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The University of Winnipeg

DB member surplus

Surplus Distribution to Defined Benefit Members

Background

The December 31, 1999 actuarial valuation disclosed a significant surplus in the University of Winnipeg Defined Benefit (DB) Pension Plan as a result of a lengthy period of very favourable investment returns. The amount of the surplus was well in excess of the level permitted under the Canada Revenue Agency (CRA) regulations, creating an excess surplus situation. The excess surplus had to be utilized in some way in order to bring it within the acceptable CRA level, or the University would have been forced by CRA to take an employer only contribution holiday.

2000 Resolution

On July 25, 2000 the University of Winnipeg Board of Regents approved a pension plan amendment enabling the University to take a two-year contribution holiday from April 1, 2000 to March 31, 2002 equal to approximately $3 million. On December 4, 2000 the Board of Regents approved a comprehensive resolution that included a distribution of $3 million in surplus to plan members (referred to as the initial surplus share). This initial distribution was designed to match in amount the University two-year contribution holiday. The initial surplus share was paid to plan members in January 2001.

Some of the more significant items that were also included in the December 4, 2000 resolution are as follows:

  1. The surplus in the DB plan was allocated equally between the University and plan members (the total amount of surplus in the plan at December 31, 1999 was $22.54 million which meant that plan members and the University were each allocated $11.27 million).
  2. The University utilized its initial share of $3 million by taking a two-year contribution holiday from April 1, 2000 to March 31, 2002 and intended to utilize its remaining surplus share of $7.27 million ($8.27 million less 50% of the $2 million cost of a Contribution Reserve required due to the DB plan being closed to new members) by way of further contribution holidays beyond the initial two-year period.
  3. A new Defined Contribution (DC) component was added to the existing Defined Benefit (DB) plan retroactive to January 1, 2000. All eligible DB members were given the choice of transferring to the new DC component. The DB component was closed to new members, and all new employees hired on or after January 1, 2001 join the DC component when eligible.
  4. DB plan members who transferred into the DC component received their full surplus share (initial and remaining surplus share) at the time of transfer. DB members who retired or terminated employment in 2000 and fully commuted their pension in 2000, were also entitled to their full surplus share.
  5. Plan members who remained in the DB component, were to receive their remaining surplus share following a review of available payment options. The remaining surplus share for DB members who had only received the initial surplus entitlement was $6.454 million at December 31, 1999 ($11.27 million reduced by: the initial surplus share paid in January 2001; the remaining surplus share transferred to the credit of plan members who chose the DC option; the remaining surplus share paid to plan members who retired or terminated in 2000 and fully commuted their pension in 2000; and 50% of the cost of a Contribution Reserve which was required due to the DB plan being closed to new members).
  6. The plan was to be changed to a “trusteed” plan at the earliest date possible.

Subsequent Events

Three sub-committees were established to implement the December 4, 2000 Board of Regents resolution. A Governance sub-committee was charged with the responsibility of drafting a Trust Agreement that would have the effect of converting the University pension plan to a trusteed arrangement; a DC sub-committee was charged with the responsibility of implementing the new DC component of the plan; and a DB sub-committee was charged with reviewing all available payment options for the payment of the remaining surplus share for DB members.

The options recommended by the DB committee involved either a cash payment or a type of a flexible pension account that would enable each DB plan member to custom tailor a DB benefit based on his/her individual needs and individual surplus entitlement at time of retirement. Unfortunately, this arrangement required the approval of the Canada Revenue Agency, and due to it being somewhat unusual, the approval could not be obtained.

While the DB sub-committee was pursuing CRA approval, the investment markets took a sudden and dramatic downturn starting with the events of September 11, 2001. By the summer of 2002, it became evident that a market recovery was not in sight and that the significant plan surplus had largely been eliminated. As a result of these events, the University halted the distribution of the remaining surplus share to DB plan members and also put a halt to any further contribution holiday beyond the initial two-year period.

In February 2003, an agreement was struck between the University, campus unions and the University of Winnipeg Retirees Association (UWRA). The agreement affirmed those parts of the December 4, 2000 resolution that had already been implemented such as: the initial two-year University contribution holiday equal to $3 million; the initial surplus distribution to plan members equal to $3 million; the establishment of the DC component; as well as the payment of the remaining surplus share to DC members and those who terminated or retired in 2000 and fully commuted their pension entitlement in 2000.

The agreement also included the following: elimination of the University’s entitlement to its remaining surplus share; the elimination of the DB members’ entitlement to their remaining surplus share; a 1% increase in University contributions to the DB component (phased in over a two-year period); a one-time University contribution into the plan of $600,000; University contributions on behalf of DB plan members who are in receipt of Long Term Disability benefits; the establishment of a group Registered Retirement Savings Plan for all members; and a special cash payment to be paid from the University operating budget (not from the pension plan) to active and retired DB members equal to $638,000 as partial compensation for not receiving the remaining surplus share.

Distribution Order

Following their review of the December 31, 2001 actuarial valuation of the plan (filed in the fall 2002), the Manitoba Pension Commission questioned why the DB member remaining surplus share was not included as a plan liability in the valuation. Further reviews by the Manitoba Pension Commission and the Superintendent of Pensions, resulted in an Order dated November 17, 2006. The Order specified that the remaining surplus share became an "earned" pension entitlement when it received Board of Regents approval on December 4, 2000 and as such, the University had to proceed with the distribution irrespective of any subsequent decisions that may have been made.

Several more years of discussions, further reviews by the Manitoba Pension Commission and two appeals by the University, culminated with a January 23, 2009 Manitoba Court of Appeal ruling that upheld the Superintendent’s decision. Due to the complexity of the distribution and the need for CRA approval, the Board of Trustees sought and received the necessary extensions to the surplus distribution deadline.

Implementation of the Order

As the Board of Trustees became the pension plan Administrator on July 7, 2008 it became the Board of Trustees responsibility to implement the pension surplus distribution Order. The Order as well as the Manitoba Court of Appeal decision provided some guidelines and parameters for the payment of the surplus; however, it quickly became evident to the Board that the matter was extremely complex and that many important aspects of the distribution remained to be addressed. As a result, clarification was sought from the Manitoba Pension Commission on a number of issues. Additionally, Canada Revenue Agency approval was required. The complexity of the issues surrounding the distribution, and the requirement for CRA approval, resulted in inevitable delays in the implementation of the Order, hence the necessary extensions to the payment deadline.

The clarifications sought by the Board covered a number of aspects including: the interest to be used to update the 1999 surplus entitlement, which DB members should be included in the distribution, in what manner should the surplus be paid, etc. The clarifications received from the Manitoba Pension Commission and the Board’s own deliberations and decisions, resulted in the following:

Eligible Members

The total number of DB plan members entitled to the remaining surplus share is 593 (224 active, 225 pensioners, 144 inactive). These are Defined Benefit plan members who received the initial surplus share, but who had not received the remaining surplus share, and includes those who have died or terminated employment.

Since all pension benefits including surplus are a sharable family asset, any plan members who have separated on or after December 4, 2000 (the date the surplus became an earned benefit according to the Manitoba Pension Commission) may be required to share their surplus entitlement with their former spouse.

Remaining Surplus Amount

The undistributed DB member surplus share at December 31, 1999 was $6.454 million. This amount has been updated with interest using the Bank of Canada Review CANSIM Series V122515 from January 1, 2000 to January 31, 2010, resulting in a total distribution amount of $8,775,827.

As there is no longer any surplus in the University of Winnipeg Trusteed Pension Plan, the Manitoba Pension Commission ordered the University to pay into the plan an amount that is equivalent to the member distribution. To cover the payment, the University applied for and received approval for a loan from the Province of Manitoba to be paid back over a 40-year period at an approximate cost of $600,000 per year.

Individual Member Surplus Calculation

The method used to calculate the individual member entitlement from the remaining surplus share is identical to the method used for the 2001 payment of the initial surplus share, meaning that it is a percentage of the December 31, 1999 contribution account value or, in the case of pensioners, the “Pensioner Accumulation” value.

Non pensioners

Eligible active and inactive DB plan members who had a contribution account value at December 31, 1999 are entitled to receive a remaining surplus share payment equal to 16.1362% of their December 31, 1999 contribution account value. Updated with interest to January 31, 2010, the remaining surplus share payment is equal to 21.94% of the December 31, 1999 contribution account value.

Pensioners

Since a pensioner’s contribution account value is eliminated at time of retirement, an equivalent value called “Pensioner Accumulation” was calculated for the purpose of the initial surplus distribution, by taking a pensioner’s contribution account value at date of retirement, increasing it for interest between date of retirement and December 31, 1999 and reducing it by 50% of the pension received by the pensioner between the date of retirement and December 31, 1999.

The initial surplus share payment to pensioners was subject to a minimum payment, referred to as the “Pensioner Minimum”. As a result of this minimum, no pensioner received an initial surplus share payment that was less than two times the pensioner’s December 1999 regular monthly pension payment.

Consistent with the 2001 method of calculation, eligible pensioners are entitled to receive a remaining surplus share equal to 16.1362% of their December 31, 1999 Pensioner Accumulation value. The Board of Trustees has also approved a further “Pensioner Minimum” payment of two times the December 1999 regular monthly pension benefit. Updated with interest to January 31, 2010, the remaining surplus share payment is equal to 21.94% of the December 31, 1999 Pensioner Accumulation value, or two times the December 1999 regular monthly pension payment (updated with interest to January 31, 2010), whichever is greater.

Method of Payment

The remaining surplus share will be paid to eligible DB plan members in the form of a lump sum cash payment. Alternative forms of payment, such as a benefit improvement, are not being offered as they would create a potential future liability, and the Board of Trustees cannot make any plan improvements that may increase the University costs without the University’s approval. By paying the surplus in cash, the risk of creating a future plan liability is avoided.