Defined Contribution (DC) Pension Plan Questions and Answers
CLARIFICATION:
The University's proposal in connection with the creation of a Defined Contribution arrangement indicates that all active plan members except those who, at December 31, 1999, were eligible for an immediate early retirement pension, be given a choice of remaining in the current Defined Benefit plan or transferring to the new DC arrangement.
The eligibility to retire early refers to the provisions of the current terms of the Defined Benefit plan and NOT to any early retirement incentive opportunity that may exist or may have existed. Under the terms of the Defined Benefit plan, any plan member may choose to take early retirement within the ten year period preceding the Normal Pension Commencement Date. For a support employee the earliest date of retirement is first of the month following attainment of age 55, for an academic employee, the earliest date of retirement is first of September following attainment of age 55.
If at the time of early retirement the plan member is less than 61 years of age and/or the plan member's age and service do not add up to 85, the early retirement pension is reduced by 1/4% for each month by which early retirement precedes the date on which the plan member would have been entitled to unreduced pension had he/she continued in employment.
Although it is a generally held view that the 1/4% per month reduction for early retirement is a penalty, in reality it represents a substantial subsidy as the true actuarial cost of early retirement is at least twice that amount.
The Manitoba Pension Commission requires that any plan member who chooses to transfer to the Defined Contribution plan (assuming that it is implemented) be treated as a terminating plan member under the Defined Benefit plan, and that the member receive all benefits accrued to the member to the date of termination. This means that the early retirement subsidy under the Defined Benefit plan would be invoked in the case of any plan member who is eligible for an immediate early retirement pension and the member would receive the value of that subsidy without actually having to retire or terminate. For this reason, plan members who are within 10 years of their Normal Pension Commencement Date at December 31, 1999, are not eligible to transfer to the Defined Contribution arrangement.
Investment Related
Q. How are Plan assets invested now?
A. In a balanced fund, managed by Conner Clark & Lunn. A balanced fund includes investments in a number of diversified investment categories, including a) deposit receipts, b) bonds, c) Canadian equities, d) American equities, e) other foreign equities. The percentage of Plan assets that can be invested in any category is governed by investment guidelines drafted by the University's Investment Committee, and approved by the Board. The investment in bonds is largely represented by government securities, though there is a limited amount in high quality corporate bonds. With respect to Canadian equities, no more than 10% of Canadian equity securities held directly can be in any one company (though with respect to the indexed portion of the Plan, this restriction does not apply). Sixty percent of the Plan's assets are invested on an "active basis" (i.e. specific stocks and bonds are held), forty percent are invested on an active asset class/passive security basis (i.e. indexed funds). The concept of diversification is that having assets distributed across a wide variety of security classes and organizations
reduces the volatility of return of the entire portfolio.
Q. How would Plan assets held for a defined contribution component be invested?
A. Initially, just as they are now, with Conner Clark and Lunn, and in a balanced fund. However, as different options, with investment managers, were agreed to, those in the DC plan would be offered choices. Assets would then be transferred out of the balanced fund managed by Conner Clark and Lunn and into the new options as chosen by individual members.
Q. How would the new options be chosen?
A. To provide diversification of options; so as to allow, for example, those with a more aggressive bent to focus their own account more to growth stocks, or to allow those of a very conservative nature to hold a higher percentage of their account in fixed income securities. Options and investment managers would be chosen after research to determine track record, cost ratios and volatility.
Q. Would the rules change for determining inflation related pension increases in the defined benefit component of the Plan under the University's proposal?
A. No. As before, if the investment yield exceeded 6%, regardless of whether the Plan was in deficit or surplus, an inflation related increase would be possible. The amount of the increase would depend, as now, on the excess of return over 6% and the level of inflation. The University would guarantee the provision would continue for the defined benefit component.
Other questions:
Q. Why not allow new faculty and support staff after January 1, 2001 to choose between the defined benefit and defined contribution components?
A. Because those that expected to leave the University before retirement would choose the defined contribution plan, leaving those intending to make the University their entire career to choose the defined benefit design. This would make the defined benefit design more costly than now, and require a higher joint contribution rate.