Intro to Pension Plans
Over the past months, as SFUFA has begun consultations regarding the upcoming round of collective bargaining and has started an examination of issues related to retirement and employment beyond age 65, we have heard consistently that SFUFA members have serious concerns about the current SFU Academic Staff Pension Plan. Retirees and those nearing retirement note that financial security is a primary concern in retirement decisions, and many faculty have found that the benefits provided by the current pension scheme are entirely inadequate.
The SFUFA Executive has begun to discuss what options might be available to address the concerns with our current plan – leave it as is; attempt to bargain an increased pension contribution from the University; bargain a defined benefit plan; seek to join a larger, existing defined benefit plan, etc. As we continue to investigate the pros and cons of various options, we hope to hear from all of you as to your satisfaction with the current plan, your feelings on the various routes we might explore, or other ideas we have not considered.
As a starting point, we present two existing plans in place in the BC post-secondary education sector; the first, SFU’s Academic Staff Pension Plan, is a defined contribution plan in which the University contributes 10% of salary into a pension account for each member; the amount accumulated at your time of retirement can then be paid out to you in a number of ways. The second, the BC College Pension Plan, is a defined benefit plan, which does accept applications from new members, and likely provides the best option for a defined benefit approach. Both members and the employer are required to make contributions, and the benefit at retirement is based on a standard formula, and guaranteed.
The plans are very, very different, and each has strengths and weaknesses. Conversion from one to the other is possible, but complex, and would require the agreement of both members and the University. The information provided here, then, is very limited, and covers only the most basic features of the two plans. We hope it will help to illustrate some of the pros and cons of the two main models that are in existence in our sector, and provide enough information that members can meaningfully ask further questions or provide feedback on the substantive question.
Defined Contribution vs Defined Benefit:
A defined contribution plan mandates the contribution rate but not the pay-out. SFU currently has a defined contribution plan. The employer pays a set amount (10%) and members may choose to make additional voluntary contributions. Those monies are invested, and either increase or decrease with the market. At retirement each member takes out the value of their contributions. There is no set amount any member is guaranteed on retirement. Depending on one’s own decisions to make additional contributions, and depending on the performance of the market, one can do very well or very poorly. It is, in effect, not so much a pension, as we understand that word, as a retirement savings plan.
A defined benefit plan mandates the benefit you receive upon retirement. Contribution rates are what may fluctuate, as the plan’s administrators conduct periodic assessments of plan health and set contribution rates accordingly to ensure that the plan has enough assets to meet all of its obligations. Rather than the individual-based accounting system of a defined contribution plan, a defined benefit plan pays according to a set formula based on salary and years of service. It means more guarantees at the end of the day, but also higher contributions, paid for by members themselves.
Under SFU’s current system, SFUFA members are not required to make contributions to the pension plan. SFU pays 10%, and members may choose to make additional contributions, or may invest independently in RRSPs, or may take no action. The current pension plan in place does not cost you as an individual anything off your paycheck. If you are concerned about retirement, you can take additional steps at your own initiative to secure your future.
Under the College Pension Plan’s system, members pay a contribution only slightly less than the employer. Rates are set every three years after an actuarial assessment, and whatever rates are established are binding on both employees and employers. When markets are difficult and numbers of potential retirees swell, rates can go up. When the market performs well and a significant surplus is accumulated, rates can decrease. Those decisions are not made by unions or employers or members, but only by the trustees of the plan. Current rates in the College Plan are around 10% each from the employer and the employee.
Plan Membership and Size of the Plan:
SFU’s pension system is an in-house plan, including faculty, teaching appointments, librarians and academic administrators. It has a membership of some 1100 people, and a total fund of something over $297 million.
The College Pension Plan includes some 23,000 people – faculty at all of BC’s public colleges, the recently-established universities, BCIT and Royal Roads University. Its assets are in the neighbourhood of $3 billion, and it is partnered for investment and some administrative purposes with other BC public sector plans which together have close to $100 billion in assets. The plan is healthy, and is listed in the top 100 of defined benefit plans in Canada.
A local plan, such as SFU’s, provides significant faculty control. Plan members elect 50% of the pension trustees, which gives you substantial input into how the current plan is managed. A case in point is the decision last year to request that the pension trustees explore an optional plan divested of fossil fuels. While that vote cannot mandate the change, it certainly sends a message and could still result in the divested option being introduced. A larger plan, such as the college plan, includes many more members, and many more organizational players, and so SFU faculty’s own voice in that scheme would be reduced.
The College Pension Plan is governed by 10 trustees – 5 appointed by the organizational members, 5 appointed by government. The trustees seek consensus, and require at least 8 trustees to support a change in the plan in order to protect decision-making from veering too far to either government or the unions/ associations involved. Any SFUFA representation at the table would have to be negotiated as part of our entry to the plan, should we decide to pursue that option.
In pensions, as in life generally, the devil is in the details – and particularly the details of taxation law. We are still researching this area, because a number of factors can impact how a move to a defined benefit plan might impact SFUFA members.
A few notes: RRSP limits are set by CRA, and cap the amount that one can put into retirement savings tax-free. Pension contributions are also tax free, and members in a defined benefit plan can still make voluntary RRSP contributions as they see fit.
As a general rule, CRA limits pension benefits to no more than $90,000 per year. This limit, however, does not apply to the College Plan, and so members who have had higher-end salaries or served in well-compensated administrative posts are not cut off.
Federal law does limit the assets a pension plan can hold. A plan cannot hold an unlimited surplus. When the college plan approaches this surplus, contribution rates are temporarily put on hold or reduced in order not to exceed that limit. While contributions can be raised in hard times, then, they can also be lowered in good times. The college plan has had times that it has done both.
Transitional issues are complicated. If we did pursue something like this, we would have to determine how to translate existing monies in our DC plan into ‘pensionable years of service’ in the college plan. We would have to sort out exactly what it would cost members to buy additional years into that plan, should they choose to do so. We would have to decide whether and when the transition would occur, and what choices individual members at different career stages would have. It would be a good deal to think about, and we don’t have many specifics yet. But it has been done before, so we would have examples to draw from.
Under the College Plan, members would be required to contribute approx 10% of salary to their pensions. Given the application of taxes etc, you would not see the full 10% as a paycut, but there most certainly would be an impact. Those who are currently making voluntary pension contributions or paying into RRSPs could of course off-set the paycheque deduction by ending or reducing those voluntary payments. But anyone not making voluntary payments of any kind would be paying more – almost certainly for greater payoff in the future, to be sure, but at an immediate cost.
The benefits one can expect to be paid under our current defined contribution plan are difficult to determine, because individuals may be making voluntary contributions, because some hold substantial RRSPs which supplement the pension savings, and because market fluctuations impact members immediately and directly. The following, then, is only very rough information for illustrative purposes, taken from a 2012 pension-focused bargaining bulletin.
In 2012, the average accumulated pension savings of an SFU faculty member between 60 and 64 was $245,199.
For members 65 years of age or older and still working, the average was $420,630 – significantly higher, but this includes members who had retired but had not yet begun to make any withdrawals from their accounts.
In any event, at no point was the average account of a member approaching or at normal retirement age anything near $500,000.
Now, market performance has improved of late, so let us presume that a member does achieve a $500,000 savings by the time s/he wishes to retire. Retirement calculators estimate this would provide an annual benefit of approximately $35,000 for the retirement years. To achieve a retirement income of $50,000 with inflation protection you would require a balance of some $750,000 in your account.
Defined benefit plans generally operate on a formula: a % of income X salary X number of years of service. The formula is not straightforward, but in general terms the college plan’s formula works out to roughly 2% X highest five years of salary X years. What does this mean?
Have 35 years of service? Retire with a guaranteed benefit of 70% of salary.
30 years of service – 60% of salary.
25 years of service – 50% of salary.
In dollars, that means a senior lecturer retiring at top of scale after 35 years would earn a pension benefit of some $70,000 per year; a full professor at top of scale would earn about $98,000 a year in pension. And those are guaranteed dollars, and eligible for inflation adjustment.
There is, of course, a challenge here. Given that our existing contributions are only at 10% per year, it is extremely unlikely that your dollars would buy you enough years in the college plan to reflect your real work history. For example, you may have been at SFU 18 years and find that your pension here is only worth 10 or 11 years in the college plan. We would have to negotiate a dollar equivalency for each year of service, and make arrangements by which SFUFA members could purchase additional years under the defined benefit arrangement.
SFU’s current pension scheme has its benefits – it is no cost to the employee, it allows for additional contributions by those who choose to make them but mandates nothing, it is highly individualized, and it is locally governed, providing substantial control to faculty members.
A defined benefit plan such as the BC College Pension Plan is less flexible, less autonomous, and costs. And a good portion of that cost has to be borne by members themselves. On the other hand, if you are 64, a possible annual pension of $30,000 looks pretty paltry compared to a guaranteed benefit of over $90,000 a year. That’s not free money – you pay for it. But you pay earlier, over the course of your career, in a large plan that can leverage more investment weight than we can on our own. And you pay for that heft, too, in autonomy and flexibility.
This is a hugely important issue. But it is also a very complicated one, and we at SFUFA are not pension experts by any stretch. We do, however, think the stakes are high enough that we should initiate this conversation, and hear from you, the members, about your priorities for our pension plan.
If you are interested in researching the plans further on your own, information is available at the following sites:
Do attend the General Meeting on July 30th if you can. For those who cannot attend, the pension presentation by representatives of the College Pension Plan will be recorded and posted to the SFUFA website following the meeting. This is designed as a presentation, rather than a Q and A, given that the information will be new. Based on feedback from that meeting, this notice, and further consultations, we will determine whether we ought to further explore a defined benefit approach (such as the college plan) as an option, or whether we ought to continue on the basis of the plan we currently have in place.