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 installments 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 email@example.com.
Question from a pensioner:
I’m currently receiving a pension from the QPP. Will the proposed plan changes impact my payment in any way?
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.
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%?
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.
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.
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).