Pension Plan Solvency Relief

In March 2011, York University applied for a two-stage solvency funding relief measure under the 1990 Pension Benefits Act (see: background documents below). The York University Pension Plan applies to all employees of the University, thus, the YUFA is part of an all-union Pension Group (YUPG). The YUFA Pensions Group includes Arthur Hilliker, Brenda Spotton Visano, and Walter Whiteley and was appointed by the Executive on 12 January 2011. Al Stauffer of the Association of Retired Faculty and Librarians was later added. Any changes to the plan require YUFA approval.

Scroll down to review all seven questions.

Why do we have (slightly) lower pension benefits

As some people know, I have continued to exchange with Richard on several sites over the last few weeks. I thank Richard for raising awareness of a number of issues – and helping us all clarify some issues in the pension plan.

It is good that more people are interested in more and wider aspects of the plan. Perhaps from this we will develop a wider knowledge of the choices people make, and the possibilities for alternative, better plans. I hope people will attend the coming two meetings, where there will be opportunities to engage in discussion, including asking questions of the YUFA lawyer and the YUFA actuarial consultant.

It will also be good if YUFA members are able to talk about some of these issues with plan members from outside of YUFA – as we are a minority of the plan members (though a majority of the $ in the plan ;-/ ). As the discussion widens, we encounter possible pension options which have different impact on different subgroups.

This conversation has widened to discussion to a number of issues and options. Over time, this has solidified my support for the current MOA, as the next necessary step in work on the pension plan, both benefits and administration. Let me repeat (somewhat edited) part of a message I sent to stewards council.

First, the differences with Richard are about defined benefit pensions from 1-5% less in the size of the pension received at some (but not all) other universities (depending on the salary if the employee – assuming the salaries at York are also the same as at other comparator universities. This same increase in pension, on the larger scale could also be addressed by higher final five year salaries (other raises)!

Let me offer some history, that might inform us of the difficulties here, and what we still might do.

* There is one example raised by Richard that I heard specific background about, so I will start with that:
– when a married person starts their pension, we are offered 50% joint and survivor pensions, while a number of pension plans offer 60%. Why?

Here is the story I heard from William Small. Back around 1994, when the provincial law made it required that spouses receive at least 60% joint and survivor pensions (unless they signed a paper accepting less), some plans increased this benefit to 60%. At York, there was also discussion. I am told that the All University Committee on Pensions (AUCP) – a consultative body which exists by law, made a unanimous recommendation to the BoG that York should also increase this benefit. However, even though the Pension Plan had a substantial surplus at the time, which could have easily paid for the costs of that benefit, the then VP Finance recommended that the BoG turn down this change – and the BOG did not make any change.
What difference does this difference in formula make? Roughly, the annual pension people will received is reduced (by the actuarial calculation), if you have a spouse and if you go with the legal default of 60%, and this reduction is after your other calculation is made. [Such a reduction is also made if you optionally choose 75% or 100% joint and survivor pensions.]
What is striking looking back at this episode is that the unions (a majority of AUCP membership) did not make a fuss about this issue. There were surpluses – and all that I heard was YUFA members and leadership fighting to get a share of the surpluses, rather than improve benefits, a missed opportunity in the search for better benefits.

*In 1997, when moving mandatory retirement back to 65 was a hot topic (we had a faculty strike), again I heard nothing about improving the formulas in the pension plan. Most people were still on money purchase pensions, and the few who were not, like recent CUPE conversions, or people entering York late in their careers (like me) were on the margins. Times of pension surplus would have been a much better time to bargain for improvements in the formula, but none of the unions made this a topic of education or a priority priority. A second missed opportunity – but also an indication that the details of the pension plan are difficult to organize an informed discussion around and develop a priority union bargaining push around.

* when the plan moved into deficits, peoples’ pensions were also moving into minimum guarantee. Still, through the early 2000’s – nobody talked about bargaining the plan text to provide better pensions. (Well a few people did but no union and no bargaining proposal made that a priority issue.) When the plan has a deficit – it is harder to bargain improvements, the costs are already going up – and that pushed the costs up even more. So a decade later(say 2004), another opportunity was missed.

* now we have much larger major deficits, deficits which are draining 25-50 million out of the university every year, as special payments, as well as added payments by the university to cover the added minimum guarantee pensions which were added on that year.
We also have the attention of the government (and the public) who do not want to see funds taken out of services to students to fund pension deficits. No external source will fund these deficits. Either we at least ensure we pay for the real pension promises we are receiving, or pressure will mount to reduce the benefits.

* a few years ago, the federal government passed another law, permitting defined benefit (and hybrid) plans to allow years of service to go above 35, without a limit – if the plan text is changed. While some plans were on top of this, and made the change, York did not. Thus with 40 years of service credited the plan, my pension calculation will be limited to 35 years of service – about a 10% loss in my pension. Another example of lack of expert attention to our plan.

* our plan text is now very dated. All the language is about “retiring” – not about “drawing your pension”. At age 71, you must draw your pension but you do not have to retire. Between 65-71, other universities permit people to draw their pension without retiring (so perhaps one could afford to work on a reduced load reduced salary arrangement of 1/2 time/). Distinct is the question: when can you stop contributing to your pension (before drawing the pension), while still working? That is muddled up in the current text, written long ago and out of date.
Our plan administration is less than transparent, and needs more input from plan members (to whom plan administration has a fiduciary responsibility).
The current MOA has text to start further discussions about these terms of the text which do not involve increased costs (and the items in the previous paragraph are examples). We can make some changes which matter to people near retirement (say over 65) now – but only when we complete the MOA.

As information has come out and discussions have continued, it is clearer to me that we are unlikely to improve the terms of the pension plan which directly cost money. Windows of opportunities have opened and closed – and right now it will be quite expensive to the employer, and also require even higher contributions from plan members. So I see this solvency situation as part of a closed window, with at least as much pressure on the plan members as on the employer.

If we do not increase contributions to something in the range proposed in the MOA, the plan will not be properly funded for plan members. The pressures to reduce benefits will increase, and we will be in a difficult fight. The attention of the public, the politicians, and the government is one ensuring the pension plans do not drain funds away from teaching and other services.

I want to pay for the plan we have, preserve these benefits for all members and move on.

Walter Whiteley
YUFA Steward, Math and Stats
YUFA nominated Pension Fund Trustee

Why do we have (slightly) lower pension benefits?

Let me offer some history, that might inform us of the difficulties here, and what we still might do.

* There is one example raised by Richard that I heard specific background about, so I will start with that: when a married person starts their pension, we are offered 50% joint and survivor pensions, while a number of pension plans offer 60%. Why?

What difference does this difference in formula make? Roughly, the annual pension people will received is reduced (by the actuarial calculation), if you have a spouse and if you go with the legal default of 60%, and this reduction is after your other calculation is made. [Such a reduction is also made if you optionally choose 75% or 100% joint and survivor pensions.]
What is striking looking back at this episode is that the unions (a majority of AUCP membership) did not make a fuss about this issue. There were surpluses – and all that I heard was YUFA members and leadership fighting to get a share of the surpluses, rather than improve benefits, a missed opportunity in the search for better benefits.

I want to pay for the plan we have, preserve these benefits for all members and move on.

Walter Whiteley
YUFA Steward, Math and Stats
YUFA nominated Pension Fund Trustee

What the 2013 CAUT pension survey tells us

Dear colleagues,

In order to evaluate the proposed pension deal, it is important to use evidence that includes comparisons with other faculty pension plans. The recent CAUT pension survey lets us do exactly that, and it shows that our proposed pension agreement does not seem to stack up well against most other Canadian faculty defined benefit and hybrid plans. We will be paying more and getting less than most.

Here’s the comparison:

Higher than average employee contributions. The average level of employee contributions for Canadian faculty pension plans is now 7.35% of salary (for the average member). If we accept the proposed agreement our contribution level would rise to 8.2% (an increase of almost $4000 per member).
Continuation of low defined benefits. The CAUT survey shows that we have one of the worst defined benefit – or minimum guarantee – formulas among all 29 hybrid and defined benefit pension plans in Canada. Unfortunately, the proposed agreement keeps our accrual rate at 1.9%, making ours one of only four DB or hybrid plans in the entire country that is below 2.0%. That can mean that our annual pension income under the minimum guarantee would often fall between $4000 – $6000 below other plans.
Our deficit is not exceptional. According to the survey our pension deficit is about the same as that of most Canadian faculty plans. This means there’s no need for us to have more costly contribution increases or worse benefits than our counterparts. In fact, deficits are improving significantly according to reports.

Going beyond the CAUT survey, I urge people to take a close look at Wilfred Laurier’s pension plan and then compare it to our proposed plan. Laurier faculty have a hybrid plan like ours, but their superior minimum guarantee formula means that a faculty member with the same career profile as someone at York will end up with pensions about $5-6000 higher.

Finally, we need to realize that it is easy to overplay the so-called pension ‘crisis’. Last year CAUT president Wayne Peters urged member associations to resist scaremongering over pensions. We may therefore want to consider how we can improve the current deal.

Should we delay the vote?

I mentioned in another posting that solvency deficits of Canadian pension plans are shrinking due to changing financial markets. In fact, relatively small changes in long term bond rates can have quite large impacts on pension deficits. This raises the question of whether we should vote for a 50% increase in our contributions on September 16.

We therefore need to think of alternatives to voting ‘yes’ to this deal. York’s Stage 2 solvency relief application to the government is not due until May 31. We can get a preliminary actuarial report of our Plan’s year-end deficit in January. This would be wise in view of reports in the media and the pension community that pension plan deficits were significantly improving in 2013. Why should we rush a deal when there is little risk in waiting a few more months to see how much the financial health of our plan has improved? The employer has the greatest interest in finalizing a deal now before its claims about a serious crisis of “unsustainability” are no longer as credible.

We have strong leverage in these ‘solvency relief’ negotiations because our collective agreement requires the employer to seek our consent before making changes to the York Pension Plan. This is not collective bargaining where there is a threat of a strike or lockout if we ask our negotiators to return to talks. In fact, we are helping the employer significantly by offering to reduce its burden for financing the York Pension Plan while increasing our contributions.

So, there are alternatives. We do not have to approve this deal on September 16. That would force negotiations to continue. Or we could pass a motion to delay the vote until early in 2014 at which time all parties might agree that smaller employee contributions increases might be in order.

I think it is in everyone’s benefit to delay the vote until we have an actuarial report. This would settle any guess work around our financial situation.

I was invited to Executive last Friday to discuss my proposal to delay the vote. Here was my argument:

The last York pension plan valuation was for December 2010. The solvency deficit was so large that the university (like most others) had to apply for the government’s offer of ‘solvency relief’ which allows institutions to amortize ‘deficieny payments’ over ten years instead of five. The next three-year pension valuation is scheduled for this year, December 2013. At that point the pension plan’s solvency deficit should be reduced significantly. If so, then the university no longer needs the lengthened amortization period to pay down the deficit (it has five years even without solvency relief). The solvency relief framework is not good for us: it allows the government to prescribe an approach to making the plan ‘sustainable’ that is based on removing risks from the employer and putting them on the employees. This framework may no longer be necessary. If we negotiate outside of the government supervised solvency relief program we have more freedom. We may still want to accept higher contribution rates (at least to a degree) for the sake of ‘sustainability’ but we can explore better ways of improving our benefits, such as improving our minimum guarantee formula, which the government might not have approved under solvency relief.

I am in favour of wider discussion – it is great that people are paying attention to, learning about, and debating issues of the pension plan. This is overdue – I have wanted it for about a decade.

However I do not want to delay the vote until the last minute as far as solvency relief is concerned. Here are a couple of reasons:

This is a multi-union and multi-party” process. We are partners with a number of unions (CUPE locals, YUSA, Osgoode Hall, … ) and will need to work with those other unions.
This change is essential for the going concern deficit, which will not change radically because of change in interest rates. Going concern deficits were central to the internal discussions among the unions, including advice from our own pension advisors (the YUFA actuary, the YUFA lawyer, the CUPE national pension advisors).
All other plans have contribution rates higher than our current rates. If we stay with our current rates, we will increase our going-concern deficits, year by year. There are a series of external and internal pressures which will seek to reduce our benefits. I am not convinced the members at York are up for a major fight on that.
Some major increases are required – the question is exactly how much: .5% less? Expecting to continue low contribution rates is walking into big danger, without a plan or a good option.
I think the plan can be better, and have a list of ways it could be improved.
I think accepting this proposal, is a good step towards further changes. This will further mobilize collective multi-union responses, and give a sounder financial basis for a number of further discussions. I have posted something elsewhere on the YUFA site on why a defined benefit plan could be better (with even higher contribution rates). The short form is: better benefits require higher contribution rates. With the major shifts in the last 15 years, even retaining current benefits requires higher contributions.
In the end, we have a good plan – but not the best possible plan. Some of the debates become about generational equity – what is good for junior members is not as good for people near retirement. What is good for people with high salaries is not so good for people with low salaries. Surprisingly this change is best for junior members with lower expected salary increases. These are a majority of the members of the pension plan.
As we debated details, I celebrate that this will sustain our good benefits. I am near drawing my pension, and I celebrate that two financial advisors have looked at my overall expectations has concluded: You have enough! My goal is that all long term plan members retiring from York can hear the same response.

Actually, Walter, it sounds like we agree. I’m not against higher contribution rates either, but only as long as we get better benefits or have some guarantee that this does not generate a windfall for the employer. That means improving our minimum guarantee or negotiating a sunset clause to cover the possibility of ‘over-paying’ when deficits disappear. To be honest, I’m not sure how one can be opposed to either of those things or why the other unions would be.

One more important point: all the faculty associations you speak of with high contribution rates (over 7.5%) have significantly better benefits formulas than we do. If you want to compare us to those pension plans, then you can’t forget this. Someone who will retire from York on an annual $70,000 minimum guarantee pension would be able to retire at Uof T, Guelph, Waterloo, etc on a $75-77,000 pension.

Our 'hybrid' pension plan: Does it justify a 50% contribution increase?

One argument for the proposed 50% permanent increase in our pension contribution rates is that under a ‘hybrid plan’, such as we have, higher contributions (from either/both employees or the employer) may have the effect of boosting our eventual retirement pension. Hybrid plans include two alternative benefit calculations: (1) the minimum guarantee formula based on years of service and highest average salary and (2) the individual member’s money purchase account (i.e. the accumulated ‘fixed’ contributions of the employee and employer plus accrued earnings over time). At retirement members receive the higher of the two options: the pension calculated under a minimum guarantee formula based on years of service and highest average salary OR the pension based on the amount in the individual member’s money purchase account upon retirement. Higher contributions theoretically could allow one’s money purchase account to generate a higher pension than the ‘defined benefit’ of the minimum guarantee.

While I am prepared to keep an open mind, there are several problems I see with using this argument to justify the current pension deal:

1. Even with higher contributions many people still will be retiring on the minimum guarantee formula – or on a money purchase pension (MPP) only slightly higher than a minimum guarantee pension. In those cases increased contributions are just an expense subsidizing the amount the employer might otherwise have paid, not improving their pensions at all. For many people their money purchase pension would have to dramatically increase before it moves higher than the minimum guarantee, or before it begins to offset the cumulative effect of the 50% annual contribution increase paid by employees.

2. The employer recently made unilateral changes to the plan’s ‘non-reduction reserve transfer which significantly raised the bar to qualify for higher money purchase pension. For new retirees (after January 2013) six percent of the funds in their money purchase account will be deducted upon retirement before their money purchase pensions are calculated (in order to create a fund to insure against shortfalls in plan performance). Also, the proposed changes to our plan mean that the employer will no longer fund any portion of the non-reduction reserve in the future.

3. People are living longer. This allows the plan sponsor (the employer) to change the mortality assumptions in the plan, which can significantly reduce the size of the money purchase pension. The employer does not need to seek YUFA’s approval to do this.

The only possible justification for proposing an irreversible 50% increase in employee contributions is that it might allow a lot more of us to retire on a much higher money purchase pension that would, in the end, yield a better retirement than would otherwise be the case. Why does the pension committee’s report not provide illustrations or evidence to make this scenario more plausible? In these circumstances, would it not be better to convert our plan to a defined benefit plan (like most public service and university faculty plans) so that we could be sure that our higher contributions would indeed lead to higher benefits?

Contribution rates seem to be the focus of both the proposed changes in the plan, and the resistance to the scale of these changes.

I think there is an agreement we must make some changes to contribution rates. Our current rates are dated to a time when investment returns were significantly higher and when mortality rates were higher (people did not live as long). The question is how high. Here is an interesting link for a series of university plans – mostly defined benefit:

What the union group bargaining these changes set as a goal was: sufficient funding to preserve the current pension benefits on a going concern basis (i.e. over many years of contributing and drawing pensions). I think the proposed new contribution rate, with full matching from the employer (which is not quite explicit in the table above, but I anticipate almost always there).

A minimum test of this is to take the contributions for a given individual, and a given year and see if they are sufficient to pay for the increased pension benefits from that year of service using the assumptions of the Actuarial Valuation. If they are less – the pension deficit is growing and there will be continuing pressure to reduce benefits (or make another increase).

If the contributions are more than necessary to fund the equivalent of the added minimum guarantee pension, what happens? Because we are a hybrid account, each of these $ goes into an account in the individual’s name. This ‘money purchase’ account grows with investment income, and at time of drawing our pension is converted into a pension. More money in our accounts means a bigger pension.

So contributing “too much” with matching from the employer (effectively a pay raise, into a savings account) is actually good for members – something I want.

There is a catch, which Richard is implicitly speaking to. Most of us now have a higher estimated minimum guarantee pension that an estimated money purchase account. There will be a real lag for long term employees between when we contribute more and when we might get a money purchase pension. For new members, this lag should be short. For people like me, within a few years of drawing our pensions, all the added contributions will achieve is that the university will contribute less additional minimum guarantee pension to me, but the total pension will be the same. So this is, in part, a generational question – one I am comfortable supporting. All members should be building good pensions.

It will be dangerous to have a pension plan where the deficits continue to grow. It will attract attention to our good pensions, moving us away from what I believe is the correct description of the plan: our deferred wages. The increased contributions are an implicit wage increase, and a fully funded pension is a pool of ‘savings‘ that is not a drain on others.

A growing pension deficit is a drain on everyone – requiring millions in extra university contributions from general funds (ie. the 3%, 4% cuts to every department, every faculty, everything that matters at York). I want the money safely in the pension fund to support my pension for many years to come.

Relying on annual major contributions from the university, because we are not funding the pension plan is a recipe for mounting pressure to reduce the pension benefits. It also attracts direct attention from the Provincial Government, who have already told some big plans (Teachers, OMERS, … ) that if they run a new deficit in the next few years they cannot increase contribution rates but must cut benefits. Having a plan that is fully funded is our best protection for our current benefits.

Walter,

You are overlooking the fact that there really is no major funding crisis for our pension plan. The Mercer Pension Health Index was at 77% a year ago, but now is 95%, very clearly indicating that most pension solvency deficits in Canada are close to being eliminated. This can’t be ignored. It seems that your argument is different: you are suggesting that in the long run we always benefit – deficit or not – from ‘paying more’ (matched by the employer)into a defined contribution scheme and that this approach is always better or more sustainable than relying on a defined benefit plan. This is completely untrue because we can certainly increase employee contributions to a DB scheme (but hopefully only to the extent needed to make the plan financially sound, respond to longevity changes, etc.). DB plans work especially well for workers with steep earnings profiles (like professors and teachers) since benefits are typically based on the last years of earnings. Defined contribution plans leave the employees with too much risk.

The larger point is that the entire pension exercise at York has been premised on a funding / deficit crisis that almost certainly no longer exists. Our leadership cannot now say that the real (unspoken) objective was to change the emphasis of the plan because of an (unspoken) belief in the advantage of the defined contribution component, independent of whether there is a funding crisis.

Richard

Is a hybrid plan or a defined benefit plan better?

York Pension plan is a hybrid pension. At the time of you draw your pension, two pensions are calculated:

what the funds in your money purchase account would provide as a pension, with the current mortality tables, and the assumption investments will earn 6% a year
what your years of service (up to 35 years) x a % in the formula x the average of your best 5 years salary will provide as a defined benefit (minimum guarantee pension)
whichever is higher is your starting pension

A few universities have such hybrid plans (York, Queen’s, Windsor, and Carleton), most have defined benefit plans (U of T for example) a modified version of our minimum guarantee pension and at least one has a defined contribution plan (Western) essentially only the money purchase component of our plan.

As Richard has pointed out – our minimum guarantee pension formula is a bit lower than a number of defined benefit plans.

Throughout the 90s most people at York retired on money purchase pensions. In recent years at York, most people are retiring on minimum guarantee pensions.

Does this matter?

Yes – all contributions made by members (and matched by the employer) go into our individual money-purchase accounts. If our new contributions are big enough, we will move up above the minimum guarantee to a higher money purchase account.

A sign that we have reached that point will be that there are no longer deficits in the pension plan!

One further point: could we now bargain to switch to a defined benefit plan (perhaps with better benefits than our current minimum guarantee plan?

The answer is – perhaps if we are also willing to share the risk, through a jointly sponsored Pension Plan. This is one of the preferred outcomes for the current government policies.

The big plans in Ontario, such as the Teachers Plan, OMERS, HOOPP (Hospital workers), and CAAT Pension Plan (College Employees) are jointly sponsored defined benefit plans.

In those big Jointly Sponsored plans:

when there is a deficit, either the contributions are raised immediately, by their board, or benefits are reduced (Right now, the government has extracted agreements that contribution will not be increased over the next three years – so new deficits will mean reduced benefits)
when there is a surplus, either benefits are increased or contributions are reduced

These plans currently have higher contribution rates that even the higher rates proposed for the York Pension Plan – higher benefits take higher contribution rates.

We at York could investigate joining an existing jointly sponsored plan. One which has invited us to consider joining is the CAAT Pension Plan (college employees):

So far, the all union group discussing our plan have not shown any interest in this option, nor has the employer. So this remains a medium term discussion point – if people are ready to re-examine the hybrid bargain.

Walter,

At universities with DB plans – like U of T – most members will retire on a pension that is 7-8 % higher than our minimum guarantee. I’m not sure that the Plan changes will push our money purchase pensions high enough to make up this difference. In fact, as I said in another post, there are a number of factors that didn’t exist in the 90’s – such as Plan provisions around the non-reduction reserve and longer life expectancies – that will work against this.

If we are going to start paying more than 8% of our salary into the pension plan, we should get a defined (guaranteed) higher benefit like other plans that have moved to the same contribution rate. We don’t need a joint sponsored plan for this. At the very least we need to be given more complete evidence of why our money purchase (‘undefined’) pension is likely to match your projections.

Should employee contributions be increased so much...and permanently?

I am very concerned about the recently announced solvency relief pension agreement. The deal that the York University Pension Group (YUPG) made includes a whopping 50% contribution increase, almost $4000 per member (and growing each year). For the average member this is 2.8% of salary, bringing our total annual pension contribution to well over 8%. There is no way to reverse this increase even though all reports suggest that the solvency deficits of pension plans in Canada are already being reduced (primarily by financial market factors such as long-awaited increases in long term bond yields).

At University of Ottawa last week our colleagues rejected an identical demand for a large increase to pension contributions. Instead, they settled on a much smaller increase of 1.23%, using the argument that pension plan finances are improving. (U of Ottawa faculty also have significantly better pension benefits than we do.) Other faculty associations have received salary offsets to diminish the impact on take-home pay. Sunset clauses allow employee contribution rates to return to a rate closer to their previous levels once a financial target for the plan has been achieved. At Guelph the faculty association has negotiated a ‘sunset clause’ which is a good way of dealing with a financial challenge that appears to be largely cyclical, not permanent.

Again this is a very significant financial issue. It is true that we have a hybrid plan, and some people will have higher pensions as a result of the increased deposits into their money purchae accounts, but I am not convinced that this will offset the very high cost (see the other forum topic on ‘hybrid plans’). I have calculated the (estimated) impact of the new contribution rates for different categories of members assuming that the lost take-home pay would have been saved by the member until retirement (this is before any offsetting benefit of a ‘possible’ higher York pension):

Estimated impact

45 yr old member ($107,000 current salary)
Career cost: $200,000

54 yr old member ($135,000 current salary)
Career cost: $75,000

60 yr old member ($150,000 current salary)
Career cost: $29,000

Proposed pension changes

A key feature in these changes is the increase in contribution rates.

I view these increased contributions (matched by the employer) to our money purchase accounts as a win for plan members:

we will have higher individual money purchase balances, which can, with good investment returns, increase our pensions
with the prediction that these contributions will fully fund the pensions, in the medium term, the plan sponsor is maintaining the current benefits in the plan

Could we have a better plan? Yes – but we would have to pay more, and would have to bargain for the employer to pay more. This is still an option for the future, if it becomes a bargaining priority for plan members!

Walter Whiteley
YUFA Nominated Trustee, York Pension Fund