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York University Pension Plan: Concerns
Report Prepared for YUFA Stewards’ Council,
7 May 2010

by Walter Whiteley, YUFA Nominated Pension Fund Trustee

Some Background:

There are two factors that are pushing the University, and the plan members, to make some changes to the York University Pension Plan:

1. At this time, there is a substantial deficit in the plan (about $200 million) that will need to be paid off, from the budget of the University. In the Appendix, I describe some of the roots of the deficit.

2. The income of the pension plan (members’ contributions, University contributions, and returns on investment) are not sufficient to pay the additional pension obligations for members who have not yet retired, or to pay the ongoing pensions of retirees, without added contributions from the University.

The University will need to start paying off this overall deficit within about 14 months – when the Actuary does the Pension Plan valuation for 2010, and reports the (revised) deficit. In law, this deficit must be reported to the provincial agency (FSCO) at least every three years, and a plan given to pay it off within a set period. This coming need to pay the deficit means the University must consult with the representatives of Plan Members (YUFA, YUSA, … ) on any plan to pay the deficit off over more than 5 years (and up to 10 years). This means there will be some discussion triggered by (a).

Even prior to the decline in the markets in 2008, the Pension Plan was falling behind, and had built up a deficit of more than $40 million, which was starting to be paid off in 2006. This prior deficit is evidence of (b) above. A second contributing factor is the rise in life expectancy that was not immediately addressed by revised mortality tables – but was allowed to slide for some years.

This larger pattern of pension obligations growing faster than the pension fund has been true, on average, since about 2000, and looks to be true for some years to come. This could be attributed to the ‘aggressive’ assumption that the investments would return at least 6% plus inflation, each year.

For comparison, the Teachers’ Pension Plan has larger contributions from plan members and from employers, assumed returns of 4.5 % per year. As an additional comparison, the York Endowment assumes returns of 5% (nothing added for inflation) each year.

What Changes may be proposed?

1. First, it is important to say that the pensions being paid to retirees cannot be changed, unless the University declares bankruptcy! The changes I anticipate will be for people who have not yet retired, including people who join the plan in the future.

2. Increased contributions are certainly a possible change. As it happens, this is a change I would support – I want a good pension!

3. Decreased benefits are a possible change. Right now we have what is recognized as a good plan (though not a great plan). One feature is the ‘hybrid’ by which the money in ‘your account’ is used to calculate a money purchase pension, and your years of service and best 5 years salary (capped at a number from the federal law) is used to calculate a minimum guarantee pension. You actually receive the higher of these two numbers.

At The University of Western Ontario, about a decade ago, the plan was switched to straight money purchase. While investments returns were good, most people were already finding that was the bigger number – so that was not considered a big deal. In 2008 however, the expected pensions of Western faculty dropped with the markets, and there was no deficit for the University. Meanwhile at York, the expected pensions dropped but had a floor of the minimum guarantee that became the expected pension for a majority of members at York, and the University had a substantial deficit in the Plan, which now needs to be paid off. At UofT, all of the pension is a minimum guarantee type pension (Defined Benefit), so there was not any change in expected pensions when the markets were good in the 1990s or when the market dropped in 2008, so UofT had big surpluses in the 1990s and has a substantial deficit from 2008.

4. So one change that might be proposed at York could be to change to type of pension plan that Western has, and have the Plan members assume all the financial risks.

5. Reduced minimum guarantee (less $ value for each year of credited service up to 35 years of service – a number of years capped by Federal Law).

6. A change to an entirely defined benefit plan, like UofT’s. Sometimes, the Employer tries to emulate conditions at UofT. This has little immediate impact, but lets the University capture more of the surpluses if we have other decades like the 1990s.

Such changes could, in principle, be retroactive to anyone who has been a member of the Plan, but not yet retired. Or they could apply to all future years of work of those in the Plan, keeping the old provisions for prior years or service. Or they could apply only to new members of the plan. Or …. ?

We can get some glimpses of the types of changes universities are considering, by looking at proposed at Queen’s in 2005. (Queen’s has the same Actuary advising their administration as York does – an actuary from Mercer.) A document on the Web (www.qufa.ca/files/pdf/canben.pdf) outlines the proposals made in 2005 to deal with the systemic problems.

1. Shift the formula for indexing pensions, to make it less likely that pensions of retirees are increased;

2. Increase the contribution rates of both Plan members and the Employer (by .5 % of salary);

3. Put an additional cap on how much of the pension is ‘defined benefit’ – that is covered by the minimum guarantee (to only apply to average salary up to $84,000).

These proposals were not implemented at Queen’s because Queen’s Faculty Association had a clause in their collective agreement that required their consent.

Given the additional deficits from the stock market in 2008 (and the possibilities of further bad years over the next decade), I anticipate that the Employer will propose larger changes to our plan.

Required Consultation on Changes

Under pension law, proposed changes must include consultation with the All University Committee on Pensions – where all employee groups are represented. We will have some time to discuss, to react, and probably, to retire prior to changes being made to the plan.

Again, changes will not impact retirees. It is possible they will not be retroactive and will primarily apply to new people entering the Plan, and to further years of service within the Plan. We don’t know yet.

We Need to Educate Ourselves on These Matters

Other than raising big concerns, why should we, as Plan members and employees, become educated on these matters?

One is that collective action – not just actions of University administrations, will be vital to shaping the response. This is a situation where the response of larger circles of discussion will be critical: within our University, within the university sector, and within the larger society.

The press and some politicians are working to stir up ‘envy’ of the good pensions we have, compared to many other workers in society. Rather than improve the protections for other workers, their solution is to make our situation worse. This is a debate we should engage in, thoughtfully and knowledgably. 

As mentioned above, we will face proposals for changes, in the next few years. We should be discussing options, and goals. Do we have a way to discuss this within York? Can OCUFA (Ontario Confederation of Faculty Associations) and the COU (university administrations) work collaboratively on this to obtain coherent provincial action?

An important factor in any discussions of the Pension Plan is that the Plan covers all University employees. YUFA members are not a majority of the Pension Plan members, though our contributions and accumulated accounts are a majority of the money, and the pensions being drawn by retired YUFA members are a majority of the money being paid in pensions. So, we need to find good ways to work with other groups of employees, in particular with YUSA, but also with the three CUPE locals, the Osgoode Hall Faculty Association, and other employees (including administrators who are members of the Pension Plan).

One route is a joint committee authorized in our current Collective Agreement:

14.01 (d) The parties agree to establish a joint committee to study pension plan and retirement provisions to look at all aspects, including possible pension improvements, improving the minimum guarantee, full benefits for same-sex spouses, credit for years of service, and portability.

There are initial plans to activate this joint committee. Stewards’ Council might have some suggestions here, but one part might be a larger Pension Caucus that holds discussions and offers input to a smaller official group that represents YUFA at the joint discussions.

Appendix

York Pension Fund Deficits (Draft)

Walter Whiteley, YUFA Nominated Trustee, York Pension Fund, February 2010

The actuarial valuation of the York University Pension Fund, for 31 December 2008, confirmed substantial deficits in the pension fund. (See below for some comments on situation December 2009) These deficits were expressed in two numbers:

1. a ‘solvency’ deficit of $281.4 million (up from $27.8 million a year earlier), which represents an estimate of the additional money required to pay the pensions if it was wrapped up today, and;

2. a ‘going concern’ deficit of $265.6 million (up from $44.1 million a year earlier), which represents an estimate of the additional money required over the medium term (15 years) to run the fund as a going concern (i.e., continue to operate and have people join, work, retire, draw pensions, etc.).

What are the consequences of these deficits if nothing major changes?

1. Under current Ontario Pension Law, the Plan Sponsor (the BoG of York University) is required to pay off the going concern deficit over 15 years and the Solvency Deficit over 5 years.

2. The University will have to pay about $50 million extra a year into the pension fund. I understand this is about 15% of the current overall University Budget.

These payments will be triggered when the next Actuarial Valuation is sent to the Ontario agency (FSCO), which will have to be done with the valuation for 31 December 2010 (reported in June 2011). It is possible that rapid increases in the value of investments will reduce these deficits. The fund is up 16% at the end of December 2009. However, because the valuation assumes earnings of more than 6% just keeps the deficit constant, the fund would have to earn about 27% this year to overcome the current deficit. It is therefore highly improbable that there will be sufficient increases in the fund to eliminate the deficits before 2011.

This deficit situation is a systemic problem faced by university pension plans across Ontario. Recent changes in the law permit the pension deficit to be paid off over 10 years (with agreement of the plan members). Such a revised repayment scheme is also based on the assumption that a ‘university could not go bankrupt’.

Why the Deficit?

A significant part of the problem is a set of flawed government policies, and flawed assumptions used by the actuarial profession, and the investment community. The University was required, by federal law, to take pension holidays and not accumulate a surplus during the 1990s – a surplus that could have cushioned the impact of recent (realized and unrealized) investment losses.

The actuarial profession has consistently used what now look like unrealistic assumptions of investment returns, interest rates, etc. (e.g., 6.5 % returns on average) which understated the risk and understated the amounts needed to pay the pensions. This type of assumed return is built into our plan, as well as a number of other university plans around the province.

The investment policy is designed to return about 8% on average – if you accept the “standard” assumptions about interest rates and returns on investments. Clearly the last year has challenged these assumptions, as some of us have challenged them for much of the last decade. Nevertheless, these assumptions have been widely shared in the previous valuations and the York plan is typical of plans around the province.

The only exceptions would be places such as University of Western Ontario where the plan was converted to a defined contribution plan – the entire risk (loss in value) is assumed by the plan member – essentially a pooled RRSP for members, with no added protection for the members. Their anticipated pensions will certainly have dropped more than at York.

The problem is systemic across the province – and versions of it are systemic across the country. These are serious flaws but they are not particular to York.

Is there an added problem at York?

Yes. Because of the wording in our Plan text, there is a complaint at FSCO about how the indexation formula is applied in times of returns lower than 6%. If FSCO rules for YUFA, it will increase the deficit by an extra $100 million. The advice to YUFA has been that this appeal must be followed up because it is our duty to represent retired as well as active members – so it is awkward, but necessary. The two preliminary rulings at FSCO have been against the complaint, and in February there were further hearings. We should know the ruling before the end of 2010.

Are Pensions of Retirees Safe?

Under all the current pension rules in Ontario – yes. The University would have to essentially declare bankruptcy to alter these pension commitments. However, there are ways to discuss changes to projected pensions of those of us who have not yet retired (see below).

What about Larger Provincial Response?

These extra payments are substantial. Here are some possibilities that I am projecting will be discussed as the Province works through whether it will fund universities for this crisis.

Note that, even under the YUFA Collective Agreement, there is a level of financial difficulty that would permit the University to close academic departments, lay off tenure track (and tenured) faculty, etc. It would not be an ‘academic exercise’. In England, they have been closing departments and laying off tenured faculty for a number of years – without the incentive of this type of financial crisis.

This is just speculation but here are some alternative actions that may occur.

1. In the medium term, the Province may decide to change the payment schedule for solvency deficit (to 10 years). This reduced some of the immediate impact, but left a major problem for the University over the next decade.

2. The University may propose changes in the Plan text, at least for people not yet retired, and perhaps only for those years between when the changes occur and retirement. Such changes could include less protection for indexation of pension; increased pension contributions, lower guaranteed pensions. (Note the recent speculation about such changes in pensions of Federal Employees.)

3. On a bigger scale, the Province may be looking at a larger pooling of pension funds for investments – similar to OMERS, OPSEU (the college teachers’ plan), or Teachers – or a pooling of all these Ontario public pensions into a massive fund on a much larger scale. It is also possible that changes will be made to:

   1. pension plans in the public sector in general,

   2. low deficits are calculated, and

   3. who is responsible for paying the deficits.

4. While leaving the contributions / accumulation phase of pension administration with the University, there may be proposals to force universities to turn pensions into annuities either with a separate fund, or with private ‘partners’. (This has occasionally been discussed, at least federally for some years. Versions continue to surface in the press.)

5. I have no sense of whether these will be made or exactly what impact there will be. That will depend on the level of the crisis and the coordinated response of the larger community.