A number of important questions about a suggested merger of the Queen's Pension Plan (QPP) and the Colleges of Applied Arts and Technology (CAAT) Pension Plan were raised over several multi-employee group meetings held since January. Given the complexity of the concept (and uncertainty in the operational details of the proposed government framework), CAAT's Derek Dobson was asked to elaborate on some of the key issues:
1. How do the QPP's excess interest increases over time compare to CAAT's 75% of CPI?
Included in the materials posted on the HR website is an Excel spreadsheet setting out the annual inflation adjustments paid to CAAT retired members each year since 1992 when the 75% of CPI method was used (CAAT Inflation Adjustments since 1992; to compare, a pdf document setting out the QPP's returns and annual adjustments is also included: QPP fund rate, excess interest to Aug2013). Prior to this date, inflation protection was paid on an ad-hoc basis based on the funding position of the Plan. It is worth noting that inflation protection has been paid in every year except one year since the inception of the Plan in 1967. A complete history is available from the CAAT website.
However, for Queen's members to evaluate inflation protection prospectively it may be more instructional to project the likelihood of inflation adjustments in the future. The Queen's pension plan uses investment returns in excess of assumptions, which from an actuarial perspective has no value since assumptions are expected to be realized over the long-term. This is a form of risk participation. This may result in years of inflation adjustments above 75% of CPI and years where no inflation increases are made. CAAT members prefer the stability and dependability of the conditional indexing approach, which provides a high degree of likelihood that increases to pensions will be made every year and reflects more closely the increases in prices they experience year over year.
The CAAT Plan provides conditional inflation adjustment at 75% of the CPI. It is based on the funding position of the Plan and is the first priority of reserves. As a result, CAAT believes this is more likely to be paid since the asset mix is expected to deliver returns in excess of the actuarial discount rate and, based on Plan's most recent filed valuation, will be paid each year at least until January 1, 2018. Our projections show a very high likelihood of this being paid in the future.
It is also worth noting that as funding reserves grow the likelihood of a contribution rate reduction for CAAT benefit increases. This is another cost and risk sharing principle of the Plan that allows members to benefit from excess returns while they are still active and contributing. The member and employer stability contribution rates would be reduced by 1% as the Plan moves to level 4 of the Funding Policy from the current level 3. Both active and retired members benefit from healthy returns and high funding levels.
2. The CAAT contribution rates are significantly higher than those of the QPP – does this bring added value from a total compensation perspective (early retirement bridge benefit; benefit and contribution rate stability; etc.)?
The difference in contribution rates for members, in large part, reflects costs sharing of pensions as well as additional benefits.
It's important to compare total costs of the Plan (both member and employer costs combined – including solvency funding and other costs) and the value of additional provisions. As well, the CAAT Plan's contribution rates take account of the fact members are living longer (to age 88) further improving the security of the pension and improving inter-generational equity among members.
Members of the CAAT pension plan participate in cost and risk sharing. Hence, over the long-term higher contribution rates that generate any excess reserves will serve to build a more secure benefit, including inflation protection, and will result in lower future contribution rates as these gains are realized. Over the longer term members can expect lower costs per dollar of benefit when compared to other pension plan models.
The CAAT Plan contribution rates and our Funding Policy reflect the desired high level of benefit security desired by all of the stakeholders. In addition to the lifetime benefits, there is significant value around indexation, survivor benefits, bridge benefits and other features. Although every member will not use every provision of the pension plan, this form of pooling risk across many members and employers has worked well for the membership and resulted in good equity among different types of members over time.
When considering both member and employer contributions, most single employer pension plans have costs higher than jointly sponsored plans, even when benefits are comparable. In addition, the value of participating in a multi-employer jointly sponsored pension plan goes beyond pension costs of total compensation, as single employer pension plan risks and costs affect more than pension benefits. Several universities have had to reduce program spending and/or have layoffs in response to the funding regime and risks of having a single employer pension plans.
3. Regarding governance post-merger: Queen's would be guaranteed seats initially but this may change / be diluted over time if other universities also merge – please explain:
At the time of merger with Queen's pension plan, it is expected that Queen's will receive two direct seats on the Board of Trustees. Further change to the composition of the Board will occur after other university plans join. The CAAT Plan has adopted the principle of first-in-last-out (FILO), so even as other plans join after Queen's, Queen's would retain its direct seats for a significant period.
At this stage it is expected that Queen's would retain its direct seats until the combined assets of the university plans exceed those of the college related assets of the CAAT Plan (currently over $7 billion). When/if this milestone occurs Queen's and its members will still have a say in the governance process albeit through a university appointment process involving all participating university groups. As Queen's would be one of the largest groups in the pension plan, significant input into the Plan would continue indefinitely based on the needs of Queen's and its members.
4. Please explain CAAT's "perfect record" since implementing its current post-retirement indexing provisions:
Conditional inflation protection (75% of CPI) has been paid each year since the benefit was introduced in 2007, even through the Global Financial Crisis of 2008/2009.
It is worth noting that once an increase is granted, it forms a permanent part of future pension payments and cannot be reduced. As well, future conditional inflation protection increases are a first priority in the Funding Policy which means that it has the first call on any reserves that pension plan has.
A filed valuation with a surplus guarantees the conditional inflation adjustment to the end of the valuation report coverage period – currently to January 1, 2018. In addition, current projections show a large and growing reserve providing additional comfort that inflation protection increases should continue for the foreseeable future.
5. Past service solvency exemption is key – what would be required from government to assist with the merger and ensure that a full solvency exemption will be granted?
The government and representatives from the opposition parties have shown support for the proposed mergers. The assets and liabilities from the university pension plans would be merged under the JSPP structure of the CAAT Plan, which has a permanent solvency funding exemption.
The government introduced the legislative framework to allow the transfer of assets and liabilities in its May 2014 (pre-election) budget, and since being reelected with a majority the Liberal party has indicated that this budget will be reintroduced as soon as possible. We believe that government officials understand that solvency exemption on the past service is essential to the success of the process; that being said, the framework currently only provides for the extension of an existing exemption upon merger with an existing JSPP (like CAAT) – the government has indicated that consideration will be given to granting a permanent solvency exemption to new "sector" JSPPs and single employer JSPP conversions on a case-by-case basis.
6. Can you provide a high-level explanation of the financing components post-merger, i.e. assuming the QPP's assets are sufficient to cover the transferred liabilities, what would the going forward contributions look like for both employer and employees? If the assets fall short, what then?
Following the merger and transfer of assets to cover the past-service liabilities, only contributions on future service are required from members and employers. No special assessments or allocation of gains and losses would be attributed back to Queen's at any time in the future.
If total assets of the entire Ontario Colleges and Universities Pension Plan (all employers and members) were to fall short in any filed valuation (beyond the reserves already accumulated), then the Funding Policy (level 1) would require the sponsors to consider the best course of action for all members, irrespective of how they joined the Plan. At level 1, Sponsors' Committee members would determine whether temporary contribution increases were required or the benefits on future service would be altered on a temporary or permanent basis. Again, these contributions and benefits changes could only be applied to future service and would apply to all members and employers. There is no segregation of different benefits or contributions by employer or member group.
7. The government framework is anticipated to require "replication" of accrued benefits – do we know what "replication" actually means?
For Queen's members, replication will likely mean protection of the defined benefit (DB) minimum guarantee of the pension plan benefits earned up to the merger date. Under the CAAT proposal, this will include benefit increases as a result of future earnings growth (i.e., final average earnings) and using all pensionable service to qualify for early retirement features.
Any excess balances above the DB minimum guarantee will continue to be part of the member's entitlement. We expect members will have a choice to transfer these funds to an RRSP or LIRA, transfer them to the CAAT Plan to earn the fund rate of return, or other permitted options. We are looking to provide as much flexibility as possible.
We expect there will be further discussion on a few provisions more difficult to replicate when combining two pensions, such as the normal form of pension, indexing and annuity conversion rates. Where replication may not be entirely possible or not desired by all parties, we expect the same value of these features will be replicated.
8. Would the government framework allow some flexibility – for example, allowing existing QPP pensioners to move voluntarily to the CAAT approach?
We prefer to see as much flexibility as possible. We expect that many pensioners will understand that the CAAT style of indexing pensions is more valuable to them.
The asset transfer legislation may require full replication of pensioner benefits including the Queen's indexing approach. If this is required to facilitate the asset transfer, we are open to exploring the option of individual pensioner choice to convert to CAAT style indexing at some future date, assuming no legislative barriers exist.
9. How would CAAT deal with members who have money purchase balances that exceed their defined benefit? How about members with AVC, past service and special vested contribution accounts?
Any excess balances above the DB minimum guarantee will continue to be part of the member's entitlement.
We expect that the members will have the choice to take these funds and transfer them into an RRSP or LIRA, transfer them into the CAAT Plan to earn the fund rate of return net of expenses, or any other option permitted under the legislation. We are looking to provide as much flexibility as possible. The value of current entitlements will remain part of the member's overall benefit. Some portions may be transferred where allowed, while others may need to be paid out.
10. CAAT's most recent valuation states that there are special payments required of 4.85%. Therefore if Queen's joins the plan won't the members be paying for a deficit for which we haven't accrued?
The reference valuation is not the valuation method used for setting contributions and paying conditional benefits. If we were to use the reference valuation instead then the pension plan would be approximately 88% funded on an actuarially smoothed asset basis and 93% on a market value of asset basis.
All liabilities coming into the plan will be using the same funded ratio of the current plan to ensure there are no cross subsidization between groups. Queen's members will not be paying for any deficit from the reference valuation as it is not applicable to how the pension plan is managed and funded.
The CAAT Pension Plan governors recognize that the transfer of past liabilities into the CAAT Pension Plan and the valuation methods used may result in reducing or eliminating the university's existing going concern deficit, if any exists. Some universities are considering using all or a portion of any reduction from their current contribution payments to offset or phase-in the increases in member contribution rates. Together, these items form part of the rationale of why CAAT would allow employers to pay part of the member's stability contribution rates for up to 15 years. At a minimum the members will be responsible for paying the basic contribution rates (approximately 9.2% of blended pensionable earnings). Only the stability contribution rates or portion thereof (currently at 3% of pensionable earnings) could be paid by the employer. We have left this to the members and employer to decide about the split of stability contribution amounts.
11. Why would I want to take on more risk and pay more contributions? Right now Queen's pays more in contributions than I do and I have less risk – why would I want to join?
A key attraction for many members is the core fact that the benefits being earned under the CAAT Pension Plan are very good and are secure. The Plan is focused on having conditional inflation protection paid to members in retirement. With increased longevity and longer retirement periods, members should not underestimate the importance and value of inflation protection. The analysis completed to date suggests that most members will end up with better retirement benefits over their lifetime under the proposal. Other benefits include very flexible pension portability should members change employers in their career and the most flexible buy back service provisions to allow members to increase their pension benefits.
Before the election was called, the provincial government was committed to moving broader public sector plans, such as university plans, to a 50/50 cost-sharing model. In a JSPP model where members are sharing contributions equally they also share the governance and decision making equally. After the election, this 50/50 cost-sharing policy will likely be reaffirmed. The CAAT Pension Plan already fulfills this 50/50 requirement and is further committed to joint governance and joint risk management. In other words, it is not a target of this type of pension reform.
With permanent solvency exemption and favourable accounting treatment, the contribution rates at CAAT are very stable. Solvency funding requirements and accounting treatment of single employer pension plans can results in highly volatile and substantial pension funding challenges. The pension funding impacts have been cited as a key reason for layoffs at other universities.
Operating as a JSPP since 1995, the Plan is very transparent to all its stakeholders. All decisions are made jointly between members and employers. For example, the Plan governors – representing employees and employers – developed a Funding Policy that delivers on the long term goals of benefit and contribution stability while managing through short term volatility. This joint risk sharing meant that the Plan was able to take steps to remain 100% funded after the 2008 market crisis and continue to make conditional indexing increases.
Beyond the pension plan benefits and contribution levels, people may also assess the longer term sustainability of the status quo, its impact on university funding (programs and jobs), and the pension policy trends and pressures moving forward. Overall, this proposal reduces costs and risks which over the longer term should benefit all university stakeholders either directly or indirectly.
12. Who else are you in talks with
We're in talks with several other universities and member groups interested in merging with the Plan. In some cases, these talks were initiated by an employee group, in other cases it was initiated by members of the administration or board of governors. Our approach is the same with all stakeholder groups. This is consistent with our Jointly-Sponsored nature.
13. What happens if Queen's leaves the CAAT pension plan?
Member consent is required to both join and leave the pension plan. As an ongoing multi-employer pension plan the accrued benefits you have earned are secure. As a JSPP in Ontario the Plan cannot reduce accrued benefits, by law.
In a JSPP, the only time benefits could be reduced would be if all participating employers all went bankrupt (or were closed) and the pension plan was forced to wind-up. We view this situation as very, very remote and are largely theoretical risks. The conditions that would result in this type of wind-up scenario would likely be worse if members who were participating in a single employer pension plan arrangement.
14. I have past service in another pension plan, will the plan accept this?
The Plan believes in pension portability. The CAAT Pension Plan accepts past service transfers from any registered pension plan in Canada, regardless of whether it was a defined benefit, defined contribution, or hybrid pension plan. It allows members the ability to consolidate their pensions from multiple periods of previous employment.
15. Please lay out what triggers each level of the Funding Policy?
When an actuarial valuation is filed with the regulators, the Funding Policy level is measured and the prescribed actions are implemented. The funding level triggers are based on the going-concern funding results of the valuation, including any actuarial asset smoothing.
When only partial funding is available within a specific funding level and when there are multiple objectives within that level (example; past level 3 and partially into level 4 where there is a blend of building reserves and contribution reductions), the Sponsors' Committee, with input from the Board of Trustees, will determine the balance of allocating reserves within that category, by considering the expected economic conditions, risks, and needs of the various stakeholders at that time.
16. Please explain the difference between Projected Unit Cost (PUC) accounting and the Modified Aggregate Cost (MAC) used by the CAAT plan. How does the CAAT plan's funding method make it easier for it to absorb the going-concern deficit of the QPP?
All of the Plan's decisions (including Funding Policy decisions) are based on the Modified Aggregate Cost method (MAC) valuation results. It is used by many of the large jointly sponsored pension plans, like Teachers', to better manage contribution volatility.
The main difference between MAC and PUC is the recognition of the next 15 years of contributions and benefits being earned, both in the actuarial value of assets and liabilities. As a multi-employer pension plan MAC ensures that Plan governors are basing benefit and contribution decisions on the longer term nature of the pension plan rather than on the point-in-time focus of the PUC method.
For pricing a merger, we will use the PUC method since it would be calculated at a specific date. On this method, Queen's and CAAT are similarly funded (about 93%) and as such the current market value of assets in the Queen's Pension Plan should be close to those required by the CAAT Plan to cover the liabilities. This method will be used to avoid subsidization across members from different employers. Once the past service pensions are in the CAAT Pension Plan, they will be measured on the MAC method, where no funding deficit exists.
17. What are the options available to CAAT plan members who continue to work past age 65? The material distributed suggests they are more restricted than under the QPP.
Under the CAAT Pension Plan, full-time members continue to earn service and earnings toward improving their pension after age 65 with no service maximum. For more, please see the CAAT pension plan website.
In short, after age 65 it is a member's choice whether to re-enroll in the pension plan or collect both a pension and their employment income. Please note that the website will be updated to reflect all employers and members when the first university joins. For example, current references to "colleges" should be read as "colleges and universities."
18. Has Queen's considered joining other JSPP's?
No, as none have approached Queen's to present this option.
19. Was Queen's approached by CAAT or did CAAT approach Queen's?
CAAT initiated broad contact with the university sector on the merger option beginning in 2012, including a presentation to OCUFA in October 2012. Queen's had its first exploratory "fact finding" meeting with CAAT in January 2013. The Board's Human Resources Committee was subsequently briefed on the merger option at a very high level, and they requested that we initiate a discussion with the employee groups to determine their interest in pursuing this potential option.
20. Has Queen's considered converting QPP to a single employer JSPP joining with other universities to create a sector JSPP?
This is a two-part question:
(1) converting to a single-employer JSPP appears to have limited upside as a recent conversion (the Toronto Transit Commission) was not granted a permanent solvency exemption for past service (which is the key objective to any conversion); and
(2) COU and OCUFA have been exploring a sector-wide JSPP but this is still in the developmental stage and appears at this point in time to be a long-term solution only that would likely require lengthy negotiation with a significant number employee unions
as well as legislative intervention to bring to fruition.
21. What would contributions and pension look like for individual currently working plan members?
Current CAAT member base contributions are 8.2% of salary up to the YMPE ($52,500 for 2014) and 11.8% on salary above YMPE, plus a 3% "stability" for a total of 11.2% / 14.8%.
On the benefit side the Queen's members would have the same benefits as the CAAT Pension Plan provides. The CAAT Pension Plan Member Handbook distributed at the first meeting provides a good description of the benefits to be earned in the future.
CAAT has indicated that a comparative benefit analysis can be provided but isn't immediately available. In the interim, a preliminary assessment has indicated the following:
Generally speaking, most of the sample members analyzed by CAAT to date fare best by accruing future service in CAAT than under the various scenarios of accruing defined benefits under the Queen's Pension Plan minimum guarantee. This is due to various features of the two plans:
- The 1.3%/2% benefit formula under CAAT will be an advantage over the Queen's formula of 1.4%/1.8% for any member who does not earn under or just slightly over the YMPE; and even for these lower-earning members the CAAT bridge benefits may offset any advantage of the 1.4% low rate under the Queen's Plan being higher than CAAT's 1.3% low rate.
- CAAT has a bridge benefit, while Queen's does not.
- Indexing is assumed under the CAAT Pension Plan.
The CAAT Pension Plan also has more generous early retirement provisions than Queen's, with early unreduced retirement possible at age 60 with 20 years of service, or with age and service totaling 85 or more. Queen's does not have an early unreduced retirement pension.
CAAT's early retirement reduction for retirement-eligible members is 3% per year from the earliest unreduced retirement date, while Queen's has a reduction based on age only, 3% per year from age 60 to 65 and 6% per year prior to age 60 for post-August 31, 2012 service, and 2% per year from age 60 to 65 and 6% per year prior to age 60 for pre-September 1, 2012 service. Thus, there are some scenarios, e.g. over 60 but with less than 20 years of service, where the same member could have a smaller early retirement reduction under the Queen's Pension Plan than under CAAT, but most scenarios favour CAAT.
All things being equal, most members would have the opportunity to earn better benefits under the CAAT Pension Plan than in the Queen's Pension Plan going forward.
Those who would fare better by remaining under the Queen's benefit regime are likely older members who also have lower earnings. Even these members may ultimately be better off under the CAAT Pension Plan, where their initial benefit at retirement may be somewhat lower but more likely to receive indexation once the pension is in pay.
22. What would contributions and pension look like for individual current retirees?
Current retiree benefits would be replicated, and as such would not be impacted in any way (same pension, same guarantee of non-reduction, same post-retirement indexing provisions). That being said, CAAT has suggested the possibility of allowing current pensioners, on an individual basis, the option of switching over to the CAAT post-retirement indexing provisions, so there may be some flexibility on this point.
23. How do we know that our contributions are not subsidizing those that are already in CAAT?
All members of the CAAT Pension Plan, including future members, pay the same contribution rates for the benefits being earned in the future. CAAT is fully funded with healthy and growing reserves. The pricing of past service liabilities for all active members being transferred is based on the CAAT funded ratio. This ensures that there is no cross-subsidization for either active member group.
24. What is the current transfer ratio in the CAAT plan?
The estimated transfer ratio of the preliminary January 1, 2014 CAAT Pension Plan valuation is 73%. However, it is worth noting that the transfer ratio has no meaning in a multi-employer jointly sponsored pension plan context as the wind-up risk is negligible. As such, commuted value payouts are at 100%.
25. If it is less than 100%, what would happen to a member that terminates?
Members are entitled to receive 100% of their commuted value (or elect a deferred pension) upon termination of membership from the CAAT Pension Plan regardless of the transfer ratio.
26. If we are to join CAAT or another JSPP, how does Queen's plan on paying the present deficit?
The primary outcome sought from a merger is a permanent solvency exemption while maintaining a quality retirement program – the government framework will sets out the terms and conditions that need to be met to obtain the exemption, and once granted eliminates the need to fund the plan on a solvency basis. As such, and following the merger and transfer of assets to cover the past-service liabilities, only contributions on future service are required from members and employers. No special assessments or allocation of gains and losses would be attributed back to Queen's at any time in the future.
Moreover, as CAAT and the QPP appear to be similarly funded on a going concern basis, the preliminary accounting/costing of the merger suggests that most of the benefit liability would be covered by the asset transfer, leaving little or no deficit for the university to deal with. The key reason is the funding method being used by CAAT (and most other Jointly Sponsored Pension Plans) is different than that used by single employer pension plans, like the QPP.
27. If some of the stakeholders desire to join a JSPP and others that wish to stay in the present plan, how will Queens deal with this – or is it all or nothing?
At this stage there is no clarity about whether this will be an option available via the government framework. That being said, there is the theoretical possibility of dealing with each employee group on an individual basis with an associated attribution of the solvency deficiency on a pro-rata basis. As noted above, it is anticipated that the regulations that will flow from the legislated framework will provide direction on this question.