Category Archives: Queen’s Pension Plan

The Pension Puzzle: Ask Bob! Part 2

One of the most-discussed topics among faculty and staff right now is the status of the Queen’s Pension Plan and the effects various adjustments might have on employee benefits.

In an effort to help answer some of those questions, we turned to Bob Weisnagel, the university’s Associate Director, Pension Benefits & Insurance. This is the second in a number of installments of this feature.

If you have more questions for Bob, send them to labour.relations@queensu.ca.

The Pension Puzzle: Ask Bob! Part 2

How will the new proposals of the five per cent charge to money purchase accounts affect the amount that I have contributed to AVCs?

All money purchase account balances, including AVCs, will be impacted by the 5 per cent charge at retirement to finance the non-reduction guarantee. Note that AVC balances (as well as Past Service and Special Vested Contributions) are currently reduced by 1.5 per cent when converted to pension for the same reason, and which matches the 1.5 per cent that the university contributes monthly in respect of required money purchase contribution accounts.

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Why aren’t reduced payments to pensioners, or soon-to-be pensioners, part of the proposed solution to current pension- plan shortfalls? Why should the younger generation shoulder most of the responsibility?

Our plan document stipulates that pensions in payment cannot be reduced; and governing legislation does not permit the accrued benefits of current employees to be adjusted downward (or reduced) as part of any pension reforms.

Younger employees will benefit from a lengthy investment return horizon, and will have a higher probability of receiving a money purchase pension greater than the minimum guarantee because of the higher monthly contributions.

These employees would still contribute less over the course of their careers at Queen’s than similarly-aged employees elsewhere who are members of jointly sponsored plans, which are plans that require the funding responsibility to be shared equally between the employer and pension plan members. For example, the Ontario teachers plan requires employee contributions at 10.2 per cent up to a Year’s Maximum Pensionable Earnings (YMPE) and 12 per cent above YMPE.  (Queen’s recommended targets are seven per cent up to YMPE, nine per cent in excess).

 

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How will my minimal guarantee pension payments be indexed?

Following implementation of the pension reforms, minimum guarantee pensions would be split as of the implementation date.

Service prior to the effective date would in effect be “grandfathered” and handled under the current rules (two per cent reduction from ages 60-64, and indexed according to the excess interest formula) and

Only service after implementation would be impacted by the new rules.

In other words, all current active members of the plan who retire on a minimum guarantee pension would have a portion of their pension indexed annually after retirement.

 

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In the case of deferred members of the pension plan, what are the implications of the proposed changes?

As deferred members are no longer accruing service credits, the minimum guarantee calculation and indexing would remain under the current rules. That being said, and depending on the length of time between the deferral date and pension initiation, investment returns continue to be applied to account balances, increasing the likelihood that a deferred member will receive a money purchase pension — in which case the five per cent contribution towards the non-reduction guarantee would apply, as would the changes to the excess interest procedure.

 

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The Pension Puzzle: Ask Bob!

One of the most-discussed topics among faculty and staff right now is the status of the Queen’s Pension Plan (QPP) and the effects various adjustments might have on employee benefits.

In an effort to help answer some of those questions, we turned to Bob Weisnagel, the university’s Associate Director, Pension Benefits & Insurance. This is the first of what we hope will be a number of instalments of this feature. So, if the pension puzzle is getting the better of you, it might be time to “Ask Bob!”

Send your questions for Bob to labour.relations@queensu.ca.

The Pension Puzzle: Ask Bob!

Question from a faculty member: I have heard that proposed changes to the QPP would increase my contributions, reduce my benefits and reduce the contributions being made by the university. Is that accurate? If so, it would seem to be very unfair.

Bob says:

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
2002-2003 $12,302,000 ($1,860,000) $10,442,000 $8,799,000
2003-2004 $13,239,000 $567,000 $13,806,000 $9,357,000
2004-2005 $15,829,000 $1,102,000 $16,931,000 $10,270,000
2005-2006 $16,356,000 $1,102,000 $17,458,000 $10,711,000
2006-2007 $17,992,000 $2,668,000 $20,660,000 $12,601,000
2007-2008 $19,604,000 $4,235,000 $23,839,000 $12,423,000
2008-2009 $21,191,000 $5,648,000 $26,839,000 $12,976,000
2009-2010 $20,897,000 $5,648,000 *** $27,480,000 $13,884,000

 

NOTES:

* 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.

 


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Question from a staff member: I’m planning on retiring soon, and expect my pension to be based on the minimum guarantee. Will the proposed plan changes mean that my early retirement pension at age 60 would be reduced by 30%?

Bob says:

No.

The Pension Benefits Act states unequivocally that accrued benefits cannot be reduced.

Pension payments for a member retiring early at age 60 on the minimum guarantee would remain at the current 10% reduction applied to the benefit formula (2% for each of the five years of early retirement). Proposed plan changes would only impact future service on a going-forward basis. Details of the technical changes can be found on the Human Resources website.

For example: if a 30-year plan member retires at age 60, one year into the new rules, the accrued benefit from the first 29 years would be handled under the old rules (i.e. 2% reduction per year early). Only the last year would be factored in under the new rules. If that member retired two years into the new rules, 28 years would be handled under the old rules and two under the new, and so on.

The same would apply to post-retirement indexing, with only the post-implementation years subject to the new rules, which would mean that the pre-implementation accrued benefit would continue to be indexed according to the excess interest formula.

In other words, the technical changes applicable to the minimum guarantee could only have a gradual impact on pensions at the outset, and in practical terms would take a generation to be fully implemented.


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Question from a pensioner: I’m currently receiving a pension from the QPP. Will the proposed plan changes impact my payment in any way?

Bob says:

No. The proposed plan changes would only affect pension payments initiated after the effective date, which would not be earlier than September 1, 2012.

Each fall, pensioners receive a letter that details the outcome of the post-retirement indexing process. In that letter, pensioners are reminded that pension payments are “guaranteed to never reduce” during their lifetime, and that “in accordance with the rules that govern the Queen’s plan, the monthly pension that you are currently receiving will continue without reduction.”

All existing pensioners will continue to benefit from the current rules governing the plan.

 

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The Queen’s Pension Plan (QPP) will likely qualify for the Ontario government’s first-stage solvency relief. Don’t we then have until 2014 to develop a well-thought-out plan to qualify for second-stage solvency relief?

The QPP is in bad financial shape and the plan will continue to deteriorate, the longer it takes to reach agreements on required changes.

The university and employee groups have a shared goal: to ensure the long-term sustainability of the plan.

While being approved for stage two solvency relief is important and provides more time to reduce the plan’s deficit, this in itself won’t fix the plan’s underlying structural problems.

Changes to the plan are also required. This has been acknowledged by all employee groups and discussions about how to do this started in 2005.

On August 31, our mandated valuation date, the plan’s actuaries will take a financial snapshot of the plan. This valuation determines the size of the additional payments that are required by law to start closing the gap between what the plan has in it and what regulatory authorities say must be in it.

Should changes be made to the plan sometime after August 31, the university can file what’s called an “interim cost certificate” or “interim valuation report”. While this would reduce the university’s payment requirements on a go-forward basis, the reduction wouldn’t be retroactive, so any reductions that could have been achieved starting August 31 would be lost.

The longer it takes to address the plan’s underlying structural problems, the worse off the plan will be at the next valuation in 2014, and the larger the long-term impact on Queen’s operating budget, which is already in deficit.

In the pension world, the longer you delay solving a problem, the worse it will get.

Putting off decisions about changes doesn’t allow the university to limit the financial hit that is coming.

It’s important to note that meetings with all employee groups about the need for plan changes have been ongoing since 2005 with no agreement, despite the plan’s deteriorating financial position.

All employee groups have been aware of the August 31 valuation date and the university’s specific proposals for changes to the plan since a meeting last November.

The changes and the urgency were reviewed and reiterated by the university at a multi-employee group meeting in May.

These changes include increasing employee contributions, an approach which has  been implemented at other universities.

Employee groups have had months to study, discuss and respond to the proposed changes.

QUFA has publicly acknowledged that increased employee contributions are necessary and the university is ready to continue these discussions in conciliation later this month.

The university’s goal is to reach negotiated settlements with all employee groups.

 

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Administration responds to pension questions

With contract talks continuing between the university’s administration and representatives of employees who belong to the Canadian Union of Public Employees (CUPE) and the Queen’s University Faculty Association (QUFA), many questions are circulating about one of the key issues at the table – the Queen’s Pension Plan (QPP). And now, the administration is continuing its efforts to respond to these questions.

Read the full story

 

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Why is the university proposing increases in employee contributions to the pension plan?

Short of reducing the minimum guarantee formula, this is the only option that would reach the savings targets required under the province’s solvency relief plan. That being said, the Queen’s Pension Plan (QPP) is primarily a money purchase plan, so increasing the contribution rate would accelerate individual members reaching an account-based pension that exceeds the minimum guarantee, which is a main goal of the plan.

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