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Will Your Pension Increase After Retirement?

Walter Whiteley
YUFA Nominated Pension Fund Trustee

19 Mar 04 - When you retire on a York Pension, your pension is protected against reduction, and it may increase. But what should you anticipate? The recent report on the York Pension Fund return is an opportunity to reconsider “expected increases”.

The plan text and the initial pension calculations for money purchase pensions are all based on the assumption the fund will earn at least 6% per year, over 4 year averages. This has been true most years, but was not true last year, or this year. What we hear from investment experts is that this average return is not likely to exceed 6% for a few more years. So there will certainly be some years with inflation, but without increases in pensions being paid. 

In the long term, will pensions increase as much as inflation? Over the last decade, calculations show that the pension increases did just match inflation (some years higher, some years lower). What do projections look like for the next decade? Recent discussions at the Pension Fund Trustees, and recent press stories from large plans like the Ontario Teachers Plan, suggest that average returns will not be as large as 6% plus inflation (what the finance people call ‘real 6%’). That is, current projections suggest that pensions being paid at York will increase some years, but will not increase as much as inflation, on average. It is important for members to plan for this possibility, and not simply anticipate that the wonderful returns of the 1990s will continue for the next decades.

What happens when average returns are below 6%, as they were this year and last year? The non-reduction clause of our plan means there is no reduction of the pension paid. The fund contains enough money to cover the pensions, although the employer has to contribute a bit more for a few years (to cover this small deficit) to ensure this remains true. We all agree on that. However, the plan sponsor and the unions (plus the York University Retirees Association) do not agree on what happens the next time the average returns exceed 6%.

The Plan administration is recording these average returns below 6% (-.6035% for 2003, -2.1481% for 2002) in a lower ‘shadow pension’ for retirees. They plan to take any future positive numbers (more than 6%) and first recover these lost percentages, before giving any increases. This is not what we, and our advisors, read the plan text to permit. The dispute about what the plan text says and means is currently in front of the Financial Services Commission of Ontario. YUFA hopes to have the formal hearing in April, and receive a ruling later this year. The dispute is not about ‘what is reasonable.’ It is about what the text says, and what people expect when they read the text and plan for the future.

Are there better ways to write the plan text and help retirees (and the university) plan for the future? Certainly. That is a larger discussion that we should encourage. Meanwhile, it is important to work out what we can expect with the current text and the current environment.