Board of Governors NH 3318 OPEN SESSION ACTION · Fund) and short corporate bonds (TD Active Short Term Corporate Fixed Income Fund), be approved. ... 26 Feb 2016 11 Mar 2016 20 May

Board of Governors PENSION & BENEFITS COMMITTEE

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

NH 3318

OPEN SESSION ACTION

9:30 1. Approval of the 17 June 2016 Minutes* and Business Arising Decision

9:35 2. Execution Against the Work Plan* [Williams] Information

9:40

10:00

10:10

11:10

11:20

11:25

3. Update on Government Pension Plan Initiatives* [Shapira]• Review of Ontario’s Solvency Funding Framework for DB Pension Plans

4. Q2 Dashboard Summary* [Byron]

5. Asset Liability Study Planning* [Byron, LaPierre]

Break

6. Report from RPPI [Forrest, Hardy]

7. Changes to Sick Leave – CUPE new hires [Forrest]

Information

Information

Decision

Information

Information

11:30

11:45

8. CPP Enhancement Impact* [Shapira]

9. Other business

Proceed into Confidential Session

Information

CONFIDENTIAL SESSION

10. Business Arising

Next Meeting: Friday 7 October 2016, 9:30 a.m. – 12:00 noon, NH 3318

Discussion

*attached

2 September 2016 Sian Williams Senior Legal Counsel

Future Agenda Items: • Payroll Pension Plan Cap• Report to the Community

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

P & B 8 Sept 2016 Page 1 of 78

http://www.fin.gov.on.ca/en/pension/solvency/review-solvency-funding.html

mailto:[email protected]

University of Waterloo Board of Governors

PENSION & BENEFITS COMMITTEE Minutes of the Friday 17 June 2016 Meeting

Present: Monika Bothwell, Lori Curtis, Stewart Forrest, Mary Hardy, Dennis Huber, David Kibble, Ramesh Kumar, Marilyn Thompson, Karen Wilkinson [chair], Marta Witer (telephone)

Regrets: Peter Forsyth, Ian Orchard, Michael Steinmann, Christine Wagner

Secretariat: Sian Williams

Guests/Resources: Linda Byron (telephone), Lee Hornberger, Michael Herz (1,2,3), Nathan LaPierre (telephone), Allan Shapira, Jackie Serviss

Regrets: Sue McGrath, Kenton Needham, Alfrieda Swainston

Organization of Meeting: Karen Wilkinson took the chair of the committee, and Sian Williams, secretary of the committee, acted as secretary. The secretary advised that a quorum was present. The agenda was approved without formal motion.

OPEN SESSION

1.APPROVAL OF THE 20 MAY 2016 MINUTES and BUSINESS ARISING FROM THE MINUTESSubject to a typographical correction requiring amendment, the committee heard a motion to accept the minutes of the 20 May 2016 meeting. Forrest and Hardy. Carried. There was no business arising.

a.Terms of Reference – Responsible Investment Working Group Approved by Board of GovernorsWilkinson reported that the Terms of Reference had been approved by the Board of Governors on 7 June 2016. The process for obtaining names for the working group has started.

2. EXECUTION AGAINST THE WORK PLANThe report was received for information. Williams advised that the committee was on schedule.

3. UPDATE ON GOVERNMENT PENSION PLAN INITIATIVESShapira provided an update on the Government Pension Plan Initiatives, indicating that the federal government may approve an expansion to the Canada Pension Plan, thereby impacting the university’s plan. Shapira also reported that the discussion paper of the Ontario government in regard to solvency of university plans is forthcoming.

4. REVIEW OF CAP PROTOCOL – ADDENDUM TO MAY 20, 2016 MATERIALShapira and Byron presented the previously distributed Aon Hewitt report entitled “Review of Cap Protocol – Addendum to May 20, 2016 Material” (the “Report”). The committee had previously requested cost information for a fixed increase in both the hard-dollar RPP and the PPP caps. The impact of the increase in RPP and PPP Caps was discussed by the members. Wilkinson encouraged members to reflect on the Report and bring forward three or four fundamental questions in regard to the Caps issue at a later date.

5. ASSET LIABILITY STUDIESShapira and Lapierre presented the previously distributed Aon Hewitt report entitled “Asset Liability Studies – June 17, 2016” (the “ALS Report”). Members discussed the nature of an asset liability study, how one is conducted, and the benefit to the university should the committee decide that Aon Hewitt be retained to conduct such a study. Shapira noted that the cost for such a study would be in the range of 60,000 to 80,000 dollars and


that it would only focus on the Registered Pension Plan. Wilkinson noted that this issue should be brought forward to be further discussed in the September committee meeting.

6. REPORT FROM RPPIForrest presented the report from RPPI to the members.

a. Investment Recommendation from Finance & Investment CommitteeAt its meeting of 19 May 2016, the Finance & Investment Committee recommended that the Registered Pension Plan fund sell 50% (approximately $60 million) of the U.S. treasuries currently held and that it should allocate the proceeds of the sale in equal parts to universe bonds (TD Emerald Canadian Bond Index Fund) and short corporate bonds (TD Active Short Term Corporate Fixed Income Fund). The Members of the Registered Pension Plan Investment Subcommittee heard a motion at its meeting on 9 June 2016 and agreed that this recommendation should be forwarded to the consideration of the members at the 17 June 2016 Pension & Benefits Committee meeting.

Members heard a motion that the Finance & Investment Committee’s recommendation, being that the Registered Pension Plan fund should sell 50% of the U.S. treasuries currently held and that it should allocate the proceeds of the sale in equal parts to universe bonds (TD Emerald Canadian Bond Index Fund) and short corporate bonds (TD Active Short Term Corporate Fixed Income Fund), be approved. Forrest and Bothwell. Carried.

b. Follow-up re: Tracking Error in TDAM Passive Global Equity AnalysisMembers agreed to defer discussion on this item to a meeting in the fall.

7. BENEFITS UTILIZATION REPORTHornberger presented the previously distributed report entitled “Benefits Utilization Report” (the “BUR Report”). Members focused on pages 53 to 55 of the agenda package and discussed a proposal by Great-West Life that the university consider introducing the Health Case Management Program. This program is a service available through Great-West Life at no additional cost and provides support, as described in the BUR Report, to those who require specialty medications for complex, chronic conditions. Thompson indicated that the Provost Advisory Committee on Staff Compensation will be considering benefits outside of the insured benefits program. Members will continue to consider these issues going forward.

8. IMPACT OF REMOVING MAXIMA FOR OUT-OF-PROVINCE RETIREESHornberger presented the previously distributed report entitled “Out-of Province Retirees”, located at page 59 of the agenda package. Members reviewed the financial impact of removing the maxima as shown in the annual review charts on page 59.

9. UPDATE RE: REQUEST FOR PROPOSALS FOR EMPLOYEE AND FAMILY ASSISTANCEPROGRAM Hornberger presented the previously distributed report entitled “Employee and Family Assistance Program”, located at page 60 of the agenda package. Members reviewed the summary of the RFP process. It was noted that Homewood Health was determined to be the successful vendor through this process.

10. UPDATE: IMPLEMENTATION OF NEW PENSION ADMINISTRATION SYSTEMHornberger presented the previously distributed report entitled “New Pension Administration System”, located at page 61 of the agenda package. Members were advised that it was necessary to change the target launch date of the new pension administration system, Ariel, from September 1, 2016 to November 1, 2016, due to a number of complicating factors. Members heard a motion to approve the proposal outlined on page 61 of the agenda package as follows: i) Change the launch date from September 1, 2016 to November 1, 2016 with Morneau Sheppell (MS) agreeing to waive any corresponding additional implementation fees; ii) Assign a Project Manager from within HR to assist with the internal non-vendor pieces of the project: iii) Hire a temporary resource to support the


pension team with the regular administration and some implementation activities; est. cost of $18,000 to $20,000 for the July to December 2016 period. Forrest and Huber. Carried. One abstention.

11. OTHER BUSINESSThere was no other business.

12. PROCEED INTO CONFIDENTIAL SESSIONThe committee did not move into confidential session as there were no confidential minutes for approval.

13. NEXT MEETINGThe next meeting will be held on Friday, 9 September 2016 from 9:30 a.m. to 12:00 p.m. in Needles Hall, Room 3318.

02 September 2016 Sian E. 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 11 Sept 2015

09 Oct 2015

13 Nov 2015

11 Dec 2015

15 Jan 2016

26 Feb 2016

11 Mar 2016

20 May 2016

17 Jun 2016

9 Sept 2016

Approval of Actuarial Valuation Assumptions Annual

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

Annual 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

Task Frequency 11 Sept 2015

09 Oct 2015

13 Nov 2015

11 Dec 2015

15 Jan 2016

26 Feb 2016

11 Mar 2016

20 May 2016

17 Jun 2016

9 Sept 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

Total Fund Overview (provided under reports from RPPI)

Quarterly

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


Presentation to University of Waterloo Pension & Benefits Committee

Prepared by Aon Hewitt

Review of Ontario’s Solvency Funding Framework For Defined Benefit Plans (Consultation Paper)September 9, 2016


Proprietary & Confidential | 2Aon Hewitt

September 09, 2016

Introduction

In 2015, the Ontario Economic Outlook and Fiscal Review announced the government’s plans to:- Extend temporary solvency relief (available to private sector employers) and - Review the current Solvency Funding Framework

In 2016 David Marshall, former CEO of WSIB was appointed head of the review

In late July, the Ministry of Finance released the consultation paper soliciting input on how to reform solvency funding

On a related note, Quebec recently adopted Bill 57 which changed the funding rules for Quebec registered pension plans in the private sector and eliminated solvency funding



September 09, 2016

Solvency Funding Review Objectives

Benefit security

Affordability and sustainability

Pension coverage

Transparency

Balancing stakeholder interests



September 09, 2016

Possible Approaches to Solvency Funding Reform

Approach A – Modified Solvency Funding Rules

Approach B – Eliminate Solvency Funding and Strengthen Going Concern Funding

Within each of these two approaches, the task force has identified several options for consideration

P & B 8 Sept 2016 Page 10 of 78


September 09, 2016


Option Comments

1. Fund Based on Average Solvency Ratios Similar to federal model; Require funding based on three-year average

of solvency ratios

2. Lengthened Amortization Period Increase amortization period to 10 years (example)

3. Consolidation of Solvency Deficiencies Reamortize entire solvency deficiency at each valuation into one payment stream

4. Fund a Percentage of Solvency Liability Target 80% solvency funding (example); no requirement to fund above that level

Increase PBGF coverage to account for higher risk to plan members

5. Fund Certain Benefits on Solvency Basis Fund normal retirement benefit on solvency basis fund; ancillary benefits on going concern basis only

6. Others Increase letter of credit limits from current 15%; use solvency reserve accounts

P & B 8 Sept 2016 Page 11 of 78


September 09, 2016


All of these options would reduce solvency funding payments from current rules, when a solvency deficit exists

Certain options would suggest higher PBGF exposure and therefore require higher premiums to mitigate risk for members

P & B 8 Sept 2016 Page 12 of 78


September 09, 2016


1. Require Provision for Adverse Deviation(PFAD)

Percentage of liabilities required as reserve Amount of reserve could be linked to:

− Maturity of plan− Investment policy − Benefit provisions

Based on Quebec rules, typical “reserve” is 15% over “best-estimate” going concern liabilities without margin

2. Shortened Amortization Period Shorten amortization period from current15 years

3. Restrict Discount Rate Superintendent to set maximum interest rate; may be based on investment policy

Use accounting discount rate

4. Solvency Trigger for Enhanced Funding Require lump sum if solvency falls below level

5. Enhance PBGF Increased going concern plus enhanced PBGF funding may balance stakeholder interests

P & B 8 Sept 2016 Page 13 of 78


September 09, 2016


Approach B will increase current service cost and lead to going concern deficits and special payment requirements more often than current funding rules

P & B 8 Sept 2016 Page 14 of 78


September 09, 2016

Legal Disclaimer

© 2016 Aon Hewitt Inc. All Rights Reserved.

This document contains confidential information and trade secrets protected by copyrights owned by Aon Hewitt. The document is intended to remain strictly confidential and to be used only for your internal needs and only for the purpose for which it was initially created by Aon Hewitt. No part of this document may be disclosed to any third party or reproduced by any means without the prior written consent of Aon Hewitt.

P & B 8 Sept 2016 Page 15 of 78

University of WaterlooAs of June 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

P & B 8 Sept 2016 Page 16 of 78

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?


P & B 8 Sept 2016 Page 17 of 78

3

Executive Summary – Going ConcernFunded Status

Asset-Liability Return

Highlights for the Quarter-Ending 6/30/2016The plan's funded ratio increased to 95.9% at 6/30/2016. This result was primarily due to the combined effects of:

■ Asset performance exceeding expectations, and

■ Contributions of $19.2 million, and

■ An increase in liabilities primarily due to interest growth.

Asset Liability Return for Quarter-Ending 6/30/2016Assets returned 2.2% during the quarter while liabilities returned 1.4%, resulting in a funded status increase of 0.9%.

Values in $1,000,000

6/30/15 9/30/15 12/31/15 3/31/16 6/30/16 Market Value of Assets $ 1,387.7 $ 1,354.9 $ 1,402.7 $ 1,409.3 $ 1,442.9 Going Concern Liability 1,422.5 1,441.6 1,453.7 1,483.8 1,505.1 Surplus/(Deficit) $ (34.8) $ (86.7) $ (51.0) $ (74.5) $ (62.2)

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

Funded Ratio (Market): 97.6% 94.0% 96.5% 95.0% 95.9%Funded Ratio (Actuarial)1: 94.4% 90.9% 93.4% 92.0% 92.9%

Asset Duration 1.9 1.9 1.9 1.8 2.1Going Concern Liability Duration 14.2 14.2 14.2 14.0 14.0

Periodic Return/Change

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

Market Value of Assets Return 3.2% -2.5% 3.3% 0.3% 2.2%

Going Concern Liability:

Return 5.9% 1.4% 0.8% 2.1% 1.4%

Funded Ratio Change (Market) -1.7% -3.6% 2.5% -1.5% 0.9%


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

P & B 8 Sept 2016 Page 18 of 78

4

Executive Summary – Risk-Free BenchmarkFunded Status


Highlights for the Quarter-Ending 6/30/2016The plan's funded ratio decreased to 56.5% at 6/30/2016. This result was primarily due to the combined effects of:

■ Asset performance exceeding expectations,


■ An increase in liabilities due to a decrease in the risk-free rate.

Asset Liability Return for Quarter-Ending 6/30/2016Assets returned 2.2% during the quarter while liabilities returned 3.8%, resulting in a funded status decrease of 1.2%.


6/30/15 9/30/15 12/31/15 3/31/16 6/30/16 Market Value of Assets $ 1,387.7 $ 1,354.9 $ 1,402.7 $ 1,409.3 $ 1,442.9 Risk-Free Liability 2,352.0 2,318.2 2,350.0 2,441.0 2,552.0 Surplus/(Deficit) $ (964.3) $ (963.3) $ (947.3) $ (1,031.7) $ (1,109.1)

Periodic Contributions $ 18.6 $ 18.7 $ 18.6 $ 19.2 Discount Rate 0.95% 1.09% 1.05% 0.89% 0.70%

Funded Ratio: 59.0% 58.4% 59.7% 57.7% 56.5%

Asset Duration 1.9 1.9 1.9 1.8 2.1Risk-Free Liability Duration 18.8 18.6 18.7 18.6 19.0




Risk-Free Liability: Return 5.2% -2.3% 0.5% 3.3% 3.8%

Funded Ratio Change -2.5% -0.6% 1.3% -2.0% -1.2%


P & B 8 Sept 2016 Page 19 of 78

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.


6/30/15 9/30/15 12/31/15 3/31/16 6/30/16 Market Value of Assets $ 1,387.7 $ 1,354.9 $ 1,402.7 $ 1,409.3 $ 1,442.9

Going Concern Liability $ 1,422.5 $ 1,441.6 $ 1,453.7 $ 1,483.8 $ 1,505.1 Risk Premium 929.5 876.6 896.3 957.2 1.046.9

Risk-Free Liability $ 2,352.0 $ 2,318.2 $ 2,350.0 $ 2,441.0 $ 2,552.0


P & B 8 Sept 2016 Page 20 of 78

6

Executive Summary – Solvency Funded Status


Highlights for the Quarter-Ending 6/30/2016The plan's funded ratio decreased to 79.9% at 6/30/2016. This result was primarily due to the combined effects of:

■ Asset performance exceeding expectations,


■ An increase in liabilities primarily due to a decrease in risk-free rates and accruals, offset by an increase in the annuity purchase spread.

Asset Liability Return for Quarter-Ending 6/30/2016Assets returned 2.2% during the quarter while liabilities returned 2.7%, resulting in a funded status decrease of 0.7%.


6/30/15 9/30/15 12/31/15 3/31/16 6/30/16 Market Value of Assets $ 1,387.7 $ 1,354.9 $ 1,402.7 $ 1,409.3 $ 1,442.9 Solvency Liability 1,559.2 1,608.1 1,690.0 1,749.6 1,806.9 Surplus/(Deficit) $ (171.5) $ (253.2) $ (287.3) $ (340.3) $ (364.0)

Periodic Contributions $ 18.6 $ 18.7 $ 18.6 $ 19.2 Effective Interest Rate 2.67% 3.17% 3.01% 2.86% 2.77%

Funded Ratio: 89.0% 84.3% 83.0% 80.6% 79.9%

Asset Duration 1.9 1.9 1.9 1.8 2.1Solvency Liability Duration 14.3 14.2 14.4 14.7 14.7




Solvency Liability: Return 13.8% 2.8% 4.7% 3.0% 2.7%

Funded Ratio Change -9.1% -4.7% -1.3% -2.4% -0.7%


P & B 8 Sept 2016 Page 21 of 78

7

Appendix


P & B 8 Sept 2016 Page 22 of 78

8

Actuarial AttestationThis document is intended to provide to the University of Waterloo a summary of the performance of the Pension Plan as of 6/30/2016.

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.

August 26, 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

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

Risk-Free BenchmarkDiscount Rate 0.95% 1.09% 1.05% 0.89% 0.70%

SolvencyAnnuity Purchase Interest Rate 2.56% 3.21% 3.04% 2.87% 2.84%Effective Date of Annuity Purchase Guidance Used 6/30/15 9/30/15 12/31/15 12/31/15 6/30/16Lump Sum Value Interest Rate (Years 1-10)1 2.30% 2.00% 1.90% 1.90% 1.70%Lump Sum Value Interest Rate (Years 10+)1 3.80% 3.70% 3.60% 3.40% 3.10%Mortality UP94 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).

P & B 8 Sept 2016 Page 23 of 78

9

Liabilities

AssetsAsset-Liability Performance Attribution – Going Concern

■ Overall, assets returned 2.2% 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 during the quarter.

■ $19.2 million in contributions were made during the quarter and the trust paid $14.4 million in benefits to the participants.

■ Liabilities as of 6/30/2016 are based on a discount rate of 5.70%.

■ Liabilities were expected to grow by $20.6 million due to interest cost during the quarter.

■ New benefit accruals increased the liability by $15.1 million during the quarter.

■ Plan liabilities decreased by $14.4 million during the quarter as benefits were paid.


Funded Ratio

■ Contributions exceeded benefit accruals during the quarter, resulting in a net increase of 0.3% in the funded status.

■ Overall, assets returned 2.2% 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 1.0%.


P & B 8 Sept 2016 Page 24 of 78

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 decreased, resulting in a net increase of $87.1 million ($128.4 million - $41.3 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 2.6%.

■ Changes in inflation expectations resulted in an increase in the funded status of 0.9%.

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

■ Return-seeking assets performed as expected having no effect on 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.


$1,402.7 $1,442.9at 3/31/16 at 6/30/16

$16.7 $0.0 $2.2 $0.5 $19.2 $2.9 $8.5 ($14.4) ($2.0)$1,200

$1,300

$1,400

$1,500

ExpectedGrowth

Risk-FreeRates

Inflation CreditSpreads

ExcessReturnSeekingAssets

Contributions BenefitPayments

Expenses Other

$2,441.0 $2,552.0at 3/31/16 at 6/30/16

$13.9 ($41.3) $0.0 $0.0 $22.2 $2.2 $128.4 ($14.4) $0.0 $2,200

$2,300

$2,400

$2,500

$2,600

ExpectedGrowth

Risk-FreeRates



Accruals BenefitPayments

Expenses Other

57.5% 56.5%at 3/31/16 at 6/30/16

+0.6% +0.9% +0.1% +0.0% +0.3% +0.0%-2.6% -0.2% -0.1%54%

56%

58%

60%

ExpectedGrowth

Risk-FreeRates



Contributionsand

Accruals

BenefitPayments

Expenses Other

P & B 8 Sept 2016 Page 25 of 78

11

Liabilities

Assets

Asset-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 credit spreads widened, resulting in a net increase of $33.3 million ($62.9 million - $29.6 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 2.3%.

■ Changes in credit spreads and the annuity purchase spread resulted in a increase in funded status of 1.4%.

■ Return-seeking assets performed as expected, having no effect on the plan's funded status during the period.


P & B 8 Sept 2016 Page 26 of 78

12

Asset Allocation and Benchmarking

Asset Class 6/30/2016

Alternatives■ MSCI USA REIT Index 3.3%

■ MSCI USA Infrastructure Index 6.1%

Fixed Income■ FTSE TMX Universe Bond Index 54.8%

Equities■ MSCI World Index 32.2%

■ S&P TSX 3.6%

Total 100.0%


P & B 8 Sept 2016 Page 27 of 78

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.


P & B 8 Sept 2016 Page 28 of 78

Presentation to the University of Waterloo Pension and Benefits Committee


Asset-Liability Study Planning Meeting | September 9, 2016 The University of Waterloo Pension Plan

P & B 8 Sept 2016 Page 29 of 78

Proprietary & Confidential | September 9, 2016 2 Aon Hewitt

Agenda

Section 1 Current State

Section 2 Asset Classes, Assumptions and Methods

Asset Classes

Liability Assumptions

Asset-Liability Metrics

Section 3 Pension-Related Objectives

Section 4 Project Plan

Appendix A Capital Market Assumptions

Appendix B Detailed Explanation of Economic Scenario Generator

P & B 8 Sept 2016 Page 30 of 78


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

P & B 8 Sept 2016 Page 31 of 78


Section 1: Current State

P & B 8 Sept 2016 Page 32 of 78


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

P & B 8 Sept 2016 Page 33 of 78


Pension Plan’s Current Asset Allocation

Current Allocation

Return-Seeking

-Canadian Equity 3.6%

-Global Equity 32.1%

-Real Estate1 3.3%

-Infrastructure2 6.2%

Total Return-Seeking 45.2%

Liability-Hedging

-Cash 11.5%

-Customized Fixed Income3 43.3%

Total Liability-Hedging 54.8%

Total 100.0%

3.6%

32.1%

43.3%

11.5%

3.3% 6.2% Canadian Equity

Global Equity

Customized Fixed Income

Cash

Real Estate

Infrastructure

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

P & B 8 Sept 2016 Page 34 of 78


Section 2: Asset Classes, Assumptions and Methods

Asset Classes



P & B 8 Sept 2016 Page 35 of 78


Asset Classes

P & B 8 Sept 2016 Page 36 of 78


Asset Classes for Pension Plans

STOCKS BONDS X X Liability-

Hedging Assets Return-

Seeking Assets

P & B 8 Sept 2016 Page 37 of 78


Asset Classes Considered in the Optimization1

Liability-Hedging Equity and Return-Seeking Fixed Income Alternatives

Universe Bonds Canadian Equity Global REITS

Long-Term Bonds Global Equity Global Listed Infrastructure

20+ Strips Emerging Markets Direct Canadian Real Estate

Real Return Bonds All Country World Index, Low Volatility2 Direct Infrastructure

Interest Rate Overlays High Yield Bonds Private Equity

Global Bonds Multi Strategy Hedge Funds

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 A 2 Modeled as 55% US Equity, Low Volatility, 30% International Equity, Low Volatility and 15% Emerging Markets, Low Volatility

P & B 8 Sept 2016 Page 38 of 78



P & B 8 Sept 2016 Page 39 of 78


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

P & B 8 Sept 2016 Page 40 of 78


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%


P & B 8 Sept 2016 Page 41 of 78


Risk-Free Valuation Assumptions

Interest Rate Varying with simulated real bond yields

Salary Increases 4.00%


Under ITA 2.75%


P & B 8 Sept 2016 Page 42 of 78


Solvency/Hypothetical Wind-Up Valuation Assumptions

Interest Rate Varying with simulated Government of Canada nominal and

real bond yields

Mortality Rates CPM 2014 combined mortality table with CPM improvement

Scale B

P & B 8 Sept 2016 Page 43 of 78



P & B 8 Sept 2016 Page 44 of 78



In the Risk Diagnosis meeting we will review the projected evolution of the plan’s demographics and

key plan metrics

We recommend reviewing the following metrics in the Risk Diagnosis meeting:

– Average age of active members

– Active liability as a percentage of total liability

– Expected portfolio return

– University current service cost (% of pensionable earnings)

– University contributions

– Going concern funded ratio

– Risk free liability funded ratio

– Solvency funded ratio

P & B 8 Sept 2016 Page 45 of 78


Section 3: Pension-Related Objectives

P & B 8 Sept 2016 Page 46 of 78


Pension-Related Objectives

The University seeks to:

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

– Ensure the long-term affordability and sustainability 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

P & B 8 Sept 2016 Page 47 of 78


Section 4: Project Plan

P & B 8 Sept 2016 Page 48 of 78


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

Early October 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

P & B 8 Sept 2016 Page 49 of 78


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

P & B 8 Sept 2016 Page 50 of 78


Appendix A: Detailed Explanation of Capital Market Assumptions

P & B 8 Sept 2016 Page 51 of 78


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%

Global Bonds 1.3% 8.4% -15.9%

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

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%

Private Equity, hedged 8.5% 28.1% -35.6%

Multi-Strategy Hedge Fund, hedged 4.7% 8.4% -10.9%

P & B 8 Sept 2016 Page 52 of 78


Correlations

91-D

ay T

-Bil

ls

Extr

a L

on

g-T

erm

Bo

nd

s

(20+

Str

ips

)

Pro

vin

cia

l B

on

ds

, L

on

g-T

erm

Lo

ng

-Term

Bo

nd

s

Un

ivers

e B

on

ds

Overa

ll R

eal

Retu

rn B

on

ds

Glo

ba

l B

on

ds

Hig

h Y

ield

Bo

nd

s

Can

ad

ian

Eq

uit

ies

U.S

. E

qu

itie

s, L

ow

Vo

l

Int'

l E

qu

itie

s, L

ow

Vo

l

Glo

ba

l E

qu

itie

s

Em

erg

ing

Mark

ets

Em

erg

ing

Mark

ets

, L

ow

Vo

l

Can

ad

ian

Real

Esta

te (

Dir

ect)

Glo

ba

l R

eal

Esta

te (

RE

ITS

)

Infr

astr

uctu

re (

Dir

ect)

(h

ed

ged

)

Glo

ba

l L

iste

d I

nfr

astr

uctu

re

Pri

vate

Eq

uit

y

Mu

lti-

Str

ate

gy H

ed

ge

Fu

nd

, h

ed

ged

Infl

ati

on

91-Day T-Bills 1.0

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

Provincial Bonds, Long-Term 0.1 1.0 1.0

Long-Term Bonds 0.1 1.0 1.0 1.0

Universe Bonds 0.2 0.9 1.0 1.0 1.0

Overall Real Return Bonds 0.0 0.7 0.7 0.7 0.6 1.0

Global Bonds 0.1 0.4 0.3 0.3 0.3 0.1 1.0

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

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

U.S. Equities, Low Vol 0.0 0.4 0.2 0.2 0.2 0.2 0.3 0.1 0.2 1.0

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

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

Emerging Markets 0.1 0.2 0.1 0.1 0.1 0.2 (0.2) 0.5 0.6 0.2 0.5 0.6 1.0

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

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

Global Real Estate (REITS) (0.1) 0.3 0.3 0.3 0.3 0.3 0.1 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) (0.1) (0.1) (0.2) 0.0 (0.4) 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 0.3 0.3 0.2 0.2 0.3 0.3 0.4 0.6 0.8 0.6 0.4 0.5 0.1 0.6 0.3 1.0

Private Equity (0.1) (0.2) 0.1 0.0 (0.0) 0.2 (0.4) 0.5 0.7 0.2 0.4 0.6 0.6 0.7 0.3 0.4 0.3 0.4 1.0

Multi-Strategy Hedge Fund, hedged 0.2 0.3 0.3 0.3 0.3 0.3 (0.1) 0.2 0.3 0.1 0.1 0.1 0.2 0.2 0.1 0.1 0.0 0.0 0.2 1.0

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

P & B 8 Sept 2016 Page 53 of 78


Government of Canada Current and Long-Term Target Yield Curves

4.5%

4.0%

3.5%

3.0%

,, 2.5% Q)

> 2.0%

1.5%

1.0%

0.5%

0.0%

1r

-.J-

0

/

--

5

Government of Canada Yield Curve

-

~

~

~

~

/

10 15 20 25 30 35 40

Maturity

- July 29, 2016 - Long-Term Target

AON Empower Results•

P & B 8 Sept 2016 Page 54 of 78


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*

P & B 8 Sept 2016 Page 55 of 78


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)

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)

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)

P & B 8 Sept 2016 Page 56 of 78





Deviation

Source Source

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

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)

P & B 8 Sept 2016 Page 57 of 78





Deviation

Source Source

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

Private Equity, hedged We model a diversified portfolio with allocations to leveraged buyouts,

venture capital, mezzanine debt and distressed debt. Return assumptions

are formulated for each strategy based on an analysis of the exposure of

each strategy to various market factors with associated risk premiums

Standard deviation such that the Sharpe

ratio is the same as that of U.S. equities,

hedged

Hedge Funds - Equity

Market Neutral, hedged

A factor benchmark is estimated via a multivariate regression on cash, fixed

income and equities. An assumed excess return is then added to the factor

return based on the expected manager skill (alpha) of the average manager

and a provision for fees is taken


(1994-2015), adjusted upward following

the views of the CMA Committee and

hedge fund research team

P & B 8 Sept 2016 Page 58 of 78





Deviation

Source Source

Hedge Funds - Global

Macro, hedged






(1994-2015)

Hedge Funds - Managed

Futures, hedged






(1987-2015)

Hedge Funds - Equity

Long Short, hedged






(1994-2015)

Hedge Funds -

Convertible Arbitrage,

hedged






(1990-2015)

Hedge Funds -

Distressed Debt, hedged






(1990-2015)

Hedge Funds - Event

Driven, hedged






(1990-2015)

Multi-Strategy Hedge

Fund, hedged

Constructed as a weighted average of Equity Market Neutral, Global Macro,

Managed Futures, Equity Long Short, Convertible Arbitrage, Distressed

Debt and Event-Driven, all hedged

Based on the volatility of the underlying

asset classes

P & B 8 Sept 2016 Page 59 of 78


Appendix B: Detailed Explanation of Economic Scenario Generator

P & B 8 Sept 2016 Page 60 of 78


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

P & B 8 Sept 2016 Page 61 of 78



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 known

pricing function relationship

– The model that was retained was a 1-factor Cox-Ingersoll-Ross model from the affine family of

term structure models

• Arbitrage-free

• Entire TSIR is a function of the short rate

• Enables the reproduction of parallel yield curve movements which have historically

accounted for 85% of all TSIR variations

• Assumes a perfect measure of concordance between TSIR points (linear correlation)

• Is relatively easy to implement and interpret

P & B 8 Sept 2016 Page 62 of 78



Equity & Alternatives Module

– The main concern surrounding the selection of a model was to achieve a superior fit with

historical data than traditional geometric brownian motion (GBM). In particular, equity returns tend

to exhibit certain characteristics that a normal distribution cannot adequately capture:

• Equities (particularly Canadian equities) tend to have fat left tails. Moreover, the fatter the left

tail, the more one will underestimate downside risk if stochastic innovations are assumed

normal

• There is empirical evidence that expected returns, standard deviations and correlations are

not constant through time

Bull (high expected return / low volatility) versus Bear (low to negative expected returns /

high volatility) markets

Many large cap equity indices tend to exhibit increased correlations during periods of

economic stress

– In order to better model the higher moments of equity distributions, a Regime-Switching Log-

Normal (RSLN) model was retained (Hardy, 2001)

– Statet is a Markov Process governed by the transition matrix

– We assume 2 possible market states

• Normal: High expected return and low volatility

• Stress: Low expected return and high volatility

tt state

S

state

S

t

t NS

S ,~log 1 22MP~ tstate

P & B 8 Sept 2016 Page 63 of 78



…Equity & Alternatives Module

– Due to implementation, parameter estimation and data issues, we implement the RSLN in steps

– We first set up a global regime for the 3 primary equity asset classes that form the basis of all our

risk management studies, namely, Canadian equities (S&P/TSX), U.S. equities (S&P 500) and

International equities (MSCI EAFE). This regime requires the joint estimation of 20 parameters:

• An expected return and standard deviation for each asset class in each state (12)

• A set of correlations for each state (6)

• Transition probabilities (2)

– Parameters are estimated from monthly historical data over the period 1987-2015 using

Maximum Likelihood techniques

• While this is a relatively short calibration period, particularly for an RSLN model, we are faced

with data series of varying lengths for other asset classes. We have found that a 1987

starting point allows us to get a sufficient history for estimation purposes, but also keep the

inconsistency in time series length reasonably low

– Once the global regime is defined, we fix the parameters and then proceed to jointly estimate the

regime-dependent parameters of inflation and all other equity and alternative asset classes in

stages

– This approach was taken because the dimension of the joint estimation problem that considers all

equity asset classes is very large and leads to optimization convergence problems

• Discontinuous likelihood function in multiple dimensions with local maxima

P & B 8 Sept 2016 Page 64 of 78


Presentation to University of Waterloo Pension & Benefits Committee

Impact of CPP Enhancement onUniversity of Waterloo (UW) Pension PlanSeptember 9, 2016

P & B 8 Sept 2016 Page 65 of 78


September 09, 2016

Table of Contents

Integration of UW Pension Plan With CPP Benefits and Contributions Structure of CPP Enhancement Benefits Under CPP2 Contributions to CPP2 Phase-In of CPP2 Contribution Rates Phase-In of Additional Benefits Under CPP2 Integrating UW Pension Plan With CPP2 Comparison of Benefits and Contributions Before and After CPP Enhancement

P & B 8 Sept 2016 Page 66 of 78


September 09, 2016

Integration of UW Pension Plan With CPP Benefitsand Contributions

Current benefit replacement rate under CPP is 25% up to average YMPE

Initial integration with CPP for DB RPPs was typically based on either:25% / 35 years = 0.71% or 25% / 40 years = 0.625%

Benefit rate under UW Pension Plan was 1.3% below average YMPE / 2.0% above average YMPE prior to May 1, 1998

Benefit rate below average YMPE was improved effective May 1, 1998 from 1.3% to 1.4%

P & B 8 Sept 2016 Page 67 of 78


September 09, 2016

Integration of UW Pension Plan With CPP Benefitsand Contributions (Con’t)

Current CPP contribution rates for employees and employers:- 4.95% of earnings between YBE ($3,500) and YMPE- Tax credit for employee contributions

Member contribution rates under UW Pension Plan:- 5.80% up to YMPE, plus8.30% between YMPE and 2xYMPE, plus9.65% above 2xYMPE

P & B 8 Sept 2016 Page 68 of 78


September 09, 2016

Structure of CPP Enhancement

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

This document will refer to the CPP enhancement as CPP2

CPP2 will be universal; no exclusions for registered pension plans

CPP2 contributions and benefit accruals will start January 1, 2019, withphase-in of contributions and benefits over period until 2025

P & B 8 Sept 2016 Page 69 of 78


September 09, 2016

Benefits Under CPP2

Two elements to CPP enhancement for future service once fully phased-in:- Increase in benefit replacement from 25% to 33.33%- Increase in YMPE by 14% (referred to as YMPE2 in this document)

CPP2 provides:- Additional benefit replacement of 8.33% up to current YMPE - Additional benefit replacement of 33.33% from current YMPEto YMPE2

- Additional benefits accrued over 40 years

Increase in YMPE does not impact current CPP benefits

P & B 8 Sept 2016 Page 70 of 78


September 09, 2016

Contributions to CPP2

Additional CPP2 contribution rates for employees and employers oncefully phased-in:- 1.0% of earnings between YBE and YMPE, plus4.0% of earnings between YMPE and YMPE2

- Tax deduction for employee contributions to CPP2

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September 09, 2016

Phase-In of CPP2 Contribution Rates

Upper Earnings Limit Phase-In Employee and Employer Contribution Rates

YearProjected

YMPEUpper Earnings

Limit1

Upper Earnings Limit as Share of YMPE

Below YMPE Above YMPE2

% of Max Rate

% ofMax Rate

2019 $59,700 $59,700 100% 15% 0.15% 0% 0%

2020 $61,500 $61,500 100% 30% 0.30% 0% 0%

2021 $63,500 $63,500 100% 50% 0.50% 0% 0%

2022 $65,600 $65,600 100% 75% 0.75% 0% 0%

2023 $67,800 $67,800 100% 100% 1.00% 0% 0%

2024 $70,100 $74,900 107% 100% 1.00% 100% 4.00%

2025 $72,500 $82,700 114% 100% 1.00% 100% 4.00%

Note: Contribution rate estimated by Finance Canada. Requires confirmation from OCA and is subject to secondary design decisions.

1Term currently being used for YMPE22 Above YMPE up to Upper Earnings Limit

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September 09, 2016

Phase-In of Additional Benefits Under CPP2

Under fully-funded approach, phase-in of contribution rates also requires phase-in of benefit accrual:- 15% / 30% / 50% / 75% / 100% would also apply to the benefit accumulation

during the phase-in period- YMPE2 would also be phased-in for benefits

Still some key benefit design issues to be worked through (e.g., drop-out provisions under CPP2)

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September 09, 2016

Integrating UW Pension Plan With CPP2 For integration with UW Pension Plan for future service, it may be easier to

think of the CPP enhancement as follows:(i) 25% benefit replacement rate extended from YMPE to YMPE2(ii) Benefit replacement rate increased by 8.33% on earnings up to YMPE2

First consideration is integrating with extension of 25% up to YMPE2:- Addressed by using YMPE2 as the breakpoint between 1.4% and 2.0%

accrual rates under UW Pension Plan- Moves benefit accrual on earnings between YMPE and YMPE2 from

2.0% to 1.4%- Moves contributions on earnings between YMPE and YMPE2 from

8.30% to 5.80%- 8.30% would apply on earnings between YMPE2 and 2xYMPE2 with the

9.65% applying on earnings above 2xYMPE2

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September 09, 2016

Integrating UW Pension Plan With CPP2 (Con’t) In theory, increase in YMPE would be automatically integrated, but that may not

be the case depending how this new limit is defined in legislation:- UW Pension Plan define the YMPE as the Year’s Maximum Pensionable

Earnings under the Canada Pension Plan- YMPE needs to remain under CPP so if new term created such as Upper

Earnings Limit, integration with higher YMPE under pension plan would not necessarily be automatic

Second consideration is whether to integrate with additional 8.33% benefit replacement rate under CPP2:- 8.33% / 40 = 0.21%- Full integration would reduce the benefit rate below YMPE2 from 1.4% to 1.2%

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September 09, 2016

Integrating UW Pension Plan With CPP2 (Con’t) Need to consider that under exchange of benefits from UW Pension Plan to

CPP2, there are no unreduced early retirement benefits under CPP

Phase-in of benefits and contributions under CPP2 complicates integration discussion

P & B 8 Sept 2016 Page 76 of 78


September 09, 2016

Comparison of Benefits and Contributions Before and AfterCPP Enhancement (Assuming No Integration With CPP2)

1Benefit and contribution accrual rates if integrated with YMPE2

Post-Age 65 Benefit Rates Contribution Rates

Before After Before AfterEarnings LessThan YMPE:

CPP 0.63% 0.63% 4.95% 4.95%

CPP2 0% 0.20% 0% 1.00%

UW PP 1.40% 1.40% 5.80% 5.80%

Total 2.03% 2.23% 10.75% 11.75%

Earnings BetweenYMPE and YMPE2:

CPP 0% 0% 0% 0%

CPP2 0% 0.83% 0% 4.00%

UW PP 2.00% 2.00% 1.40%1 8.30% 8.30% 5.80%1

Total 2.00% 2.83% 2.23%1 8.30% 12.30% 9.80%1

Earnings BetweenYMPE2 and 2xYMPE

UW PP 2.00% 2.00% 8.30% 8.30%

Earnings Above2xYMPE

UWPP 2.00% 2.00% 9.65% 9.65%

P & B 8 Sept 2016 Page 77 of 78


September 09, 2016

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This document contains confidential information and trade secrets protected by copyrights owned byAon Hewitt. The document is intended to remain strictly confidential and to be used only for your internal needs and only for the purpose for which it was initially created by Aon Hewitt. No part of this document may be disclosed to any third party or reproduced by any means without the prior written consent ofAon Hewitt.

P & B 8 Sept 2016 Page 78 of 78

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