SFU Staff Pension

The three employee groups have completed their respective referendums on the proposed Memorandum of Agreement and the result is that the proposal has been rejected.  The University Administration and the Executive of the three member groups have been apprised of the cumulative result.

In order for the proposal to have succeeded, it would have to have been unanimously endorsed by the three employee groups.  This, however, did not happen.

Each of the groups delivered the result of their respective referendum directly to the Employees’ Joint Pension Committee (EJPC).  The EJPC considered whether or not to release the result of each group’s voting, but concluded that not only would there be nothing to gain by doing so, but it could be disadvantageous or harmful to the plan members’ position.  As a result it was decided that only the cumulative result (accept/reject) would be provided to the University and the groups’ Executive.  Further, each group’s Executive were asked to consider keeping their members’ results confidential for the same reasons.

The University Administration has asked for the voting breakdown by group.  The EJPC has turned down that request.

EJPC representative for CUPE 3338, Ken Myrtle, has put together a document that digs into some of the nitty-gritty about commuted values.  He describes what it is, how it is calculated and provides details on the factors that influence the calculations.  If you are interested in more details of the commuted value and its calculation than what you have been presented to date, this document might be just what you’re looking  for.  This document is in PDF format, and is available here (as well as in the Documents section of this web site):

Commuted Value: What is Your Pension Worth?

The Employees’ Joint Pension Committee (EJPC) and the University Administration have finalized the wording of a proposed Memorandum of Agreement that, if ratified by the plan members, would see a moratorium put on the commuted value lump-sum payment option of the pension plan.  The text is as follows:

The University and the EJPC, acting on behalf of the Administrative and Professional Staff Association, CUPE Local 3338 and the Poly Party, agree that notwithstanding any provisions currently provided in the Pension Plan, effective January 31, 2012, no plan member terminating employment from the University will have the option to receive a commuted value after the age of fifty‐five (55), in lieu of the prescribed retirement benefit. This provision shall remain in effect for twelve (12) months.

Members with a deferred pension at January 31, 2012 and members who are eligible to receive a Small Benefit Commutation, as noted in Section 13 of the Pension Plan, will be exempt from this moratorium and will remain eligible to receive a commuted value in lieu of a monthly pension.

It is expected that each of the three member groups will hold a ratification referendum on this question.  The EJPC has asked the three groups to hold their referendum such the it concludes at 4:00 pm on November 29, 2011.  Once each group have tallied their votes, the results will be sent to the Chair of the EJPC and from there relayed to the University Administration.

There seems to be a notion held by some people that taking the commuted value lump sum option upon retirement is going to get them a fat wad of cash that they may spend as they wish.  For example, one person I’ve spoken to said that they wanted to take the commuted value lump sum payment to start a small business.  This may not be possible.

The BC Pension Benefit Standards Act governs pension plans in British Columbia.  It stipulates that, with few and specific exceptions, the commuted value of a pension plan cannot be fully cashed out .  Up to the limits stipulated by income tax regulations, an amount of that money is “locked-in”.  If you choose to transfer the commuted value of your pension benefit out of the pension fund, the locked-in portion must be transferred directly into another instrument that is intended to provide you with retirement income.  The reason for this to ensure that the pension entitlement is used in the manner in which it was intended – to provide you with retirement income.¹   The rest of the money (the non-locked-in portion)  is subject to income tax.

Note that this “locking-in” does not apply to any voluntary contributions you may have made to your pension plan.

For an overview of this “locking-in” requirement and its exceptions, see the following bulletin:

¹ Financial Institute Commission Information Bulletin Number PENS-07-001 (Revised). (http://www.fic.gov.bc.ca/pdf/pensions/bulletins/pens-07-001.pdf)

For full details, refer directly to the Pension Benefits Standards Act (esp. section 30) and Regulation (esp. section 25).

A copy of the valuation report for the pension plan has been received from the plan Trustees.  As expected, the report reveals that the plan fund is suffering from both a going-concern deficit and a solvency-deficit.

The Going-Concern Deficit

The going-concern deficit is about $16M, if one averages the value of the plan assets over a given number of years.  Looking at just the past year, the deficit is $21.5M.  To overcome this deficit the University is required by law to pay a minimum of $1.6M per year over the next 15 years to make up for this short-fall.  At the last valuation (as of Dec. 31, 2007), the going-concern test revealed a surplus of about $105,000.

The Solvency Defict

The solvency deficit in 2007 was about $21.7M.  This has risen now to $64M in the recent valuation (to Dec. 31, 2010).  The University has a couple of options in dealing directly with this deficit.  Both options however require the deficit be taken care of within five years.  The options are:

1. Pay off the deficit – The University would have to pay about $10.4M per year for each of the next five years.  This would be on top of the $4.9M it would have to pay for the next two years to cover the pre-existing deficit from the 2007 valuation.
2. Purchase letters of credit to cover the liabilities that would be incurred should the plan be terminated.

Some institutions in BC are not required to have their plan tested for solvency.  The Administration has indicated that they would pursue obtaining solvency test exemption.

The University Administration’s Preferred Fix

Of course, another way to reduce or eliminate these deficits would be to change the terms of pension plan.  Doing things like eliminating the commuted value option, capping the University’s contributions, cost-sharing with the employee members, and so on would all reduce the liability and cost to the University.

This appears to be the fix that the University Administration is wanting to pursue.  As we saw in July, you can expect to see in the coming weeks the University Administration re-iterating the financial difficulties they are facing with funding the plan and providing you with possible options for mitigating those difficulties.

Any changes to the pension plan however, short of terminating it altogether, requires unanimous support from each of the three member employee groups (APSA, CUPE 3338 and the Poly Party) as well as the University Administration.

The University administration is calling our pension plan “unsustainable.”  How do we know how the pension plan fund is doing?

Taking the pulse

By law, the pension plan must undergo an assessment of its health at least once every three years.  This assessment is referred to as a valuation and it is performed by an actuary.  The valuation is performed on a snapshot of the plan fund, the plan’s liabilities and a mitt full of “actuarial assumptions” on a given day.  A snapshot of our pension plan was taken on December 31, 2010.  Since then, a plan actuary has been crunching the numbers and is due to deliver the final valuation report to the plan trustees in September.

In determining the plan health, the actuary has to make certain assumptions about what is going to happen in the future.  Some of those assumptions include things like how long people are expected to live, at what age they are likely to retire, what will happen with inflation, how will the pension fund’s investments perform, and so on.  Some of these assumptions are not specific to our pension plan at SFU (e.g,. mortality rates) while others are (return on our plan fund’s investments).  It’s a tricky business but its the best we’ve got.

What we’ll look for

There are two tests that are performed on the plan data as part of the valuation that are key to determining the health of the plan.  They are the solvency test and the on-going concern test.

The solvency test looks at the health of the plan fund in the face of a plan termination.  That is, if the pension plan was terminated on the day the snapshot was taken, would there be enough money in the plan fund to pay out all of the plan’s obligations.  The last time a valuation was performed, it was based on a snapshot taken December 31, 2007.  The valuation performed on that data revealed that there was not enough money in the plan fund to meet all of the plan’s liabilities — it would have been short by about 12 million dollars.

The on-going concern test looks at the health of the plan under the assumption that the plan will continue on.  The last valuation performed showed that the fund was very marginally under-funded.  It recommended that the University administration increase contributions to the fund by about 1/3 of one percent.  Specifically, it was recommended that the contribution to the pension plan increase from 12.34% of staff salary to 12.69.

What do we expect to see this time

A lot of things have changed over the past three years that are going to effect the test results.  Obviously, the economic down-turn peaking in 2009 was not good for the plan fund.  Further, people are living longer and as a result, the mortality assumptions have changed (better for the retiree, worse for the pension plan fund!).  The University administration has indicated that they expect to see the solvency deficit soar from $12M to about $66M!  Further, they expect to see a more significant on-going concern deficit than in the last valuation, requiring them to increase the contribution rate to 15% of staff salary; an increase of about 2.3%.

But the actual numbers will come out in September.  And as soon as we have those numbers, we’ll bring them to you.

Stay Tuned!