University of Waterloo | October 27, 2009

Pension Plan Presentation to

Board of Governors

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 Hewitt Associates.

Agenda for Today

Answering the following questions:

– What is the pension promise under the UW Pension Plan and how is
the plan structured to deliver that?
– What are the sources of funding for the pension promise?
– Where are we today in the funding of the pension promise?
– How are we managing both the short-term and long-term risks?
– How is the environment changing?
Answering any other questions you have

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 Plan Structure

Defined benefit plan covering all eligible employees under

one set of provisions
Funded by contributions from members and university
Two plans:
Registered Pension Plan (RPP) Payroll Pension Plan (PPP)

■ Provides pension benefits up to dollar maximum ■ Provides pension benefits that cannot be
permitted under Income Tax Act (ITA) provided under RPP as a result of application of
ITA maximum pension, subject to a cap

■ In 2009, maximum pension reached ■ In 2009, cap reached at final average salary of
at final average salary of approximately approximately $153,000; indexed annually
$136 000; indexed annually
$136,000;

Overall cap applied which is reached at

final average salary of approximately $173,000

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Plan Structure (continued)

Liabilities move back and forth between RPP and PPP depending on rate
of increase in ITA maximum pension
RPP pension fund assets held in trust
For RPP,
For PPP, University holds assets in reserve against the liabilities,
although assets do not constitute trust assets
From a financial management perspective, RPP and PPP are viewed as
one plan

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 Plan Benefits

Key Plan Provisions

Averaging Period for Earnings: Highest 36 consecutive months in last 120 months

Benefit Rate for Each Year of Service: Below CPP Wage Base: 1.4%
Above CPP Wage Base: 2.0%

Standard Form of Payment: Lifetime pension with a 10-year guarantee

Earliest Age for Unreduced Early Retirement Pension: Age 62

Automatic Indexation of Pension Benefits After Retirement: 100% of increase in CPI up y 1st)
p to 5% ((each May

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Funding Sources

Member Contributions
6 79% of pensionable salary
Currently 6.79% Ultimate Cost of Pension Plan

University Contributions Benefits paid to members,

Currently 9.85% of pensionable salary as determined by plan provisions
(145% of member contributions)
+

Investment Earnings Administrative costs

Currently assume investment return
net of inflation of 3.85% per year

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 Contribution Rates

Member contribution rates have been increased to reflect the increasing

cost of providing the same level of pension benefits:
Prior to
July 1, 2007 July 1, 2007 July 1, 2008 May 1, 2009

1
Salary Below YMPE 4.55% 4.80% 5.05% 5.80%

Salary Above YMPE up to 2x YMPE 6.50% 7.15% 7.85% 8.30%

Salary Above 2x YMPE 6.50% 7.85% 9.20% 9.65%

Over period from January 1, 2007 to May 1, 2009:

– Average member contribution rate has increased from 5.18% to 6.79%
off pensionable
i bl salary
l
– University contribution rate has increased from 8.98% to 9.85%
of pensionable salary (combined contribution rate for RPP and PPP)

1 Year’s Maximum Pensionable Earnings Under Canada Pension Plan ($46,300 in 2009)

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Contribution Framework

% of $ Amount Based on
Pensionable Salary 2009 Pensionable Salary

Required Member Contributions 6.79% $ 18,302,000

Total University Contributions 9.85% $ 26,538,000

Less: University Current Service Cost

Registered Pension Plan (7.81)% (21,024,000)

Payroll Pension Plan (0.13)% (360,000)

Equals: Remaining University Contributions 1.91% $ 5,154,000

Currently being allocated to Payroll Pension Plan

to build up reserve to manage potential
increase in contributions at next filed valuation

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 Pension Fund Asset Mix

Based on Market Value

Asset Class as of September 30, 2009 Investment Manager

Real Return Bonds 23%

Fixed-Income/Cash 36% ■ TDAM Universe Bonds

■ McLean Budden (Balanced)

Canadian Equities 19% ■ McLean Budden (Balanced)

■ Highstreet

U.S. Equities 5% ■ TDAM Hedged U.S. Equities

Global Equities 17% ■ Trilogy

■ Walter Scott

100%

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Funded Status of RPP Filed With

Pension Regulator

January 1, 2008 January 1, 2009 October 1, 2009 (est.)

(millions) (millions) (millions)

Going Concern Valuation

1
Assets—No Asset Smoothing $ 906 $ 746 $ 832
1
Assets—With Asset Smoothing $ 915 $ 863 -

Liabilities $ 892 $ 936 $ 983

Funding Excess/(Shortfall)—No Asset Smoothing $ 14 $ (190) $ (151)

Funding Excess/(Shortfall)—With Asset Smoothing $ 23 $ (73) -

Solvency/Wind-Up Valuation
Solvency Excess/(Deficiency) $ 116 $ (86) $ (67)
Wind-Up Excess/(Deficiency) $ (163) $ (331) $ (379)

Going Concern Valuation Solvency Valuation Wind-Up Valuation

Based on plan continuing Based on plan being wound up Based on plan being wound up
as a going concern entity on the valuation date on the valuation date
(excludes indexation benefits) (includes indexation benefits)

1 Real Return Bonds valued at discounted cash flow using 3.85% real rate of return

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 Shorter-Term Challenge

Actuarial valuation as of January 1, 2011 will have to be filed with pension regulator:
– Expected going concern funding shortfall would trigger amortization payments to be
funded by additional University contributions and/or redirecting assets from the PPP
– May trigger additional University contributions to amortize solvency deficiency
Increased contribution requirements managed in part through:
– Increases in member and University contributions (increases effective May 1, 2009)
– “Contribution reserve” being created from additional contributions
between May 1, 2009 and January 1, 2011
– Short-term use of assets set aside for obligations under PPP
– Electing to adopt temporary funding relief provisions introduced by
Ontario Government (can defer start date for any special payments to
January 1, 2012)

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Managing Risk

Long-term risk:
– Pension fund does not achieve real rate of return on which contribution
structure is based
– Pension benefits are higher than expected due to:
> higher than expected salary increases
> more than expected early retirements
> longer than expected payment period
> higher than expected indexation of pension benefits

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 Managing Risk (continued)

Short-term risk:
– Short-term volatility in economic and demographic factors on
previous page that generate unfunded liabilities which in turn generate
additional special payments
– Since investment risk is being taken to allocate more of the plan
funding to investment returns, volatility in rate of return on pension fund
is primary element of short-term risk
Asset/liability mismatch risk:
– Liabilities and assets change as interest rates change
– Mismatch occurs when volatility of assets is very different from
volatility of liabilities

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Managing Risk (continued)

Risk Risk Mitigator
Inflation risk Automatic indexation applies on increase in CPI
up to 5%; P & B Committee decides above that
Real return bonds to hedge portion of
indexed ppensioner liabilities
Salary increase risk Fixed dollar caps on pension benefits
Annual tracking of cap impact
Longevity risk Updated mortality tables
No unreduced early retirement pension before
age 62
Mismatch risk Real return bonds
Short-term contribution volatility University contribution protocol
Timing of actuarial valuations
Filing strategy
Asset smoothing g
Early recognition of funding issues
Long-term contribution increases Very limited contribution holidays
Monitoring actuarial assumptions
Ensuring money is being spent on core
pension promise
One plan/pension benefits not bargained
P & B Committee structure/membership

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 Current Environment

Report of the Ontario Expert Commission on Pensions

(the “Arthurs’ Report”)
Public sector pension plans developing service offerings to other
pension plans
Temporary funding relief provisions introduced by Ontario Government
Initiatives through the Council of Ontario Universities to obtain a
solvency funding exemption for universities
Government expectations on how Ontario universities should address
pension funding issues

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