It needs to be clearly stated: the pension proposals specifically exclude any change to the minimum guarantee benefit formula. However, the rules are complex and it appears that some have mistakenly interpreted several of the proposed changes as “reduced benefits.” Here are some examples of that confusion:
- The proposed 5% charge to money purchase accounts is intended to partially off-set the cost of the “no reduction” guarantee on money purchase pensions. Over the long-term, money purchase pensions built up with higher employee contributions would likely be greater than the minimum guarantee pension, even taking into account the 5% charge;
- Eliminating the early retirement subsidy on minimum guarantee pensions prior to age 65 (increasing the reduction from the current 2% to 6% if retirement occurs between ages 60 and 65) – could result in a smaller benefit for faculty who choose to retire before age 65 but, as the vast majority of faculty choose to work beyond retirement age, this potential reduction would only affect those who voluntarily left early.
- No indexing of minimum guarantee benefits – this proposal only applies to future service, and would have minimal impact on minimum guarantee benefits at the front end (no elimination of the early retirement subsidy and indexing on accrued service prior to implementation). Even with this proposal, the underlying, but lesser, money purchase component of a member’s pension will continue to be indexed, and eventually will surpass the minimum guarantee pension in payment, resulting in an indexed benefit from that point forward.
As to the university reducing its contribution to the pension plan, this is, perhaps, a recognition that changes to the plan would, potentially, reduce the university’s extra payment obligations once the next valuation is filed. In other words, if nothing is done, the university’s pension funding requirements will increase following the next valuation (up to as much as $70-million per year, or more than 15% of the overall operating budget.
However, even with changes to employee contribution levels, the university contributions will still increase significantly from their current levels even if we benefit from solvency relief: in addition to the contributions made to individual member money purchase accounts, Queen’s will continue to pay both current service costs (as required for the Defined Benefit or “minimum guarantee” side of the plan) and the additional special payments on the current deficit from the last filed valuation (currently about $5M annually). In addition, the university will be responsible for the additional costs incurred once interest on the solvency deficiency is factored into the equation — according to the stage one relief rules, while solvency payments are deferred for three years plan sponsors will have to cover the interest during that period, which for Queen’s is estimated to be around $12M.
Queen’s will receive “credit” for its going concern extra payments, so the current plan, already, is to proactively increase the university’s contributions by about $7M annually. If all of the proposed plan changes were agreed to by all employee groups in time to be fully factored into the August 31 valuation then this would serve to reduce the required current service costs — but this reduction would only be a fraction of the additional special payments the university is expecting to pay into the pension plan between now and the next valuation in 2014.
In the end, the university’s total contributions to the pension plan will continue to be larger than the employees’. In all of this, it is very important not to forget that a requirement for stage two relief is a more equitable cost/risk sharing between the plan sponsor and plan members. The payment structure must be changed in order to qualify for stage two relief (for more on that, see http://www.queensu.ca/labournews/?cat=16).
QPP employer and employee contribution history: Concern has been raised that employees are being asked to make additional contributions to the QPP while the University either maintains or reduces its contribution – the chart below is taken from the Plan’s required Annual Information Returns filed with the Financial Services Commission of Ontario and sets out the increasing University contributions over time:
|Plan Year||Employer contributions
(money purchase + current service cost)
|Less: Reduction of Employer contributions*||Plus: Employer special payments**||Total Employer contributions||Employee contributions|
* Pursuant to a requirement under the Income Tax Act that was changed in the early 1990s, annual MG contributions (or current service cost) were paid from surplus starting January 1, 1993 and ending February 29, 2004.
** Pension legislation requires sponsors to make additional special payments to their pension plans to fund deficiencies identified in periodic actuarial valuations.
*** Under stage one solvency relief, going concern special payments will be credited against solvency deficiency interest payments – total special payments are estimated to increase to about $12 million annually until the next required valuation in 2014.
Posted in: The Pension Puzzle: Ask Bob!