YUFA
Retirement
A Shadow Falls Between You and Your Pension
By Walter Whiteley (YUFA Trustee for the Pension Fund), John
Heddle (past-YUFA representative to the All University Committee on
Pensions), and Robert MacDermid (YUFA Communications Officer)
19 Jan 03 - The negative return on university pension plan investments over the past
year has highlighted a dispute between YUFA and the administration over
the payment of increases to pension amounts. This dispute first rose last
fall when the pension fund return was projected to be negative and the
Employer presented, for the first time, their calculations under the
'non-reduction clause' of our plan.
The Employer proposed to create a "shadow pension", the pension that would have been paid were it not for the non-reduction clause. Thus, whenever the non-reduction clause kicked in, a shadow pension would be created for each pensioner and it would be to this shadow pension that any subsequent increase would be applied. Your actual pension would not increase until the shadow pension exceeded what you were receiving, which could be years after the indexing formula turned positive again.
Nothing in the plan text justifies such a
calculation, unlike for example, the formula for the 4-year rolling
average increment, which is specified. Furthermore, many other plans
in Ontario have text that does create shadow pensions explicitly.
The Queen's university plan, for example, does contain language that
provides for shadow pensions. Since the text was written by the
Employer and does not contain such language, such a provision cannot be
assumed to be present by default.
YUFA contends that the administration has worked with an interpretation of
the pension plan text that reduces the costs of the 'non-reduction clause'
and reduces the long term pensions of retirees when there is a downturn
followed by an upturn in financial markets. The YUFA Executive, and
the YUFA representatives to the All University Pension Committee, John
Heddle and to the Pension Fund Trustees, Walter Whiteley, have repeatedly
argued that the Official Pension Plan text contains no such provisions.
The Association for Retired Faculty has also informed the administration
that it has received independent legal and actuarial advice that the plan
text does not support the existence of a shadow pension. YUFA has
therefore decided to take the dispute to the Financial Services Commission
of Ontario, the body that adjudicates disagreements over pensions.
What's at issue
The Pension Plan provides for a yearly increase to a retired member's
pension if the moving four year average fund return exceeds 6%. Any
earnings on the fund up to 6% are already built into the calculation of
retirees' pensions. When the returns are greater than 6% over a four
year period, the additional percentage is used to increase pensions. When
the rate of return on pension fund investments falls below the four-year
average of 6%, or even into negative returns, our Pension Plan
specifically says that pension payments may not be reduced. YUFA
reads the Plan as saying that when rates of return are once more above the
benchmark four-year average of 6%, increases will once again be paid to
retired employees.
The Employer interprets the plan text differently. The Employer has said
that if the moving four year average fund return is below 6%, although
your actual pension will not be reduced, the "deficit" will be
tracked by creating a "shadow pension" amount, and future
adjustments positive or negative will be applied to the reduced
"shadow pension." According to the Employer, if the four year
average fund returns are below 6% in one year, but over 6% in the next
year, your actual pension will not go up in the next year, until the
"shadow pension" exceeds your actual pension being paid.
This means that your pension will be lower the second year, and all future
years of retirement. There is no mention at any point in the text of
such a shadow pension calculation.
There is a small fund (3% added to your contributions by the Employer) to
pay for the non-reduction clause. If this is insufficient, the
additional costs would fall to the plan sponsor. The costs, or the
savings, of the interpretation do not affect the funds available for
pensions.
YUFA's contention is that the Employer's reading of the plan may
reduce any adjustments to pensioners for a considerable period.
If investment returns stay below 6% for a number of years, the
"gap" created by the "shadow pension" will become so
large that future years of better returns would not extinguish the gap for
a long time into the future. In other words, pensions would be
effectively frozen. The negative return for 2002 and modest returns (8%)
for the following four years would leave pensions effectively frozen for
some time.
There is a basic principle that one cannot reduce the benefits of people
who have retired. Our current retirees have read the text, and have
chosen the plan with the natural interpretation. YUFA cannot agree
to any reduction for current retirees.
The same non-reduction clause comes into effect in the year of retirement.
The pension is computed based on the value of funds the previous January
1, plus contributions to date. If the value determined at the
end of the year is lower, the pension is not reduced. Again, the
Employer is calculating 'shadow pensions' based on such lower values and
will hold back future increases to make up any gap.
This issue affects all York employee groups as we are bound by the same
Pension Plan text and interpretations.