Board of Governors - APPENDIX VI - June 28, 2000

THE UNIVERSITY OF WESTERN ONTARIO ACADEMIC STAFF AND ADMINISTRATIVE STAFF PENSION BOARDS

Report to Board of Governors, June 28, 2000

Presented by: Louise Koza, Manager Pension Investments and Plan Policy
Accompanied by:
Professor Mair Zamir, Chair of Academic Staff Pension Board
and Ms. Karin Feulgen, Chair of Administrative Staff Pension Board

Overview

This report covers the events and activities of the Pension Boards during the 1999 calendar year. The University sponsors two pension plans, one for academic staff and one for administrative staff. Both plans are "Defined Contribution" arrangements where the amount of funds set aside each year by both the employee and the University is defined by formula. The formulae differ among employee groups due to negotiations between the University and the respective groups. The pension benefit payable at retirement is dependent upon the accumulated contributions and investment income on these funds made throughout the career of the staff members.

Each pension plan is administered by a 7 member Pension Board - 4 elected representatives and 3 appointed by the University. By agreement, the two Boards pool their investments and share in the administration and communication efforts associated with the pension plans.

The combined Boards have established three sub-committees to deal with (i) Fiduciary & Administrative issues, (ii) Investment Policy and (iii) Communications & Counselling issues respectively. The sub-committees do most of the research and preparation work for recommendations proposed and voted on at the combined Pension Board meetings. A copy of the pension board governance document is provided in the enclosed booklet for your reference.

There are some different governance structures emerging for similar pension arrangements, including incorporating the pension plan as an entity separate from the organization. The pension boards will consider these alternative governance structures in their annual self-assessment of governance for the plans.

The contributions of members and the University are allocated to various investments offered under the plan, at the discretion of the member (with the exception of some contributions for "Special" staff members who were entitled to a minimum benefit under the previous pension plan) . Currently there are fifteen distinct investment options available for members, and the distribution of funds among these investments can change monthly:

Money Market Fund Diversified Equity Fund

Target Date Funds (5) Canadian Equity Fund

Long Term Bond Fund US Equity Funds (2)

Diversified Bond Fund Non-North American Equity Fund

Canadian Bond Fund

Global Bond Fund

Financial Status of the Pension Plans⁽¹⁾

General accounts referred to above are established and administered by the University for paying benefits promised to members who retired under the previous pension plan and under the Excess Earnings annuity option of the current plan. As determined by an actuarial valuation, there are more funds in the general accounts than are estimated to be required to pay the promised benefits -- the excess funds in the general accounts are referred to as "surplus". To assist the University's cash flow, "contribution holidays" have been taken where the amount of required University contributions is reduced and the appropriate amount of surplus funds, as determined by contribution levels for each plan, are allocated to member's accounts.

Actuarial reports, which are pending for the year ending December 31, 1999, will confirm the surplus in each plan at that date. Contribution holidays have been taken by the University to fund the administrative costs to operate the pension plans and also to fund special early retirement arrangements.

The administrative staff plan surplus is expected to be eliminated within 3 years at which time the University's contributions will be increased by approximately $500,000 per year. The pension boards will be meeting with the plan actuary on the funded status of the plans to discuss the level of a surplus "buffer" that should be established, (the point at which contribution holidays should be discontinued) so not to jeopardize the funded status of the plans.

The pension investments experienced a relatively good performance during 1999. The combined pension assets grew from $730 million to approximately $814 million. Details of the Investment performance of the pension funds are provided in the enclosed booklet.

Operational Costs:

The pension boards administer the plans with the assistance of many professionals, including investment consultants, actuarial consultants, legal advisors, financial statement auditors, pension administrators and retirement counsellors. All professional fees and staff expenses are funded by the University, which has been reimbursed for the costs by applying part of the surplus in each plan against the required monthly contributions. During 1999, these fees amounted to approximately .2% of invested assets which is unchanged from the previous year.

Investment management fees, transaction costs and trustee fees are funded by the members' and the University's investments. Unit values for the funds are determined after deducting these fees, which amount to about .15% per year of funds invested. With a total expense cost of about .35% of invested assets, the pension boards believe the plans operate at an expense level far below that of comparable mutual funds, which tend to charge fees that average about 2.25% of invested assets.

Significant Activities of Pension Boards During 1999

• Designed and delivered educational workshops (12 in total as of June 2000) to members seeking more information about the plans. These were very well accepted and now there is a significant waiting list to attend the sessions when they are offered again (August 2000).
• Appointed a new custodian for the assets: The Northern Trust Company. Northern replaces CIBC-Mellon Global Securities (formerly Canada Trust Pension Custody) as trustee and holder of securities. The new custodian is expected to enhance the time, accuracy and delivery of information on the investments.
• Revised investment mandate for the Diversified Bond Fund (formerly the Intermediate Term Bond Fund) to include bonds issued by governments in US, Europe and Asia.
• Revised the investment mandate for the US component of the Diversified Equity Fund (formerly the Equity Fund) to include securities in the S&P 400 index and Russell 2000 index. The US component now invests in the largest 2900 US stocks.
• Introduced two new investment options for members: the Canadian Bond Fund and Global Bond Fund. These options have the identical managers and mandates of the respective components of the Diversified Bond Fund. They have been offered as separate options so that members can create their own diversified bond portfolio based on their view of risk/reward.

Overall, members are developing a greater awareness and appreciation of the pension programs at Western. They has been an observed increase in requests for counselling, education and an increase in voluntary contributions. As a result, the department resources have been strained to keep up with the demand for assistance. Coupled with the addition of new responsibilities relating to Retirement Income Funds and management of other pension plans, it is anticipated the department staff will expand by at least two full time positions in year 2000.

As counselling costs are increasing, the manager and the board are working with other industry representatives to develop best practices for defined contribution plans, in an effort to clarify what investment education should be provided by fiduciaries of a DC plan.

Rates of Return of Pension Investments

As of December 31, 1999

1. Preliminary figures, subject to finalization of financial statements and actuarial reports