Annual meeting and election of PAC members
Earlier this year, the McGill University Pension Plan (MUPP) held its annual meeting which was attended by about 40 plan members. Elections were held to appoint a member on the Pension Administration Committee (PAC) representing administrative and support staff.
All pension plan members were also asked to vote for or against continuance of the voting procedures. As plan members voted in favour of continuance of the voting procedure, this means that, in accordance with the rules of the plan, the pension committee includes four elected members – two academic representatives and two representatives of administrative and support staff and that the proportional voting method remains the same.
Other committee members include two representatives of the principal, two representatives of the board of governors and one independent member. This creates an evenly weighted committee and provides parity when discussing plan issues.
All nine members of the Pension Administration Committee (PAC) act as plan trustees. They make recommendations to McGill’s board of governors on plan design and on measures to be taken to ensure long-term sustainability of the plan. “Although we were disappointed that few members were present, for those who did attend, the question and answer period in particular is an excellent opportunity for plan members to express their point of view and get greater clarity on the undertakings of the pension plan,” said John D’Agata, Director, Pensions and Payroll.
How the McGill pension plan performed in 2010
At the annual meeting, how the plan’s investments performed in the past year was presented to plan members. The global financial crisis that emerged in 2008 changed the investment climate completely. Although 2010 proved to be a positive year in terms of the rate of return of the pension plan, the ten-year annualized rate of return for the balanced account for instance is down significantly from what it was a decade earlier. Long-term investment returns dropped sharply and markets have become more volatile creating a difficult environment for pension plans. Life expectancy rates are also on the rise. Pension plans are being hard hit: lower interest rates have increased liabilities, asset positions have been hurt by lower investment returns, and increasing defined benefit minimum payments and increasing maximum benefit levels, coupled with more money being paid out due to people living longer have all taken their toll. Pension plans everywhere have had to adjust to this new reality.
In fact, the Canadian Federation of Independent Business launched a campaign to highlight what it calls a looming pension crisis. It says the nation’s public sector workers, which account for about 20% of the working population in Canada, get pension benefits that those in the private sector can only dream of. The trouble is the government can’t pay for them. As for the McGill pension plan, it is very generous, but the economic turmoil of recent years signals that the contribution rate, which is based on future interest rate assumptions, life expectancy, the rate of return on investments, and rising maximum contribution and benefit limits, cannot be sustained.
Three-year pension valuations are the law
Every three years, the McGill pension plan undergoes a valuation by an independent actuarial firm. This valuation is required by law. The valuation found that an increase in the overall level of contributions is required to maintain the long-term health of the plan.
Changes need to be made to the McGill pension plan to allow it to meet its long-term obligations. In May, McGill’s board of governors approved a three-pronged amendment, as recommended by the PAC. Discussions were held with representatives of various employee groups in the following months to explain the amendment to the plan.
Three-pronged amendment to the McGill pension plan
- Starting January 1st, 2012, required member and University contributions to the pension plan will cease at the normal retirement date of age 65, although employees will still be able to make voluntary pension contributions.
- The rate of contribution needs to be increased to reflect today’s market realities. An increase of 1% to 3% in the rate of member contributions will be introduced on January 1st, 2013 for all pension plan members above age 39.
- Effective January 1st, 2014, funding deficits will be shared equally by Part A members (hybrid plan) and the University. This mechanism allows further adjustments to the contribution levels as needed into the future.
How the McGill pension plan is designed
Eligible employees who started working at McGill before January 1st, 2009 participate in a hybrid plan (known as part A) that provides both the benefits of a defined benefit arrangement and a defined contribution plan. Under the hybrid plan, McGill and the member each contribute a set amount to the plan every month (defined contribution component). When you retire, you use your pension account balances to « buy » a pension. The hybrid plan also includes a defined benefit minimum which establishes a certain level of income at the normal retirement date based on the number of years of employment and salary level. If your pension account balance based on the performance of the balanced account is less than the defined benefit minimum, the MUPP pays a supplement to make up the difference.
In other words, if investments are paying good returns, you are likely to obtain a higher value through the defined contribution component, benefiting directly from strong market performance. If the investment returns are low, you may have a defined benefit minimum provision to fall back on.
A hybrid plan provides a safety net for members but requires high levels of contributions to be able to pay the minimum benefit when investments are not generating good returns. Switching all employees to a defined contribution plan would be one option to make the MUPP sustainable. The defined contribution plans pay out on termination or retirement the value of a member’s holdings and do not guarantee a minimum benefit, thus eliminating pension plan deficits. Eligible employees who started at McGill January 1st, 2009 or later participate in a defined contribution plan.
Establishing the proper contribution level to the plan
In order to maintain the current level of benefit, establishing a proper contribution level to the pension plan is a first step in reducing the likelihood of funding deficits arising in the future. The alternative to increasing contribution levels is to decrease future benefits which would impact individual members to varying degrees. The consequences of implementing a reduction in the defined benefit minimum formula was considered to be less advantageous than the impact that increasing member contributions would have on members’ financial well-being.
The ability to share deficits allows for ongoing contribution rates to be established using assumptions that are neither too conservative nor too aggressive and allows for an appropriate level of risk in the management of pension plan investments.
Although funding deficits are to be shared equally by members of the plan and the University, additional contributions required from members will be put back into their own individual pension account. In turn, an equivalent reduction in the University contribution to the member’s account will be made. The University will continue to make special contributions to offset funding deficiencies in accordance with pension legislation.
These changes to the McGill pension plan are about sustainability. The University is taking steps today to make sure the plan is healthy and viable in the future. Although there is no threat to current pensions, additional contributions are needed or the McGill plan will not be in a position to continue to pay out pensions to retiring employees over the longer term. McGill has absorbed these extra contributions over the past few years, but continuing to do so places a significant strain on the University’s limited financial resources.
Pension plans, including McGill’s plan, are facing a very different environment than even five years ago. Contributions to the pension plan are invested, and the returns on all investments have fallen dramatically since the global financial crisis whose effects still linger. To put things in perspective, the balanced account of the MUPP realized an annual gross rate of return of 11.8% from January 1st, 1991 to December 31st, 2000. From January 1st, 2001 to December 31st, 2010, the annualized gross rate of return for the balanced account was only 5.6%.
The decision to increase contributions in order to preserve the same level of benefit to members upon retirement means that members pay more now but payouts are not reduced to retiring members.
For all the details about the recent changes, click here www.mcgill.ca/pensions/communiques).