Board of Governors - APPENDIX VII - November 22, 2001

REPORT OF THE ACADEMIC AND ADMINISTRATIVE STAFF PENSION BOARDS

FOR APPROVAL

Insurance Company Demutualization Proceeds

As a result of the demutualization of insurance companies that hold group annuity policies of the University, it has been necessary to research the ownership and payment of demutualization proceeds from two insurance companies in particular: Industrial Alliance and Metlife. The proceeds represent settlement of ownership entitlements as the insurance company went from being mutually owned by the policy holders to a publicly traded corporation. As the insurance industry evolves, there is a potential to receive further distributions. The recommendation has been worded so that it may apply to future distributions under similar circumstances.

Recommended: That the proceeds resulting from demutualization of insurance companies with whom the University holds group annuity contracts be distributed directly to the annuitants for whom the annuity payments were established under the respective policies, based on the formula used to determine the demutualization entitlement.

Rationale:

• legally the annuities purchased under the group policies are not pension plan assets but assets of the annuitants and therefore any proceeds relating to the annuity payments are the assets of the annuitants
• annuitants who receive retirement benefits under individual policies which were initiated by the University on the individuals' behalf have already received demutualization proceeds directly from the insurance companies
• the premiums used to purchase the annuities were funds that represented fully vested benefits - the member owns all of the proceeds due to vesting provisions of the pension program
• if the pension fund or the University kept part or all proceeds, annuitants could argue that the pension fund or the University is getting an unjust enrichment to the detriment of the annuitants - expect significant legal expense to defend such a position

Compliance:

• A rather lengthy legal opinion was obtained from Hicks, Morley. The opinion describes all the statutory considerations as well as common law. The recommendation is based on common law analysis
• The pension board considered getting a waiver signed by those annuitants wishing to receive the proceeds, to reduce the liability of the University should these insurance companies fail to meet their promises at some point in the future. Our legal counsel has strongly discouraged us from using such a waiver since it would likely admit the University's full liability in such a case.
• Group policy contracts do not specifically address ownership of this type of distribution
• recommendation is consistent with pension board principles of fairness and prudence
• recommendation is consistent with what other employers have done in similar situations

Conflicts:

• similar proceeds were declared by Sunlife, the carrier for the life insurance policies that cover our active employees (together with other Ontario Universities): proceeds have been frozen by Sunlife due to a claim to ownership that has been made by employee unions.

Data:

• Demutualization proceeds from Industrial Alliance sent directly to University was $1,193,787.
• Demutualization proceeds from Metlife sent directly to the University was $64,149.55.
• Number of annuitants under Industrial Alliance group policy: 220
• Number of annuitants under Metlife group policy: 20

Implementation:

• approve by pension boards - completed October, 2000
• approve by Board of Governors - November, 2001
• individual payments determined based on formula used by insurance companies
• make payments to annuitants (or their surviving spouses), with interest from the date the funds were received by the University.