of approximately $42 million as at June 30, 2016, increasing the going concern deficit to around $104 million (after eliminating the funding reserve of $44.4 million). The university current service cost and impact on university contributions shown on page 9 of the distributed materials were also discussed. Shapira noted that over the course of the upcoming year, the committee will need to review contributions in more detail.

6. CPP ENHANCEMENT IMPACT Shapira reminded the committee that at the last meeting on 9 September 2016 he had presented the report entitled “Impact of CPP Enhancement on University of Waterloo (UW) Pension Plan”. Shapira referred again to this presentation, and advised that the bill to enhance the CPP had been released the day prior, on 6 October 2016. Shapira took the committee through the presentation again. The structure of the CPP enhancement was thoroughly discussed. It was noted again that full funding requirements for any CPP enhancement means that contributions, benefit entitlements and payments and funding associated with the enhancement will have to be accounted for separately. CPP enhancement contributions and benefit accruals will start 1 January 2019, with phase-in of contributions and benefits over the period until 2025.

7. OTHER BUSINESS There was no other business arising.

8. NEXT MEETING The next meeting is on Friday 11 November 2016 from 9:30 a.m. – 12:00 p.m. in Needles Hall Room 3318.

With no additional business in open session, the Committee proceeded into confidential session.

1 November 2016 Sian Williams

Senior Legal Counsel


Pension & Benefits Committee, Board of Governors, University of Waterloo Execution against Work Plan

The below represents the annual responsibilities of the P&B Committee and has been prepared as an aid to planning only. The committee’s activities are much broader, however, and include: legislative changes, plan changes and improvements; selection of managers and service providers; and requests from the UW community regarding pension and benefits plans.

1 The 2015 version of the SIPP was approved by the Board of Governors at its 27 October 2015 meeting. There is also a need to consult with the community on the incorporation of environmental, social and governance factors into investment decision-making. So the annual review of the SIPP will be deferred until after consultation takes place. 2 1 January 2014 Actuarial Valuation Report was filed in July 2014.

Task Frequency 13 Nov 2015

11 Dec 2015

15 Jan 2016

26 Feb 2016

11 Mar 2016

20 May 2016

17 Jun 2016

9 Sept 2016

7 Oct 2016

11 Nov 2016

Approval of Actuarial Valuation Assumptions Annual

Approval of the Statement of Investment Policies and Procedures (SIPP)

Annual 1 1

Preliminary Valuation Results (RPP and PPP) Annual

Actuarial Valuations (RPP and PPP) Annual

Actuarial Filing2 Minimum every three years

Cost-of-living adjustment to payroll pension plan limit

Annual

Cost-of-living Increase for Pensioners Annual

Pensions for Deferred Members Annual

Salaries for Pension Purposes for Individuals on Long-term Disability

Annual

Benefits Plan Premium Renewals Annual

Indexing of Long-term Disability Plan Benefits and Maxima

Annual


3 Conducted online in May 2015 4 Completed in September 2016

Task Frequency 13 Nov 2015

11 Dec 2015

15 Jan 2016

26 Feb 2016

11 Mar 2016

20 May 2016

17 Jun 2016

9 Sept 2016

7 Oct 2016

11 Nov 2016

Investment Status of PPP Annual

Review of Contribution and Protocol Caps (RPP and PPP)

Annual

Budget Overview Annual

Benefits/Financial Analysis Report Annual

Cost of Removing Life-time Maximum on Out-Of-Province Health Care Coverage for Retirees

Annual

Investment Manager Review (provided under reports from RPPI)

Twice 4

Total Fund Overview (provided under reports from RPPI)

Quarterly 4

Flexible Pension Plan Annual

Previous Years’ Fees and Expenses Annual

Annual Audit of the Pension Plan Fund Financial Statements

Annual

Annual Report to the Community Annual

Indexing of Health and Dental Plan Maxima Annual

Committee Evaluation3 Annual


University of WaterlooAs of September 30, 2016

To protect the confidential and proprietary information included in this material, it may not be disclosed or provided to any third parties without the approval of Aon Hewitt.

Pension Risk Management Dashboard


2

About This Material

This dashboard was prepared for the University of Waterloo to track changes in funded status of the Pension Plan over successive reporting periods, as well as quantify the amount of risk to which the Pension Plan is exposed. The report presents the funded status and performs the analysis on three bases:

Risk-Free Benchmark Basis – This liability is calculated using best estimate assumptions for retirement, termination and other demographic experience, and a discount rate and inflation assumption determined with reference to the risk-free environment. For this report, the liability has been determined at the real return bond yield plus a 40 basis point credit spread to reflect additional yield that can be achieved with relatively little additional risk. This liability differs from the solvency calculation in that the demographic assumptions are best estimate and statutory “grow-in” provisions are not included.

Going Concern Basis – This liability is calculated using the going concern assumptions at the most recent valuation. The analysis is performed using the market value of assets without regard to the Funding Reserve established in the most recent valuation. This Funding Reserve was established to reflect gains from the sale of the real return bonds. A separate line item showing the funded ratio reflecting the funding reserve is included on page 3.

Solvency Basis – This liability is calculated using assumptions determined in accordance with the Canadian Institute of Actuaries Annuity Purchase guidance and Commuted Value standards in effect at each measurement date shown in this report. A summary of these assumptions is included on page 8.

This dashboard also contains a reconciliation that compares the going concern liability with the liability calculated using the risk-free benchmark. The difference between the two liabilities represents the amount of return expected to be provided by taking on risk in the investment portfolio. Over successive quarters the tool helps quantify how that risk changes as the underlying interest rates change.

On both bases the following information is shown:

■ Current Funded Status and Historical Asset Liability Performance

— How well funded is the plan?

— What has been the return on plan assets and liabilities?

■ Detailed Asset and Liability Performance Attribution

— What factors drove the performance of assets and liabilities over the prior period?

— What is the relative impact of these factors on the assets and liabilities in isolation and in combination?

For the Risk-Free Benchmark Basis, the following information is also shown:

■ Scenario Testing

— What risk exposures does the plan face?

— What would be the impact of a downside event for each risk factor?



3

Executive Summary – Going ConcernFunded Status

Asset-Liability Return

Highlights for the Quarter-Ending 9/30/2016The plan's funded ratio increased to 98.2% at 9/30/2016. This result was primarily due to the combined effects of:

■ Asset performance exceeding expectations,

■ Contributions of $19.5 million, and

■ An increase in liabilities primarily due to interest growth.

Asset Liability Return for Quarter-Ending 9/30/2016Assets returned 3.7% during the quarter while liabilities returned 1.4%, resulting in a funded status increase of 2.3%.

Values in $1,000,000

9/30/15 12/31/15 3/31/16 6/30/16 9/30/16 Market Value of Assets $ 1,354.9 $ 1,402.7 $ 1,409.3 $ 1,442.9 $ 1,499.0 Going Concern Liability 1,441.6 1,453.7 1,483.8 1,505.1 1,526.1 Surplus/(Deficit) $ (86.7) $ (51.0) $ (74.5) $ (62.2) $ (27.1)

Periodic Contributions $ 18.7 $ 18.6 $ 19.2 $ 19.5 Effective Interest Rate 5.75% 5.75% 5.70% 5.70% 5.70%

Funded Ratio (Market): 94.0% 96.5% 95.0% 95.9% 98.2%Funded Ratio (Actuarial)1: 90.9% 93.4% 92.0% 92.9% 95.3%

Asset Duration 1.9 1.9 1.8 2.1 2.1

Going Concern Liability Duration 14.2 14.2 14.0 14.0 14.0

Periodic Return/Change

Cumulative12 Months 12/31/15 3/31/16 6/30/16 9/30/16

Market Value of Assets Return 9.7% 3.3% 0.3% 2.2% 3.7%

Going Concern Liability:

Return 5.8% 0.8% 2.1% 1.4% 1.4%

Funded Ratio Change (Market) 4.2% 2.5% -1.5% 0.9% 2.3%


1Reflects funding reserve of $44.4 million due to sale of Real Return Bonds


4

Executive Summary – Risk-Free BenchmarkFunded Status





■ An increase in liabilities due to a decrease in the risk-free rate and an increase in inflation expectations.



9/30/15 12/31/15 3/31/16 6/30/16 9/30/16 Market Value of Assets $ 1,354.9 $ 1,402.7 $ 1,409.3 $ 1,442.9 $ 1,499.0 Risk-Free Liability 2,318.2 2,350.0 2,441.0 2,552.0 2,627.9 Surplus/(Deficit) $ (963.3) $ (947.3) $ (1,031.7) $ (1,109.1) $ (1,128.9)

Periodic Contributions $ 18.7 $ 18.6 $ 19.2 $ 19.5 Discount Rate 1.09% 1.05% 0.89% 0.70% 0.59%

Funded Ratio: 58.4% 59.7% 57.7% 56.5% 57.0%

Assets Duration: 1.9 1.9 1.8 2.1 2.1Risk-Free Liability Duration: 18.6 18.7 18.6 19.0 19.1




Risk-Free Liability: Return 10.2% 0.5% 3.3% 3.8% 2.3%

Funded Ratio Change -1.4% 1.3% -2.0% -1.2% 0.5%



5

Reconciliation of Risk-Free Benchmark and Going Concern Funded Status

*Going Concern

The difference between the Risk-Free Liability and the Going Concern Liability is a measure of the amount of risk premium on which the Pension Plan funding is based.


9/30/15 12/31/15 3/31/16 6/30/16 9/30/16 Market Value of Assets $ 1,354.9 $ 1,402.7 $ 1,409.3 $ 1,442.9 $ 1,499.0

Going Concern Liability $ 1,441.6 $ 1,453.7 $ 1,483.8 $ 1,505.1 $ 1,526.1 Risk Premium 876.6 896.3 957.2 1,046.9 1,101.8

Risk-Free Liability $ 2,318.2 $ 2,350.0 $ 2,441.0 $ 2,552.0 $ 2,627.9



6

Executive Summary – Solvency Funded Status





■ An increase in liabilities primarily due to a decrease in risk-free rates, and accruals.



9/30/15 12/31/15 3/31/16 6/30/16 9/30/16 Market Value of Assets $ 1,354.9 $ 1,402.7 $ 1,409.3 $ 1,442.9 $ 1,499.0 Solvency Liability 1,608.1 1,690.0 1,749.6 1,806.9 1,855.6

Surplus/(Deficit) (Before Expenses) $ (253.2) $ (287.3) $ (340.3) $ (364.0) $ (356.6)

Periodic Contributions $ 18.7 $ 18.6 $ 19.2 $ 19.5 Effective Interest Rate 3.17% 3.01% 2.86% 2.77% 2.69%

Funded Ratio: 84.3% 83.0% 80.6% 79.9% 80.8%

Assets Duration: 1.9 1.9 1.8 2.1 2.1

Solvency Liability Duration: 14.2 14.4 14.7 14.9 15.0




Solvency Liability: Return 13.0% 4.7% 3.0% 2.7% 2.1%

Funded Ratio Change -3.5% -1.3% -2.4% -0.7% 0.9%



7

Appendix



8

Actuarial AttestationThis document is intended to provide to the University of Waterloo a summary of the performance of the Pension Plan as of 9/30/2016.

This analysis is intended to assist University of Waterloo with a review of the associated issues and options, and its use may not be appropriate for other purposes. This analysis has been prepared solely for the benefit of University of Waterloo. Any further dissemination of this report is not allowed without the written consent of Aon Hewitt.

In conducting the analysis, we have relied on plan design, demographic and financial information provided by other parties, including the plan sponsor. While we cannot verify the accuracy of all the information, the supplied information was reviewed for consistency and reasonableness. As a result of this review, we have no reason to doubt the substantial accuracy or completeness of the information and believe that it has produced appropriate results.

Experience different than anticipated could have a material impact on the ultimate costs of the benefits. In addition, changes in plan provisions or applicable laws could have a substantial impact on cost. Actual experience may differ from our modeling assumptions.

October 31, 2016

Actuarial Methods & AssumptionsOur analysis of the estimated financial position of the Pension Plan is based on the following:

Plan Provisions & Membership DataSame as in the Actuarial Valuation Results as of January 1, 2016 presentation to the Pension and Benefits Committee Meeting dated February 26, 2016

9/30/15 12/31/15 3/31/16 6/30/16 9/30/16Going ConcernDiscount Rate 5.75% 5.75% 5.70% 5.70% 5.70%Inflation 2.00% 2.00% 2.00% 2.00% 2.00%

Risk-Free BenchmarkDiscount Rate 1.09% 1.05% 0.89% 0.70% 0.59%

SolvencyAnnuity Purchase Interest Rate 3.21% 3.04% 2.87% 2.84% 2.76%Effective Date of Annuity Purchase Guidance Used 9/30/15 12/31/15 12/31/15 6/30/16 6/30/16Lump Sum Value Interest Rate (Years 1-10)1 2.00% 1.90% 1.90% 1.70% 1.60%Lump Sum Value Interest Rate (Years 10+)1 3.70% 3.60% 3.40% 3.10% 3.00%Mortality CPM2014 CPM2014 CPM2014 CPM2014 CPM2014

All other assumptions and methods are the same as those shown in the Actuarial Valuation Results as of January 1, 2016 presentation to the Pension and Benefits Committee Meeting dated February 26, 2016. For the Risk-Free Benchmark basis, all other assumptions and methods are the same as those used for Going Concern basis.

1 Lump Sum Value Interest Rates are based on rates in effective on the first day of the month following quarter end (i.e. January 1st, April 1st, July 1st and October 1st).



9

Liabilities

AssetsAsset-Liability Performance Attribution – Going Concern

■ Overall, assets returned 3.7% during this quarter, as opposed to an expected growth assumption of about 1.2% per quarter.

■ The fixed income assets gained value due to a decrease in the underlying risk-free rates and shrinking credit spreads.

■ The plan's return-seeking assets performed better than expected.

■ $19.5 million in contributions were made during the quarter and the trust paid $15.6 million in benefits to the participants.

■ Liabilities as of 9/30/2016 are based on a discount rate of 5.70%.

■ Liabilities were expected to grow by $21.1 million due to interest cost during the quarter.

■ New benefit accruals increased the liability by $15.5 million during the quarter.

■ Plan liabilities decreased by $15.6 million during the quarter as benefits were paid.


Funded Ratio

■ Contributions exceeded benefit accruals during the quarter, resulting in a net increase of 0.4% in the funded status.

■ Overall, assets returned 3.7% during this quarter, as opposed to an expected growth assumption of about 1.2% per quarter. As a result, there was an increase in funded status of 2.3%.



10

Liabilities

Assets

Asset-Liability Performance Attribution – Risk-Free Benchmark



■ The plan's return-seeking assets were a significant contributor to the performance of the portfolio.



■ Risk-free rates decreased, and inflation expectations increased, resulting in a net increase of $53.5 million ($29.2 million + $24.3 million)




Funded Ratio

■ Overall, the difference in exposure to risk-free rates between assets and liabilities combined with changes in risk-free rates resulted in a decrease in funded status of 0.6%.

■ Changes in inflation expectations resulted in a decrease in funded status of 0.5%.

■ Changes in credit spreads resulted in an increase in funded status of 0.1%.

■ Return-seeking assets performed better than expected, adding 0.7% to the plan's funded status during the period.

■ Contributions and benefit accruals during the quarter resulted in a net increase of 0.3% in the funded status.


$1,442.9 $1,499.0at 6/30/16 at 9/30/16

$17.0 $0.0 $3.1 $19.2 $19.5 $13.0 $0.8 ($15.6) ($0.9)$1,200

$1,300

$1,400

$1,500

ExpectedGrowth

Risk-FreeRates

Inflation CreditSpreads

ExcessReturnSeekingAssets

Contributions BenefitPayments

Expenses Other

$2,552.0 $2,627.9at 6/30/16 at 9/30/16

$13.6 $24.3 $0.0 $0.0 $23.6 $0.8 $29.2 ($15.6) $0.0 $2,400

$2,500

$2,600

$2,700

ExpectedGrowth

Risk-FreeRates



Accruals BenefitPayments

Expenses Other

56.5% 57.0%at 6/30/16 at 9/30/16

+0.4% -0.5% +0.1% +0.7% +0.3% +0.4%-0.6% -0.3% +0.0%54%

56%

58%

60%

ExpectedGrowth

Risk-FreeRates



Contributionsand

Accruals

BenefitPayments

Expenses Other


11

Liabilities

AssetsAsset-Liability Performance Attribution – Solvency



■ The plan's return-seeking assets were a significant contributor to the performance of the portfolio.



■ Risk-free rates decreased, and the annuity purchase spread was unchanged, resulting in a net increase of $24.0 million ($24.0 million + $0.0 million).




Funded Ratio

■ Overall, the difference in exposure to risk-free rates between assets and liabilities combined with changes in risk-free rates resulted in a decrease in funded status of 1.0%.

■ Changes in credit spreads and the annuity purchase spread resulted in a increase in funded status of 0.2%.

■ Return-seeking assets experienced gains during the quarter in excess of expected, adding 1.1% to the plan's funded status during the period.



12

Asset Allocation and Benchmarking

Asset Class 9/30/2016

Alternatives■ MSCI USA REIT Index 3.1%

■ MSCI USA Infrastructure Index 7.0%

Fixed Income■ FTSE TMX Universe Bond Index 53.5%

Equities■ MSCI World Index 32.8%

■ S&P TSX 3.7%

Total 100.0%



13

Glossary of Terms


■ Funded Status and Asset-Liability Return

— Liability Return reflects the growth in liability due solely to interest rate movements and excludes the impact of Accruals and Benefit Payments.

■ Asset Liability Performance Attribution

— Expected Growth reflects assets growing at the expected annual return and liabilities increasing at the interest rate.

— Risk-Free Rates splits out the expected movement in assets and liabilities based on movements in federal bond yields.

— Inflation splits out the expected movement in assets and liabilities based on movements in implied inflation, determined based on real and nominal federal bond yields.

— Credit Spreads splits out the expected movements in corporate and provincial bond yields in excess of federal bond yields.

— Excess Return-Seeking Assets defines the movement in the Return-Seeking assets based on benchmark returns in excess of expectations. The expectations are defined by the long-term capital market assumptions of the plan and are reflected in "expected growth".

— Benefit Payments displays the expected decrease in assets and liabilities due to benefit payments during the period.

— Contributions/Accruals displays the expected increase in assets and liabilities due to employer contributions and new benefit accruals, respectively.

— Other includes fixed income returns due to coupons and other active management effects, from the asset perspective. From a liability perspective, this bucket includes all liability changes not explained by financial movements during the period.


Presentation to the University of Waterloo Pension and Benefits Committee

Prepared by Aon Hewitt

Asset-Liability Study Risk Diagnosis Meeting | November 11, 2016 The University of Waterloo Pension Plan


Proprietary & Confidential | November 11, 2016 2 Aon Hewitt

Agenda

Section 1 Purpose and Objectives

Section 2 Risk Diagnosis

Section 3 Asset Classes and Constraints

Section 4 Project Plan

Appendix A Additional Results

Additional Metrics, Base Scenario

No Solvency Funding Scenario

Appendix B Liability Assumptions

Appendix C Capital Market Assumptions

Appendix D Detailed Explanation of Economic Scenario Generator



Project Workflow

Objectives

Context

Strategy Proposal

Implementation

Input & buy-in

from

Committee

Approval from

Committee

Objectives

Risk tolerance

Enterprise risk

Success metrics

Time horizon

Plan demographics

Regulations

Peer trends

Capital markets

Starting valuations

and outlook

Idea generation

Analyses

Testing & refining

Decision criteria for

trade-offs

Practical steps to

implement

Specify new

mandates

Transition plan

Monitoring link to

objectives



Section 1: Purpose and Objectives



Purpose of Report

Review the projection of key financial metrics for the current target asset mix

Agree on asset classes and constraints for further modeling

Identify any modifications required to assumptions and/or methodology



Pension-Related Objectives

The University seeks to:

– Provide long-term security of promised benefits to plan participants

– Ensure the long-term affordability and sustainability and equity of the plan

– Maintain a reasonable level and volatility of plan contributions for members and the University

Therefore the goal of an investment strategy is to minimize risk while maintaining sufficient return to

provide the promised benefits at a reasonable cost



Section 2: Risk Diagnosis



Risk Diagnosis

The Risk Diagnosis involves projecting the plan’s financial state over the next 10 years

– We project 1,000 stochastic scenarios with our economic scenario generator and we analyze key

variables in each scenario to evaluate the financial status of the plan

– The Risk Diagnosis allows assessment of the risks of the plan under the current target asset mix

The starting point for the Risk Diagnosis is the January 1, 2016 actuarial valuation

– Actual asset performance between January 1, 2016 and July 31, 2016 is reflected

– 2016 contribution requirements are based on the January 1, 2014 filed actuarial valuation

The going concern discount rate as of January 1, 2016 is 5.5% (0.2% lower than valuation results)

The projection reflects filing an actuarial valuation as at January 1, 2017 including the following

solvency relief measures:

– A new valuation is not required to be filed until January 1, 2020

– Solvency special payments for 2017, 2018, and 2019 are equal to the interest on the solvency

deficit to the extent that the interest exceeds the going concern special payments

The projection reflects filing an actuarial valuation as at January 1, 2020 including the following

solvency relief measures:

– Solvency special payments are amortized over a 7-year period

Actuarial valuations are filed on an annual basis thereafter

The maximum pension is assumed to be increased in line with the Income Tax Act maximum pension

each year, thereby creating losses once the current limit is breached

Ontario is expected to change solvency regulations over the next 10 years, however the projection

assumes that the current solvency funding regulations apply through the full analysis



Risk Diagnosis

The projection is based on the target asset mix:

Target Allocation

-Canadian Equity 15.0%

-Global Equity 40.0%

-Real Estate1 5.0%

-Infrastructure2 5.0%

-Cash 2.0%

-Customized Fixed Income3 33.0%

Total 100.0%

1 Currently invested in Canadian REITS. For the purposes of asset-liability modelling, this allocation will be modelled as Global REITS

2 Currently invested in shares of Brookfield Infrastructure Partners L.P. For the purposes of asset-liability modelling, this allocation will be modelled as

Listed Infrastructure

3 Currently invested in Active Short Term Corporate Bonds, Universe Bonds and US Treasury Bonds. For the purposes of asset-liability modelling, this

allocation will be modelled as Universe Bonds



Risk Diagnosis

Projections of the following measures are included:

– Demographic:

• Average age of active members

• Active liability as a percentage of total liability

– Financial

• Expected portfolio return

• University current service cost (% of pensionable earnings)

• University contributions (% of pensionable earnings)

• Going concern funded ratio

• Risk free liability funded ratio

• Solvency funded ratio

• Total Current Service Cost (% of pensionable earnings)



Risk Diagnosis

Average Age of Active Members

Consistent with the valuation assumptions , our projection assumes no members retire in the first

year. As a result, the average age of active members is projected to increase from 47.7 to 48.6 as of

1/1/2017, and then decreases to 47.4 at 1/1/2018 reflecting two years worth of retirements

After the initial period, members are assumed to retire when they reach the age of 64

The average age steadily increases from 47.4 to 48.3 as of 1/1/2021 and then remains stable over the

remainder of the projection period

The average age for active faculty members decreases slightly more at 1/1/2018, and then increases

more steadily over the projection period than for other members



Risk Diagnosis

Active Going Concern Liability as a Percentage of Total Going Concern Liability

Due to our assumption that no members retire in the first year, the proportion of going concern

liabilities attributed to active members increases from 55% to 59% after one year before stabilizing

between 50% and 53% over the remainder of the projection period



Risk Diagnosis

Description

The Risk Diagnosis charts on the following pages include the following information for each metric:

– 5th percentile (5% of scenarios are lower)

– 25th percentile

– 50th percentile (median)

– 75th percentile

– 95th percentile (5% of scenarios are higher)

– Conditional Tail Expectation (“CTE”)

• The CTE is the average of the 50 scenarios that are worse than the 5th or 95th percentile



Risk Diagnosis

Expected Portfolio Return

The mean 10-year

annualized return is 5.1%

The worst-case 10-year

annualized return is -0.9%

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 10-Year

95th Percentile 20.1% 20.3% 20.3% 20.7% 20.6% 20.0% 20.5% 20.1% 21.1% 20.9% 9.9%

75th Percentile 10.6% 11.1% 11.3% 11.5% 11.5% 11.4% 11.5% 11.7% 11.5% 12.2% 7.1%

Median 5.2% 5.2% 5.4% 5.3% 5.7% 5.8% 5.9% 6.1% 5.8% 6.0% 5.2%

25th Percentile -0.7% -0.6% -0.7% -0.7% -0.8% -0.1% -0.3% -0.8% -0.1% -0.4% 3.2%

5th Percentile -10.6% -10.0% -9.9% -9.4% -10.4% -9.7% -9.2% -9.4% -9.2% -9.6% 0.4%

Mean 5.0% 5.1% 5.3% 5.4% 5.5% 5.6% 5.7% 5.7% 5.8% 5.9% 5.1%

Standard Deviation 9.2% 9.1% 9.2% 9.2% 9.4% 9.1% 9.1% 9.1% 9.1% 9.4% 2.9%

CTE95 -14.2% -13.9% -14.1% -13.8% -14.1% -13.7% -13.6% -13.4% -13.2% -13.5% -0.9%



Risk Diagnosis

University Current Service Cost (% of pensionable earnings)

At the median, university

current service costs as

a % of pensionable

earnings are expected to

remain relatively stable

over the projection period

In the worst cases,

university current service

cost increases to over

10% of pensionable

earnings

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

95th Percentile 9.0% 9.0% 9.1% 9.3% 9.4% 9.6% 9.6% 9.8% 9.9% 10.1%

75th Percentile 9.0% 8.8% 8.8% 8.9% 9.0% 9.2% 9.4% 9.4% 9.6% 9.7%

Median 9.0% 8.8% 8.6% 8.7% 8.7% 8.8% 8.8% 9.0% 9.2% 9.1%

25th Percentile 9.0% 8.6% 8.4% 8.3% 8.3% 8.3% 8.5% 8.4% 8.5% 8.6%

5th Percentile 9.0% 8.4% 7.9% 7.7% 7.5% 7.6% 7.5% 7.5% 7.5% 7.6%

Mean 9.0% 8.7% 8.6% 8.6% 8.6% 8.7% 8.8% 8.9% 9.0% 9.1%

Standard Deviation 0.0% 0.2% 0.4% 0.5% 0.6% 0.6% 0.7% 0.7% 0.8% 0.8%

CTE95 9.0% 9.1% 9.2% 9.3% 9.4% 9.6% 9.7% 9.9% 10.0% 10.2%



Risk Diagnosis

University Contributions (% of pensionable earnings)

University contributions

will remain stable over

the next 4 years in

accordance with

solvency funding relief

provisions


contributions are

expected to increase to

just over 18% of

pensionable earnings

after the completion of

the 1/1/2020 actuarial

valuation, and are

projected to remain high

until 2023

The worst-case,

contributions after

1/1/2020 are between

40% and 55% of


2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

95th Percentile 11.2% 14.4% 14.3% 14.3% 36.6% 41.9% 43.5% 46.7% 46.7% 46.7%

75th Percentile 11.2% 12.2% 12.4% 12.7% 26.5% 29.1% 31.0% 30.5% 28.8% 24.2%

Median 11.2% 11.1% 11.4% 11.5% 18.4% 20.0% 19.5% 15.7% 12.5% 9.9%

25th Percentile 11.2% 10.6% 10.3% 10.3% 10.5% 9.4% 8.8% 8.6% 8.6% 8.5%

5th Percentile 11.2% 9.9% 8.9% 8.3% 7.3% 3.9% 0.0% 0.0% 0.0% 0.0%

Mean 11.2% 11.5% 11.4% 11.3% 19.3% 20.9% 20.8% 19.8% 18.6% 16.6%


CTE95 11.2% 15.2% 15.0% 14.9% 39.9% 46.5% 48.1% 52.0% 52.7% 54.1%



Risk Diagnosis

Going Concern Funded Ratio

At the median, the going

concern funded ratio is

expected to gradually

increase over the

projection period

– The asset return is

expected to be

slightly higher than

the discount rate

due to margin in the

setting of the

discount rate

In the worst cases, the

going concern funded

ratio is between 68% and

77%

1/1/2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

95th Percentile 90.4% 103.3% 112.1% 119.3% 123.7% 126.1% 129.3% 134.6% 135.7% 137.8% 143.5%

75th Percentile 90.4% 98.6% 102.7% 105.1% 106.6% 109.1% 111.9% 113.9% 115.6% 118.7% 119.7%

Median 90.4% 95.4% 96.1% 96.7% 96.8% 98.5% 100.2% 102.2% 104.4% 105.9% 107.3%

25th Percentile 90.4% 91.9% 89.4% 88.5% 87.0% 87.9% 89.6% 92.2% 93.8% 95.1% 95.7%

5th Percentile 90.4% 85.9% 79.4% 75.8% 72.9% 74.6% 77.5% 79.3% 80.8% 81.4% 81.5%

Mean 90.4% 95.2% 96.1% 96.8% 97.3% 99.3% 101.6% 103.9% 105.8% 107.6% 108.9%


CTE95 90.4% 84.0% 75.7% 71.2% 68.0% 69.6% 72.9% 74.2% 76.2% 76.2% 76.8%



Risk Diagnosis

Risk Free Liability Funded Ratio

At the median, the risk

free funded ratio is


increase over the

projection period


expected to be

higher than the risk

free discount rate


risk free funded ratio is

between 41% and 52%

1/1/2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

95th Percentile 53.5% 62.9% 68.4% 73.9% 77.8% 81.5% 85.5% 89.7% 93.6% 95.4% 99.1%

75th Percentile 53.5% 58.4% 61.5% 64.2% 66.2% 69.6% 72.2% 75.7% 77.6% 79.9% 82.4%

Median 53.5% 55.3% 57.0% 58.4% 59.8% 61.8% 64.3% 66.7% 69.0% 70.8% 72.8%

25th Percentile 53.5% 52.2% 52.7% 52.8% 53.0% 55.0% 57.6% 59.2% 62.0% 63.6% 64.6%

5th Percentile 53.5% 48.0% 45.8% 44.9% 44.4% 47.1% 48.9% 50.2% 52.3% 54.2% 55.5%

Mean 53.5% 55.3% 57.2% 58.8% 60.2% 62.7% 65.4% 68.0% 70.4% 72.5% 74.3%


CTE95 53.5% 46.7% 43.7% 42.2% 41.0% 43.1% 45.5% 47.3% 49.1% 50.6% 51.8%



Risk Diagnosis

Solvency Funded Ratio

At the median, the

solvency funded ratio is


increase over the

projection period


expected to be

higher than the

discount rate. This

is partially offset by

the cost of indexing

in each year


solvency funded ratio is

between 59% and 78%

1/1/2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

95th Percentile 79.5% 89.5% 99.6% 107.9% 115.9% 124.6% 129.5% 135.4% 141.0% 142.4% 147.0%

75th Percentile 79.5% 84.8% 89.7% 93.7% 97.2% 99.8% 104.2% 108.5% 112.6% 115.3% 119.1%

Median 79.5% 81.4% 83.6% 85.1% 86.6% 89.9% 92.7% 96.1% 98.1% 102.0% 103.8%

25th Percentile 79.5% 78.1% 77.4% 76.8% 76.9% 79.8% 82.3% 85.4% 88.1% 90.4% 91.9%

5th Percentile 79.5% 73.0% 68.8% 66.2% 63.9% 67.2% 70.4% 72.9% 75.9% 77.6% 79.1%

Mean 79.5% 81.4% 83.7% 85.7% 87.7% 91.2% 95.0% 98.7% 102.0% 105.0% 107.5%


CTE95 79.5% 71.2% 65.3% 61.8% 59.7% 62.8% 66.3% 67.9% 71.4% 73.3% 75.3%



Risk Diagnosis

Total Current Service Cost (% of pensionable earnings)

At the median, total

current service costs are

expected to relatively

stable as a % of


In the worst cases, total

current service costs

increase to over 17% of


7/8/1905 2017 2018 2019 2020 2021 2022 2023 2024 2025

95th Percentile 16.3% 16.3% 16.4% 16.6% 16.7% 16.9% 16.9% 17.1% 17.2% 17.4%

75th Percentile 16.3% 16.1% 16.1% 16.2% 16.3% 16.5% 16.7% 16.7% 16.8% 17.0%

Median 16.3% 16.1% 15.9% 16.0% 16.0% 16.1% 16.1% 16.3% 16.4% 16.4%

25th Percentile 16.3% 15.9% 15.7% 15.7% 15.6% 15.6% 15.8% 15.7% 15.8% 15.9%

5th Percentile 16.3% 15.7% 15.2% 15.0% 14.8% 14.9% 14.8% 14.8% 14.7% 14.9%

Mean 16.3% 16.1% 15.9% 15.9% 15.9% 16.0% 16.1% 16.2% 16.3% 16.3%


CTE95 16.3% 16.4% 16.5% 16.6% 16.7% 16.9% 17.0% 17.2% 17.3% 17.5%



Section 3: Asset Classes and Constraints



Asset Classes Considered in the Optimization1

Liability-Hedging Equity (Return-Seeking) Alternatives (Return-Seeking)

Universe Bonds Canadian Equity Listed Real Assets2

Long-Term Bonds Global Equity Direct Real Assets3

20+ Strips Emerging Markets

Real Return Bonds All Country World Index, Low Volatility4

Interest Rate Overlays

Private Debt

Multi-Asset Credit5

1 Details on all of the asset classes in the Aon Hewitt model, as well as descriptions of the underlying methodologies, can be found in Appendix C 2 Modeled as 50% Global REITS and 50% Listed Infrastructure 3 Modeled as 50% Direct Real Estate and 50% Direct Infrastructure 4 Modeled as 55% US Equity, Low Volatility, 30% International Equity, Low Volatility and 15% Emerging Markets, Low Volatility 5 Modeled as equal allocations to High Yield Bonds, Bank Loans, and Emerging Market Debt

Confirm each asset class listed above will be included in the optimization

Should portfolios excluding any of the asset classes be considered?



Proposed Constraints

The table below summarizes the portfolio constraints that we suggest be used for the Return-

Seeking Component (“RSC”) during the optimization of the asset allocation

The constraints are used to ensure that optimized portfolios are feasible

Current Target

Target

within RSC Minimum Maximum

Equities

- Canadian Equity 3.6% 15.0% 23.1%

- Global Equity 32.1% 40.0% 61.5%

- Emerging Markets 0.0% 0.0% 0.0% 15% of non-Canadian Equity

- ACWI, Low Volatility 0.0% 0.0% 0.0% 50% of non-Canadian Equity

Total Equities 35.7% 55.0% 84.6%

Alternatives

- Listed Real Assets 9.5%1 10.0% 15.4% 25% of RSC

- Direct Real Assets 0.0% 0.0% 0.0% 25% of RSC

Total Alternatives 9.5% 10.0% 15.4% 25% of RSC

Total Return-Seeking 45.2% 65.0% 100.0%

1 Currently invested in Canadian REITS and shares of Brookfield Infrastructure Partners L.P.



Proposed Constraints

The table below summarizes the portfolio constraints that we suggest be used for the Liability-

Hedging Component (“LHC”) during the optimization of the asset allocation

The constraints are used to ensure that optimized portfolios are feasible

Current Target

Target

within LHC Minimum Maximum

Liability-Hedging

- Cash 11.5% 2.0% 5.7%

- Universe Bonds 43.3%1 33.0% 94.3%

- Long-Term Bonds 0.0% 0.0% 0.0%

- 20+ Strips 0.0% 0.0% 0.0%

- Real Return Bonds 0.0% 0.0% 0.0%

- Interest Rate Overlays 0.0% 0.0% 0.0%

- Private Debt 0.0% 0.0% 0.0% 20% of LHC

- Multi-Asset Credit 0.0% 0.0% 0.0% 20% of LHC

Liability-Hedging 54.8% 35.0% 100.0%

1 Currently invested in Active Short Term Corporate Bonds (18.0%), Universe Bonds (21.0%), and US Treasury Bonds (4.4%)

For the purposes of asset-liability modelling, this allocation will be modelled as Universe Bonds



Section 4: Project Plan



Proposed Project Plan

Meeting Preparatory Activities Meeting Outcomes Timeline

Planning Meeting

/ Objective Setting

• Prepare discussion

document for

Planning Meeting

• Review plan and project objectives

• Identify asset classes to include in

analysis

• Confirm asset and liability assumptions

• Outcome: Assumptions set and

objectives understood and agreed

upon

September 9, 2016

Asset Class

Discussion with

Finance and

Investment

Committee

• Prepare subset of

Planning Meeting

document to discuss

asset mixes for study

• Outcome: F&I Committee provides

input into asset classes for the study

October 6, 2016

Risk Diagnosis • Run projection of plan

demographics and

stochastic projection

of assets and

liabilities

• Prepare discussion

document for Risk

Diagnosis meeting

• Review projected evolution of the plan’s

demographics

• Review the projection of plan liabilities

• Review the projection of the plan’s

funded status and contributions under

the current asset mix policy

• Confirm asset classes to include in

optimization

• Outcome: Determine the appropriate

measures for optimization

November 11, 2016



Proposed Project Plan

Meeting Preparatory Activities Meeting Outcomes Timeline

Optimization • Run stochastic

projections for a large

number of portfolios

• Rank portfolios

according to the

reward and risk

variables and draw an

efficient frontier line

• Determine the optimal asset allocation while

taking into account the plan’s commitments

and risk tolerance

• Optimization of the portfolio

• Outcome: Asset Mix strategy determined

January 20, 2017



Appendix A: Additional Results



Additional Metrics, Base Scenario



Risk Diagnosis

University Current Service Cost ($ millions)



expected to increase

steadily in line with

increases in pensionable

earnings

In the worst cases,

university current service

cost increase to over $50

million

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

95th Percentile 35.9 37.7 38.0 39.8 41.5 43.3 45.1 46.8 48.7 50.4

75th Percentile 35.9 36.9 36.7 38.2 39.7 41.2 42.7 44.4 46.1 47.5

Median 35.9 36.3 35.8 36.9 38.2 39.4 40.8 42.3 43.8 44.8

25th Percentile 35.9 35.6 34.6 35.3 36.3 37.2 38.5 39.6 40.9 41.9

5th Percentile 35.9 34.5 32.8 32.9 32.7 33.7 34.2 34.3 35.4 36.5

Mean 35.9 36.2 35.6 36.6 37.8 39.1 40.4 41.7 43.1 44.4

Standard Deviation 0.0 0.9 1.6 2.2 2.7 3.0 3.4 3.8 4.2 4.3

CTE95 35.9 38.0 38.4 40.3 42.3 44.2 46.0 47.8 49.8 51.5



Risk Diagnosis

University Contributions ($ millions)

University contributions

will remain stable over

the next 4 years in

accordance with

solvency funding relief

provisions


contributions are

expected to increase to

$81 million after the

completion of the

1/1/2020 actuarial

valuation, and are

projected to remain high

until 2023

The worst-case,

contributions after

1/1/2020 are between

$170 million and $270

million

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

95th Percentile 44.8 60.1 59.3 61.6 161.1 189.7 201.2 222.0 225.9 231.4

75th Percentile 44.8 50.8 51.6 54.2 116.3 132.1 141.6 144.1 137.8 117.8

Median 44.8 46.2 47.3 48.9 80.8 89.9 88.7 72.2 60.5 49.5

25th Percentile 44.8 44.0 42.6 43.3 46.9 43.2 40.5 40.7 40.8 40.7

5th Percentile 44.8 40.7 36.7 35.1 31.7 18.4 0.0 0.0 0.0 0.0

Mean 44.8 47.8 47.4 48.3 84.8 94.4 95.8 93.7 89.6 81.7


CTE95 44.8 63.3 62.8 64.3 177.2 211.6 224.5 248.7 258.3 269.6



Risk Diagnosis

Total Current Service Cost ($ millions)

At the median, total


expected to increase

steadily in line with

increases in pensionable

earnings

In the worst-case, total

current service costs

approach $90 million

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

95th Percentile 65.2 68.2 68.8 71.7 74.5 77.2 79.8 82.2 85.1 87.3

75th Percentile 65.2 67.3 67.1 69.5 72.0 74.4 76.5 79.0 81.5 83.6

Median 65.2 66.6 66.0 68.0 70.1 72.2 74.2 76.3 78.5 80.4

25th Percentile 65.2 65.9 64.7 66.2 68.1 69.6 71.6 73.4 74.9 76.6

5th Percentile 65.2 64.7 62.8 63.5 64.4 65.7 66.9 68.0 69.5 71.0

Mean 65.2 66.6 65.9 67.8 69.9 71.9 73.9 75.9 78.0 79.9


CTE95 65.2 68.6 69.4 72.5 75.8 78.5 81.2 83.8 86.7 89.1



Risk Diagnosis

Going Concern Interest Rate

1/1/2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

95th Percentile 5.50% 5.60% 5.75% 5.85% 5.95% 5.95% 6.05% 6.10% 6.15% 6.15% 6.20%

75th Percentile 5.50% 5.55% 5.60% 5.65% 5.70% 5.75% 5.75% 5.80% 5.85% 5.85% 5.85%

Median 5.50% 5.50% 5.55% 5.55% 5.60% 5.60% 5.65% 5.65% 5.65% 5.70% 5.70%

25th Percentile 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.55% 5.55% 5.55% 5.55%

5th Percentile 5.50% 5.45% 5.40% 5.40% 5.40% 5.40% 5.45% 5.45% 5.45% 5.45% 5.45%

Mean 5.50% 5.52% 5.55% 5.59% 5.62% 5.64% 5.67% 5.69% 5.71% 5.73% 5.75%


CTE95 5.50% 5.40% 5.35% 5.35% 5.35% 5.35% 5.40% 5.40% 5.40% 5.40% 5.40%



Risk Diagnosis

Risk Free Interest Rate

1/1/2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

95th Percentile 0.7% 1.2% 1.4% 1.6% 1.7% 1.9% 2.1% 2.2% 2.4% 2.5% 2.6%

75th Percentile 0.7% 0.9% 1.1% 1.3% 1.4% 1.6% 1.7% 1.7% 1.9% 1.9% 2.1%

Median 0.7% 0.7% 0.9% 1.1% 1.2% 1.3% 1.4% 1.5% 1.6% 1.6% 1.7%

25th Percentile 0.7% 0.6% 0.7% 0.8% 0.9% 1.0% 1.1% 1.2% 1.3% 1.4% 1.4%

5th Percentile 0.7% 0.3% 0.4% 0.5% 0.6% 0.7% 0.8% 0.9% 0.9% 1.0% 1.0%

Mean 0.7% 0.7% 0.9% 1.1% 1.2% 1.3% 1.4% 1.5% 1.6% 1.7% 1.7%


CTE95 0.7% 0.2% 0.3% 0.3% 0.5% 0.6% 0.6% 0.7% 0.7% 0.8% 0.8%



Risk Diagnosis

Solvency Interest Rate

1/1/2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

95th Percentile 2.7% 3.1% 3.8% 4.3% 4.7% 5.0% 5.4% 5.7% 6.1% 6.1% 6.3%

75th Percentile 2.7% 2.9% 3.2% 3.5% 3.7% 4.0% 4.1% 4.3% 4.5% 4.6% 4.7%

Median 2.7% 2.7% 2.9% 3.1% 3.2% 3.4% 3.5% 3.6% 3.6% 3.8% 3.9%

25th Percentile 2.7% 2.6% 2.6% 2.7% 2.8% 2.9% 2.9% 3.0% 3.1% 3.2% 3.2%

5th Percentile 2.7% 2.4% 2.3% 2.3% 2.4% 2.4% 2.5% 2.5% 2.6% 2.6% 2.7%

Mean 2.7% 2.7% 2.9% 3.1% 3.3% 3.5% 3.6% 3.8% 3.9% 4.0% 4.1%


CTE95 2.7% 2.3% 2.2% 2.2% 2.3% 2.3% 2.3% 2.3% 2.4% 2.4% 2.5%



No Solvency Funding Scenario



Risk Diagnosis – No Solvency Funding Scenario

University Contributions (% of pensionable earnings)

Removing solvency

funding reduces the

volatility and worst-case

contributions compared

to the base scenario

In 2025:

– Standard deviation

decreases from

14% to 7%

– CTE decreases

from 54% to 29%

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

95th Percentile 11.2% 14.4% 14.3% 14.1% 20.7% 21.9% 22.5% 24.2% 24.8% 25.8%

75th Percentile 11.2% 12.2% 12.1% 12.0% 14.8% 15.7% 16.4% 16.5% 17.4% 17.5%

Median 11.2% 10.8% 10.6% 10.6% 10.5% 10.4% 10.8% 10.9% 11.1% 11.2%

25th Percentile 11.2% 9.3% 9.2% 9.1% 8.7% 8.8% 8.9% 8.8% 9.0% 9.0%

5th Percentile 11.2% 8.6% 8.4% 8.2% 7.5% 6.4% 0.7% 0.0% 0.0% 0.0%

Mean 11.2% 11.0% 10.8% 10.6% 11.8% 12.1% 12.3% 12.5% 12.7% 12.9%


CTE95 11.2% 15.2% 15.0% 14.9% 22.8% 24.3% 25.2% 26.8% 27.8% 28.9%




Going Concern Funded Ratio

Removing solvency

funding reduces the

median and worst-case

funded ratios due to

reduced contributions in

adverse market

conditions

As at 1/1/2026 :

– Median funded ratio

decreases from

107% to 96%

– CTE funded ratio

decreases from

77% to 64%

1/1/2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

95th Percentile 90.4% 103.3% 112.0% 118.9% 123.2% 124.9% 127.0% 132.5% 133.8% 135.3% 141.2%

75th Percentile 90.4% 98.6% 102.6% 104.8% 106.1% 107.3% 109.0% 109.1% 110.1% 110.9% 111.9%

Median 90.4% 95.4% 96.0% 96.4% 96.4% 96.1% 95.5% 95.5% 95.7% 96.0% 96.3%

25th Percentile 90.4% 91.9% 89.3% 88.2% 86.7% 85.0% 83.9% 84.4% 83.5% 83.8% 83.0%

5th Percentile 90.4% 85.9% 79.3% 75.1% 72.2% 71.4% 71.6% 69.7% 70.0% 68.9% 68.7%

Mean 90.4% 95.2% 95.9% 96.5% 96.8% 97.1% 97.4% 97.8% 98.2% 98.6% 99.2%


CTE95 90.4% 84.0% 75.7% 70.9% 67.3% 66.0% 66.2% 65.0% 64.9% 64.3% 63.7%




Risk Free Liability Funded Ratio

1/1/2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

95th Percentile 53.5% 62.9% 68.2% 73.5% 77.8% 81.0% 84.8% 88.2% 92.1% 93.4% 96.8%

75th Percentile 53.5% 58.4% 61.5% 64.1% 66.0% 68.3% 70.1% 72.7% 73.5% 75.4% 76.9%

Median 53.5% 55.3% 56.9% 58.3% 59.6% 60.3% 61.5% 62.1% 63.3% 64.2% 65.4%

25th Percentile 53.5% 52.2% 52.6% 52.7% 52.9% 53.5% 53.8% 54.4% 54.7% 55.8% 56.4%

5th Percentile 53.5% 48.0% 45.8% 44.8% 44.1% 44.7% 44.9% 44.6% 45.5% 45.7% 46.1%

Mean 53.5% 55.3% 57.1% 58.6% 59.9% 61.3% 62.7% 64.1% 65.3% 66.5% 67.7%


CTE95 53.5% 46.7% 43.7% 42.1% 40.5% 40.9% 41.4% 41.4% 41.5% 42.4% 42.5%




Solvency Funded Ratio

1/1/2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

95th Percentile 79.5% 89.5% 99.5% 107.6% 115.4% 124.1% 129.4% 134.7% 139.2% 140.4% 143.8%

75th Percentile 79.5% 84.8% 89.5% 93.2% 96.9% 98.6% 101.7% 104.7% 107.7% 109.9% 113.1%

Median 79.5% 81.4% 83.5% 84.8% 86.2% 88.0% 89.0% 90.2% 90.5% 92.3% 93.8%

25th Percentile 79.5% 78.1% 77.3% 76.4% 76.3% 76.9% 77.1% 78.1% 78.7% 79.0% 78.8%

5th Percentile 79.5% 73.0% 68.8% 66.0% 63.3% 64.0% 64.3% 63.7% 64.1% 64.3% 65.5%

Mean 79.5% 81.4% 83.6% 85.5% 87.3% 89.3% 91.2% 93.1% 94.9% 96.5% 98.2%


CTE95 79.5% 71.2% 65.3% 61.6% 59.1% 59.3% 59.6% 58.6% 59.1% 59.2% 60.2%



Appendix B: Liability Assumptions



Current State Financial Position – June 30, 2016 ($ Millions)

Going

Concern

Basis

Risk Free

Basis

Solvency

Basis

Liability $ 1,505.1 $ 2,552.0 $ 1,806.9

Assets 1,442.9 1,442.9 1,442.41

Surplus (Deficit) $ (62.2) $ (1,109.1) $ (364.5)

Funded Ratio 0.96 0.57 0.80

Employer Portion of

Normal/Incremental Cost $ 31.8 $ 59.4 $ 68.2

As a % of Liability 2.1% 2.3% 3.8%

Nominal Discount Rate 5.7% 2.1% 2.8%

Indexation 2.0% 1.4% 0.0%

Real Discount Rate 3.7% 0.7% n/a

Liability Growth Rate:

• 3.8% + 2.8% = 6.6%

Interest-Only Growth Rate:

• 2.8%

1 Reduced by estimated wind-up expenses of $500,000



Liability Projection Assumptions

Salary Increases Simulated inflation + 2.00%

Increases in YMPE and Maximum Pension

Under ITA Simulated inflation + 0.75%

Retirement, Withdrawal and Mortality Rates In accordance with January 1, 2016 going concern assumptions

Cost of Living Adjustments In accordance with plan provisions and simulated inflation

New Entrants Stable population;

New entrant profile based on recent plan experience



Going Concern Valuation Assumptions

Interest Rate Set in accordance with asset mix and varying according to simulated

Government of Canada bond yields for the portion of the portfolio that

is fixed income

Salary Increases 4.00%


Under ITA 2.75%




Risk-Free Valuation Assumptions

Interest Rate Varying with simulated real bond yields

Salary Increases 4.00%


Under ITA 2.75%




Solvency Valuation Assumptions

Interest Rate Varying with simulated Government of Canada nominal bond

yields

Mortality Rates CPM 2014 combined mortality table with CPM improvement

Scale B



Appendix C: Capital Market Assumptions



Pension Plan’s Current and Target Asset Allocation

Current Allocation Target Allocation

Return-Seeking

-Canadian Equity 3.6% 10.0%

-Global Equity 32.1% 45.0%

-Real Estate1 3.3% 5.0%

-Infrastructure2 6.2% 5.0%

Total Return-Seeking 45.2% 65.0%

Liability-Hedging

-Cash 11.5% 2.0%

-Customized Fixed Income3 43.3% 33.0%

Total Liability-Hedging 54.8% 35.0%

Total 100.0% 100.0%

1 Currently invested in Canadian REITS

For the purposes of asset-liability modelling, this allocation will be modelled as Global REITS

2 Currently invested in shares of Brookfield Infrastructure Partners L.P.

For the purposes of asset-liability modelling, this allocation will be modelled as Listed Infrastructure

3 Currently invested in Active Short Term Corporate Bonds (18.0%), Universe Bonds (21.0%), and US Treasury Bonds (4.4%)

For the purposes of asset-liability modelling, this allocation will be modelled as Universe Bonds



Capital Market Assumptions Summary as of July 31, 2016

1 Conditional Tail Expectation: Average of the worst 50 out of 1,000 scenarios

Asset Class 10-yr Compound

Return

Average Annual

Standard Deviation

Average Annual

CTE 95%1

Inflation 2.0% 1.5% -0.9%

91-day T-Bills (Cash) 1.3% 1.1% 0.1%

Overall Real Return Bonds -0.1% 10.9% -21.0%

Long-Term Provincial Bonds 1.1% 9.8% -18.2%

Long-Term Bonds 1.1% 9.6% -17.8%

Extra Long-Term Bonds (20+ Strips) -0.6% 16.8% -30.6%

Universe Bonds 1.4% 4.9% -8.4%

Private Debt 3.6% 6.9% -9.7%

High Yield Bonds (USD) 5.0% 11.4% -16.4%

Bank Loans (USD) 3.7% 7.0% -10.7%

Emerging Market Debt (USD) 3.7% 9.9% -14.5%

Canadian Equities 6.7% 16.7% -26.1%

U.S. Equities, Low Vol 5.7% 13.4% -18.8%

Int'l Equities, Low Vol 5.2% 10.6% -16.8%

Global Equities 6.7% 14.9% -23.0%

Emerging Markets 7.4% 25.3% -34.7%

Emerging Markets, Low Vol 5.8% 15.6% -23.0%

Canadian Real Estate (Direct) 5.1% 12.5% -23.1%

Global REITS (Listed-unhedged) 5.7% 18.5% -27.7%

Infrastructure (Direct), hedged 7.0% 18.8% -25.2%

Infrastructure (Listed-unhedged) 5.7% 14.6% -21.7%



Correlations as of July 31, 2016

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91-Day T-Bills 1.0

Extra Long-Term Bonds (20+ Strips) 0.1 1.0

Private Debt 0.1 0.7 1.0

Provincial Bonds, Long-Term 0.1 1.0 0.9 1.0

Long-Term Bonds 0.1 1.0 0.9 1.0 1.0

Universe Bonds 0.2 0.9 0.9 1.0 1.0 1.0

Overall Real Return Bonds 0.0 0.7 0.6 0.7 0.7 0.6 1.0

High Yield Bonds (0.0) 0.1 0.3 0.3 0.2 0.2 0.3 1.0

Bank Loans (0.1) (0.0) 0.2 0.0 0.0 (0.0) 0.1 0.7 1.0

Emerging Market Debt (0.0) 0.4 0.5 0.5 0.4 0.4 0.4 0.7 0.5 1.0

Canadian Equities (0.0) 0.1 0.3 0.2 0.2 0.1 0.3 0.6 0.4 0.6 1.0

U.S. Equities, Low Vol 0.0 0.4 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.0 0.2 1.0

Int'l Equities, Low Vol 0.0 0.4 0.3 0.3 0.3 0.2 0.3 0.3 0.2 0.3 0.5 0.6 1.0

Global Equities (0.0) 0.2 0.2 0.1 0.1 0.1 0.2 0.4 0.3 0.4 0.7 0.6 0.7 1.0

Emerging Markets 0.1 0.2 0.2 0.1 0.1 0.1 0.2 0.5 0.3 0.6 0.6 0.2 0.5 0.6 1.0

Emerging Markets, Low Vol (0.0) 0.4 0.3 0.2 0.2 0.1 0.3 0.5 0.3 0.5 0.6 0.3 0.6 0.6 0.9 1.0

Canadian Real Estate (Direct) (0.2) (0.2) (0.1) (0.0) (0.1) (0.1) 0.1 0.2 0.4 0.2 0.2 0.1 (0.0) 0.1 0.0 0.1 1.0

Global Real Estate (REITS) (0.1) 0.3 0.4 0.3 0.3 0.3 0.3 0.5 0.4 0.5 0.5 0.5 0.7 0.7 0.6 0.6 0.1 1.0

Infrastructure (Direct) (hedged) (0.2) (0.1) (0.0) (0.1) (0.1) (0.2) 0.0 0.3 0.6 0.3 0.2 0.1 0.1 0.1 0.1 0.2 0.3 0.2 1.0

Global Listed Infrastructure (0.0) 0.5 0.2 0.3 0.3 0.2 0.2 0.3 0.2 0.4 0.4 0.6 0.8 0.6 0.4 0.5 0.1 0.6 0.3 1.0

Inflation 0.2 (0.0) 0.0 (0.0) (0.0) (0.0) 0.1 0.0 0.2 0.1 0.1 (0.1) 0.0 (0.0) 0.0 (0.0) (0.0) (0.0) 0.2 0.0 1.0



Asset Class 10-yr Compound

Return

Average Annual

Standard Deviation

Average Annual

CTE 95%1

Inflation 2.0% 1.4% -0.9%

91-day T-Bills 1.6% 1.2% 0.2%

Overall Real Return Bonds 0.6% 9.9% -18.6%

Long-Term Provincial Bonds 2.8% 11.0% -18.1%

Long-Term Bonds 2.6% 10.8% -17.8%

Extra Long-Term Bonds 1.8% 20.9% -32.9%

Universe Bonds 2.4% 5.4% -8.0%

Private Debt 3.9% 6.3% -8.1%

High Yield Bonds (USD) 2.6% 9.7% -16.3%

Bank Loans (USD) 3.0% 6.6% -11.7%

Emerging Market Debt (USD) 3.8% 10.8% -16.9%

Canadian Equities 6.7% 17.7% -27.0%

Global Equities, Low Vol 5.2% 10.6% -15.9%

Global Equities 6.9% 15.4% -24.4%

Emerging Markets 8.2% 27.2% -37.2%

Emerging Markets, Low Vol 6.5% 16.1% -23.9%

Canadian Real Estate (Direct) 5.6% 14.5% -28.2%

Global REITS (Listed-unhedged) 5.9% 18.9% -28.6%

Infrastructure (Direct) 7.0% 16.7% -30.9%

Infrastructure (Listed-unhedged) 5.9% 15.5% -21.6%

Capital Market Assumptions Summary as of July 31, 2014

1 Conditional Tail Expectation: Average of the worst 50 out of 1,000 scenarios

These assumptions are provided in response to the request to look at how results would change

based on the parameter inputs

We will determine the optimal asset mixes using these assumptions for the purpose of stress testing



Correlations as of July 31, 2014

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Infl

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91-Day T-Bills 1.0

Private Debt 0.1 1.0

Extra Long-Term Bonds (20+ Strips) 0.0 0.7 1.0

Provincial Bonds, Long-Term 0.1 0.9 1.0 1.0

Long-Term Bonds 0.1 0.9 1.0 1.0 1.0

Universe Bonds 0.2 0.9 0.9 1.0 1.0 1.0

Overall Real Return Bonds 0.0 0.6 0.7 0.6 0.6 0.6 1.0

High Yield Bonds (0.0) 0.4 0.1 0.3 0.2 0.2 0.3 1.0

Bank Loans (0.1) 0.2 (0.0) 0.0 0.0 (0.0) 0.1 0.8 1.0

Emerging Market Debt (0.0) 0.6 0.4 0.5 0.5 0.4 0.4 0.7 0.5 1.0

Canadian Equities (0.0) 0.3 0.1 0.2 0.2 0.1 0.3 0.6 0.4 0.6 1.0

Global Equities, Low Vol 0.0 0.3 0.4 0.2 0.2 0.2 0.2 0.3 0.2 0.3 0.5 1.0

Global Equities (0.0) 0.2 0.1 0.1 0.1 0.1 0.1 0.4 0.3 0.4 0.7 0.7 1.0

Emerging Markets 0.1 0.2 0.2 0.1 0.1 0.1 0.2 0.5 0.3 0.6 0.6 0.5 0.6 1.0

Emerging Markets, Low Vol (0.0) 0.3 0.3 0.1 0.1 0.1 0.2 0.5 0.3 0.5 0.6 0.6 0.6 0.9 1.0

Canadian Real Estate (Direct) (0.2) (0.1) (0.2) (0.0) (0.1) (0.2) 0.1 0.3 0.4 0.2 0.2 (0.0) 0.1 0.1 0.1 1.0

Global Real Estate (REITS) (0.1) 0.4 0.2 0.2 0.2 0.2 0.3 0.5 0.4 0.5 0.5 0.7 0.7 0.6 0.6 0.1 1.0

Infrastructure (Direct) (0.1) (0.0) (0.2) (0.1) (0.1) (0.2) 0.0 0.4 0.7 0.4 0.3 0.1 0.1 0.1 0.2 0.3 0.3 1.0

Global Listed Infrastructure (0.0) 0.2 0.4 0.2 0.2 0.1 0.2 0.4 0.3 0.4 0.4 0.8 0.6 0.4 0.5 0.1 0.6 0.2 1.0

Inflation 0.2 0.0 0.0 (0.0) (0.0) (0.0) 0.1 (0.0) 0.2 0.0 0.1 (0.0) (0.0) 0.0 (0.0) 0.0 (0.0) 0.2 0.0 1.0



Government of Canada Current and Long-Term Target Yield Curves



Long-Term Target Yields for Key Bonds

All assumptions are established after a thorough analysis of all available quantitative and qualitative resources including, but not limited to, in-

house analyses of historical returns, external analyses of long-term historical returns presented in published research articles, the actual state

of the market and the good judgment of the national assumptions committee. The assumptions are further checked against those formulated by

the Aon Hewitt Global Assumptions Council for consistency.

* The cost of hedging reflects the fact that purchasers of real return bonds in the market are prepared to pay a price for the protection against inflation risk as part of a buy and

hold strategy.

Index

Long-Term Target Yield

Assumption Source

Inflation 2.0% Bank of Canada target

Short Term (91-day T-Bills)

2.65%

Based on the historical spread to 10-year federal bonds

7-year federal bonds (CANSIM V122542)

3.66%


10-year federal bonds (CANSIM V122543)

3.87%

Based on inflation (2.0%) plus target Real GDP growth (1.9%)

Long-Term Federal

bonds (CANSIM V122544)

4.23%


Federal Long-Term Real

Return Bonds (CANSIM V122553)

2.01%

Based on the historical spread between Bank of Canada long-term

benchmark bond yield (V122544) and federal long-term real return bond

(V122553), which can be interpreted as expected inflation and a bias

reflecting a cost of hedging inflation*



Expected Returns and Standard Deviations

Asset Class Expected 10-yr Annualized Return (Compound)

10-yr Average Annual Standard

Deviation

Source Source

Realized Inflation Based on consensus forecasts, market implied inflation, inflation risk

premium, historical inflation rates and the Bank of Canada target

Estimated from historical data series

(1987-2015)

Canadian Fixed Income Expected returns are generated by Aon Hewitt’s proprietary bond model.

Historical money market yields, actual yield curve and expected long term

nominal and real return YTMs are used to calibrate the model that generates

yield curve movements. Expected returns are then derived from the yield

curve movements

Generated by the same model that

generated the expected fixed income

returns (tested against historical numbers

for reasonability)

High Yield Bonds,

hedged

Derived from a U.S. 5-yr bond yield, plus a credit spread and net upgrade

benefit, less a provision for default


(1987-2015)

Bank Loans Sum of the floating rate, considering floors, credit spreads and changes in

price, less the net effect of defaults


(2007-2015)1

Emerging Market Debt Derived from a U.S. mid-term bond yield, plus a credit spread, less a

provision for default


(1997-2015)

Private Debt Modeled as Corporate BBB Bonds plus a spread of 100bps Generated by the same model that

generated the expected fixed income

returns for Corporate BBB Bonds (tested

against historical numbers for

reasonability)

Canadian Equities Forecast earnings are used to calculate the equity market cash flows. The

forecast cash flows are then discounted and their aggregated value is

equated to the current level of the equity market to arrive at an expected

return


(1987-2015)

1 Historical data is available since 1992. From 1992 to 2007, the historical returns exhibit very low volatility. Beginning in 2007, volatility has significantly increased and returns on bank

loans have become highly correlated with those of high-yield bonds. We have chosen to ignore the period 1992-2007.




Asset Class

Expected 10-yr Annualized Return (Compound)


Deviation

Source Source

U.S. Equities Forecast earnings are used to calculate the equity market cash flows. The

forecast cash flows are then discounted and their aggregated value is

equated to the current level of the equity market to arrive at an expected

return. Simulated currency returns are applied to the local currency

distribution to arrive at an estimate in CAD

Standard deviation of the simulated

unhedged distribution (1987-2015)

U.S. Equities, Low

Volatility

Expected return such that the Sharpe ratio is the same as for U.S. Equities Estimated from historical data series in

local currencies (1990-2015)

International Equities Forecast earnings are used to calculate the cash flows for the main equity

markets comprising the EAFE index. The forecast cash flows are then

discounted and their aggregated value is equated to the current level of the

equity markets to arrive at an expected return for each of the economies.

They are then combined to form the EAFE return, taking into account half of

the diversification. Simulated currency returns are applied to the local

currency distribution to arrive at an estimate in CAD

Standard deviation of the simulated

unhedged distribution (1987-2015)

International Equities,

Low Volatility

Expected return such that the Sharpe ratio is the same as for International

Equities

Estimated from historical data series in

local currencies (1991-2015)

Global Equities Based on the return of a portfolio comprised of a 50% allocation to U.S.

equities (S&P 500) and a 50% allocation to International equities (MSCI –

EAFE)

Standard deviation of an unhedged

portfolio comprised of 50% U.S. equities

and 50% International equities




Asset Class Expected 10-yr Annualized Return (Compound)


Deviation

Source Source

Emerging Markets Long term earnings growth assumptions are established for each of the

main countries and combined into a composite to forecast earnings and

calculate the equity market cash flows. The aggregated value of discounted

forecast cash flows is equated to the current level of the equity market to

arrive at an expected return


(1988-2015)

Emerging Markets, Low

Volatility

Expected return such that the difference in expected return between

Emerging Markets and Emerging Markets low volatility is the same as the

difference in expected return between International and International low

volatility equities


(1997-2015)

Canadian Real Estate

(Direct)

Based on an estimated income yield, real rental growth, expected inflation,

and management fees

Historical standard deviation adjusted

upward to reflect appraisal smoothing

(1987-2015)

Global REITS, unhedged Discount of 1% to the expected return on Global Equities reflecting the

asset class' lower beta


(1990-2015)

Infrastructure (Listed),

unhedged

Discount of 1% to the expected return on Global Equities reflecting the

asset class' lower beta


(1995-2015)

Infrastructure (Direct) Based on the current income yield, expected inflation, 50% leverage, cost of

financing and management fees. Additional return of 1.5% added to reflect

greater allocation to value-added and opportunistic investments.

Derived from the standard deviation of

Real Estate, Global REITS and Listed

Infrastructure. Adjusted for leverage and

adjusted to maintain same Sharpe ratio

as previous



Appendix D: Detailed Explanation of Economic Scenario Generator



Detailed Explanation of Economic Scenario Generator

The Canadian ESG is divided into 2 stochastic components:

– Term Structure of Interest Rates (TSIR)

– Equities, Inflation & Alternatives

Equity, Inflation & Alternatives Module

Short Rate

Module

Stochastic Factors

TSIR Module

Function of

Stochastic Factors

Fixed Income

Module



Detailed Explanation of Economic Scenario Generator

TSIR Module

– The objective is to model the dynamic behaviour of the TSIR and ensure that changes in the

market value of the bond portfolio are directly linked to changes in the TSIR through a

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