Responses to Pension Survey Questions
SFUFA PRESIDENT’S RESPONSES TO QUESTIONS
FROM THE PENSION SURVEY
The following constitutes the best answers we are able to provide based on the information available to us to date. If there is a discrepancy between this information and any regulation of the College Plan or pension legislation, the latter would prevail.
When might a switch to the College Pension Plan be available?
This question is impossible to answer with any sort of accuracy. SFUFA is holding a vote on the question of a switch to the College Pension Plan. If this vote indicates that members wish to have the option to switch, our bargaining team will put forward a proposal to this effect in bargaining. If the University is willing, we may negotiate a clause saying that the parties have agreed to seek membership in the College Pension Plan and establish a general timeframe.
What would be the cost of purchasing years of service?
Ultimately, it is the College Pension Plan that would calculate these costs, and the work involved in these calculations would not be trivial. As a result, the College Pension Plan is unlikely to calculate these costs prior to SFU beginning to negotiate a move for our members. If the SFUFA membership votes in favour of negotiating a move to the defined benefit College Pension Plan, our bargaining team will put forward a proposal to this effect in bargaining, and if the University agrees, negotiations would begin between SFU and the College Pension Plan.
While the cost of purchasing years of service might appear to be key to making a decision, it should be noted that there are in fact a series of distinct decisions that the association and individual members will have to make. The board of the BC College Pension Plan has indicated to us that, were we to join their plan, current SFUFA members would not be required to switch from their current plan to college plan. While membership in the plan would be mandatory for those hired after the effective date, all existing members would have the ability to choose which pension system to use. Thus, the decision is in fact a series of decisions. The first decision is whether we as a faculty association want to make the switch. Second, if that decision is yes, and a switch is negotiated, individual members would have to decide whether to make the switch themselves. Third, members who decided to make the switch would then have to decide whether to purchase years of service. Thus, individual members can choose not to purchase years of service if the costs are perceived to be unfavourable when the time comes. Essentially, we would negotiate the option for current members to switch, and an obligation for future members to join, but the cost of purchasing years of service is irrelevant to future members, and therefore to the question of whether they should be obliged to join.
If I have worked at SFU for X years, would I need to purchase X years of past service to switch to the College Pension Plan?
No. Note that if you do not purchase any years of past service, you will only accumulate benefits for the years worked between the time we join the plan and the time you retire.
What will happen to the balance in my existing SFU pension fund?
If SFUFA negotiates a switch, and if you as an individual choose to switch to the College Pension Plan, you will have the option to either (a) use some or all of existing retirement savings (either in their SFU pension plan, or in RRSPs held elsewhere) to buy past years of service in the college plan or (b) keep existing retirement savings where they are, and only accumulate years of service in the college plan going forward.
Are the rates of return better with our current plan or with the College Pension Plan?
We have attempted to address this question with the actuarial report, which is available at http://www.sfufa.ca/current-issues/pensions/resources/. In order to compare our current system with the College Pension Plan, the actuarial report has had to assume that members are putting 9% of salary into a retirement vehicle (above the employer contribution). This assumption allows the two plans to be more fairly measured against one another, but likely does not reflect reality for many members. Comparing the two plans is difficult to answer because a) the current DC model has no standard, predictable benefit and b) the College Pension Plan requires a significant contribution from members that is not mandatory in our current system. The payout from a 10% employer contribution is never going to be comparable to an 18% contribution shared between both employer and employee. For members who make additional retirement savings outside of our current plan, the rates of return will depend on their investment decisions.
The key distinction between the plans is not which plan is expected to provide greater income in retirement – it is the nature of the risks in the two plans, and the amount of individual flexibility. The college plan provides more certainty of retirement income, because the risks of market fluctuations and longevity are pooled among many members. This is not to say risk is eliminated in the college plan, but moved – from the benefits side to contributions. The college plan requires that members share the cost of pension contributions with the university; if markets perform poorly for an extended period of time, members and the employer may be required to increase their contributions to the plan to maintain its sustainability. Of course, under the same scenario members of a defined-contribution plan such as our current plan might be wise to increase contributions to their retirement savings. The question of which plan is better is therefore not just about the numbers, but also one’s tolerance to different kinds of risk, one’s inclination and abilities to manage finances, as well as personal circumstances.
Can SFUFA provide a formula or advice regarding whether it would be beneficial for me to move to the College Pension Plan or remain in the current plan?
Whether a switch to the College Pension Plan would be beneficial for an individual member would depend on a number of personal circumstances, including one’s tolerance of various types of risk. As a result, it is not possible to assess what is best for an individual using a formula. If the option to switch to the College Pension Plan is negotiated with the administration, we will endeavor to provide as much information as we can (e.g., in the form of seminars), but we will not be able to provide financial advice on an individual level.
Could SFUFA provide a calculator that would calculate income in retirement given my balance in our current plan, compared with what I could expect to receive from the College Pension Plan? Could SFUFA model a few different scenarios (salaries, market differentials and retirement ages), comparing our current plan with the College Pension Plan?
The actuarial report (http://www.sfufa.ca/current-issues/pensions/resources/) models a few different scenarios of retirement income under various market scenarios, and durations of employment. This report was a substantial cost to the association, and developing calculators or further scenarios properly would require professional assistance and so incur substantial additional costs. As explained elsewhere in this FAQ, the decision of whether to make a switch is less about numbers and more about one’s tolerance to different kinds of risk and one’s desire for flexibility in retirement planning.
What are the implications of a switch for someone close to retirement?
If SFUFA negotiates a switch, all current members will have the option of switching to the College Pension Plan, and if you as an individual choose to switch to the College Pension Plan, you will have the option to either (a) use some or all of existing retirement savings (either in the SFU pension plan, or in RRSPs held elsewhere) to buy past years of service in the college plan or (b) keep existing retirement savings where they are, and only accumulate years of service in the college plan going forward. Someone close to retirement might choose to switch, but to not purchase years of service, in which case they would earn a small benefit from the College Pension Plan. A member might choose to do this if they felt the small benefit accrued from the pension plan would be greater than the benefits achieved from additional contributions to their SFU defined contribution plan. Alternatively, a member close to retirement might choose to use their retirement savings to purchase years of service if the defined benefits of the College Pension Plan were greater than what was available through the purchase of an annuity, or if the member was concerned that the costs of purchasing an annuity might change before they retired. Members making these decisions would benefit from professional advice.
What would happen if the total number of members in the plan declined over time (i.e., due to fewer positions at colleges)?
The funding level of the plan is evaluated every three years, and contribution levels are adjusted accordingly. It should also be noted that, if the number of members declines, the long-term obligations of the plan will also decline (because there will be fewer people retiring in the future). Therefore, a smaller number of members does not translate to a smaller number of active members having to support a larger number of retirees. This is not a Ponzi scheme- an individual’s retirement benefits are paid for from their contributions (although investment and longevity risk are pooled among many members).
If a switch to the College Pension Plan would make it compulsory for future members, are we not forcing future members to save for retirement when they can least afford it, i.e., early in their careers? Do current members have a right to make such a decision on behalf of future members?
Whether we decide to stay with our current plan or join the College Pension Plan, we are making a decision on behalf of future members. The extent to which the forced savings aspect of the College Pension Plan would represent a hardship is a subjective question than members will have to assess based on their own experience (e.g., do you budget and spend based on your gross income, or on the size of your biweekly take-home pay?). Someone forced to save for retirement as soon as they start at SFU might find this a hardship, but if they are not forced to save, will they wish that they had started saving sooner when they approach retirement?
If we switched to the College Pension Plan, would the University continue to make contributions?
In the College Pension Plan, the university’s contributions are approximately equal to those of members (the actuarial report provides further detail, see: http://www.sfufa.ca/current-issues/pensions/resources/). Because contributions are shared between the employer and employee, both share the contribution risk, since contribution rates might rise in the future (and might decline if market conditions were good for a sustained period).
How much would a switch to the College Pension Plan cost SFU? What would we need to give up in bargaining to get the administration to agree to this switch?
With respect to ongoing contributions, in the College Pension Plan, the university’s contributions would be approximately equal to their current contributions (the actuarial report provides further detail, see: http://www.sfufa.ca/current-issues/pensions/resources/). We are not in a position to assess the university’s costs of the initial switch, and/or the ongoing costs of maintaining both the existing plan (until all current members retired) and the new plan. Clearly, the university would be taking on a contribution risk, since contribution rates might rise in the future, but this risk would be shared with members (and contribution rates would decrease if market conditions were good for a sustained period). We are optimistic that the university will see the option to switch as mutually beneficial, since the increased certainty regarding retirement income will enable members to retire when they want to, rather than needing to work longer because they feel they cannot afford to retire.
Are benefits indexed to cost of living increases?
The short answer is yes. There is a limit set on the maximum increase, but this limit has been above the actual increase in CPI since the 1980s, i.e., the indexing effectively matches CPI. See “How does my pension reflect cost of living increases?” at http://www.pensionsbc.ca/portal/page/portal/PEN_CORP_HOME/CPP_HOME_PAGE/CPP_PENSION_FAQ/CPP_FAQ_RETIRE/
In the calculation of retirement benefits in the College Pension Plan, do the highest 5 years of salary include market differentials, and/ or salary supplements associated with administrative positions (e.g., Chairs, Deans)?
Yes. Note that the formula for calculating retirement benefits is based on the highest 5 years of salary, not the last 5 years of salary.
Many employers are moving away from defined benefit plans to defined contribution plans. Why would we want to go the other way?
Employers have moved away from defined benefit plans because many traditional defined benefit plans are employer-funded and so present a substantial liability (i.e., if markets do poorly or if the employer has not made sufficient contributions, the employer is still responsible for providing the promised benefits to retirees). The College Pension Plan is different in two important respects. Firstly, the employer is only responsible for contributions paid into the plan, and not for paying the benefits. As a result, there is a risk that contributions may increase, but because contributions are shared with employees, this risk is shared. Secondly, the College Pension Plan is strictly regulated to ensure its sustainability. Whereas an employer with a privately-funded plan might choose to “borrow” from the pension plan, or not make adequate contributions for whatever reason, the College Pension Plan may adjust contribution rates every three years to ensure that there is no major shortfall. The move away from defined benefits plans has not occurred because they are perceived to be disadvantageous to the employees.
Under what circumstances would employee contributions to the plan rise, and what mechanisms would be in place to limit these rises?
The College Plan Board of Trustees has the power to decide what steps to take in the face of a funding shortfall (i.e., increase contribution rates, decrease benefit accrual on a go-forward basis, or limit the indexing of benefits to inflation). The Board of Trustees is composed of appointees from both the provincial government and union representatives, and requires a supermajority to change contribution rates, etc. This is a mechanism to ensure that such decisions are based on the health of the plan, and not on politics. Note that benefits can only be changed on a go-forward basis, e.g., if a member works for 10 years under one benefit formula and then the formula is changed and the member works for 10 more years, the member’s benefits in retirement will be based on 10 years on the old formula, and 10 years on the new formula. Note that conditions that would lead to increased employee contributions (i.e., poor market performance over a sustained time-period) would also lead to poor gains in our defined contribution plans.
What happens if I move to an employer that does not have a transfer agreement in place with the College Plan? What if I move outside BC/Canada?
Where can I find out more about the College Pension Plan?