Why is there discussion about changing or folding the QPP? Why aren’t we just leaving things as they are?
We have gone through a decade of large shortfalls in pension funding. This generates mandatory additional payments into the plan which ultimately come from the University Budget.
There are two types of deficits: Going concern deficits are shortfalls in the plan assuming that the plan will continue indefinitely. These fluctuate with changes in investment returns and can arise or disappear over time depending on the general financial climate.
Solvency deficits are those that would be realized if the plan wound up now – this is additional money needed to pay out all that the plan owes at the present moment. This is what the government is insisting that Queen’s University pay into the plan.
The QPP has deficits as follows as of Aug 31 2017
- Going concern deficit = $~32 million
- Solvency deficit = $~313 million
For the Queen’s Pension Plan, the Sponsor (Queen’s) is liable for the deficits. There is a formula, set by the Provincial Government, for how the Sponsor (Queen’s in our case) amortizes those deficits. The government regulations for how this is done are currently under revision. These changes will reduce the burden but nevertheless force additional payments.
Why has the Province suddenly demanded solvency payments?
The Province is part paymaster of universities and has been working to control costs in this sector for some time. So, they have good reason to want to be seen to control for liabilities at employer pension plans that have deficits. While it seems unlikely that an Ontario university will close its doors and thus trigger solvency costs, it is not entirely impossible. As well, some individual plans are known to be ‘in poor health’ due to actuarial miscalculation (people are living longer than anticipated), employer ‘holidays’ from contributions, and generally poorer investment returns since 2008.
One way the Province sees to reduce its own liabilities and to ensure better (i.e. more conservative) management in the future is to ‘encourage’ university employers and employees to move to a Jointly-Sponsored Pension Plan (JSPP) model. There are precedents like OMERS (Ontario Municipal Employees Retirement Savings) and HOOPP (Healthcare of Ontario Pension Plan). These JSPPs are larger and therefore more stable than single-employer plans and as they are jointly managed by employers and employees, they tend to be conservatively run and thus run fewer and smaller deficits. Finally, since there are multiple employers, there is less risk to the plan if one employer winds up business.
One way to ensure employers in the sector are amenable to looking at jointly sponsored alternatives has been to demand solvency payments and to hint that conversion to a JSPP may absolve universities of these in the future. These payments have been budgeted to come out of operating costs.
What is the UPP? What is this plan likely to look like?
You may have heard of a new JSPP called the University-Sector Pension Plan (UPP). This is literally a work in progress, initially involving delegates from a number of unions representing university workers (CUPE, USW, OPSEU, ONA, PSAC etc.), the Ontario Confederation of University Faculty Associations (OCUFA) to which QUFA belongs, and the Council of Ontario Universities (COU). The Province has provided funds for these groups to investigate the possibility of forming a new JSPP for universities with OCUFA taking the lead on this on the labour side. Queen’s University and QUFA have been active participants from the beginning of this process in 2014.
Negotiations continue and an agreement has been reached on what the USPP would look like. This has been a complex problem because university pension plans often, if not usually, cover faculty and other employee groups. Different types of employees need different features in a plan to make it attractive for them, for example:
- The average physical plant or custodial worker started paying into the plan at a young (20s) age and has worked a physically demanding job. This person is likely to earn around the $60-70k range at retirement. They benefit from a plan that pays well on earnings below YMPE (Year’s Maximum Pensionable Earnings, $54,900 in 2016).
- The average faculty member started paying into the plan much later (often not starting their regular employment until their late 30s or early 40s, or later) and is likely to earn over $100k for most of their career. This person usually doesn’t want to retire until their early 70s and benefits from a plan that pays well on earnings over YMPE.
Work is ongoing to accommodate these work and retirement patterns in one plan.
Participants in these negotiations hope that a deal can be reached that helps all employees and as soon as we know what the architecture of UPP will look like, we will disseminate this information to you. A website has been created to centralize information about the UPP: universitypension.ca.
A Jointly Sponsored Pension Plan means shared risks – what does that mean practically? Why would we agree to share risks when right now, only the employer is responsible for risks in the QPP?
As mentioned above, one of the attractive features of JSPPs to the Provincial Government is that both employers and employees manage the plan. Employees tend to be risk-averse and so manage their pensions quite a bit more conservatively than single-employer plans under sole management of the employer. However, alongside shared control, comes shared risks which means that if the plan finds itself in deficit – unable to cover what it owes to members – both employers and employees share responsibility for making the plan healthy again.
The usual responses to cover shortfalls are:
1. Raise contribution rates (these are paid by both employers and employees);
2. Reduce future pensions of those paying in now;
3. Reduce or Suspend cost of living increases to retirees.
As to why QPP members would move voluntarily to share risks, there are a number of reasons why we should consider this as a viable option:
- Risks to the plan are likely to be fewer given joint governance – it will require both parties to agree to make changes.
- Just as shortfalls belong to both parties, so do any surpluses. Previously, these were absorbed by the employer and did not accrue to plan members. With a JSPP, they can be used to reduce contributions or increase future benefits.
- Importantly, the Provincial Government is committed to making JSPPs attractive. Thus, they are unlikely to waive solvency payments and those payments will have a noticeable impact on university budgets (including hiring budgets). Moving to a JSPP gets Queen’s out from under this obligation and may ease budgets as a result. However, with a lessening of the solvency requirements, the government is about to require an 8% increase in reserves within the plan, as insurance against future risks.
What is the likely timeline for decision-making and transition?
The framework for the UPP has been fleshed out over the last year or so. This year, 2017, is a ‘Build’ phase where a smaller group of universities, where both the Administration and Labour expressed an interest in proceeding as we have at Queen’s, will finish the design of a UPP. That initial design is now largely complete although some issues remain. Following that, institutions will decide whether to participate or not. If there is a sufficient number of participants then a plan will be formed and take over the pensions from the participating institutions. This step is also likely to take some time. The plan will enable other institutions to join upon inception.
How will the decision be made as to whether to join the UPP?
The Provincial Government has designed a framework for transition to a new plan. While some details remain to be worked out, it is likely that QUFA would conduct a referendum that would then govern its decision to join the UPP. Pension plan members in other unions, non-unionized employees, and retirees would also have a say in the decision but how those votes are managed will not be under QUFA’s control.
What was bargained with the employer in the last round of contract negotiations?
In the last round of bargaining, QUFA and the other employee unions agreed to work with Queen’s administration to make the QPP sustainable. There are 3 possible steps in the plan we agreed to:
1. Explore starting a University Sector JSPP – the JSPP explained above;
2. Explore joining an existing JSPP;
3. Fix the existing plan.
In addition, we agreed that as and when likely changes to the pension are known, we would return to the bargaining table to consider how they impact overall compensation and whether we would ask for offsets. In other words, we have agreed that the collective agreement can be ‘re-opened’ to talk about pension changes.
For example, the UPP will have an overall contribution rate of 20% of salary which will be shared equally. That would represent a net increase to employee contributions from 9% to 10%. Just as we would at any time in the past, QUFA would negotiate for consideration elsewhere in the collective agreement to offset this added cost. These negotiations will be no different from those we have previously concluded in the sense that the strength of our position will depend on the support of our members.
What happens if members of the QPP reject the UPP?
If the wider pension plan membership (not just QUFA) rejects moving to the UPP as proposed, we (QUFA) would return to the numbered list above and move to #2, consideration of other jointly sponsored plans. If that failed, we would talk about fixing the existing plan which would entail honouring the solvency payments and may entail increasing member contributions or altering benefits.
I’ve heard about the CAAT plan – what is that and is it a good option for us?
The Colleges of Applied Arts and Technology Pension Plan or CAAT plan is one option for some of us in the university sector. CAAT has expressed interest in taking on a few university plans but would not likely take the whole sector because this would result in a loss of governance control to the Colleges.
We have looked at CAAT and while we haven’t eliminated it as an option, we think it’s expensive for what you get. Currently, the UPP seems to be a better option.
If I’m close to retirement or able to activate my pension, should I do that quickly in order to “lock in” my benefits or should I wait to see what happens with a new plan or does it matter?
QUFA cannot offer financial advice of this nature.
What we know is that all accrued benefits already earned within the QPP will be guaranteed and grandfathered going forward if the UPP takes over. On Day 1 of the UPP all future benefits would be earned within that plan. This new plan would provide a guaranteed benefit of approximately 1.6% below YMPE (QPP has 1.4%) and approximately 2% above YMPE (QPP has 1.8%).
Mar 7, 2018