DEFINED CONTRIBUTION (DC) PLAN PROPOSAL
INTRODUCTION OF A DEFINED CONTRIBUTION PLAN
The Pension Committee is currently considering the introduction of a Defined Contribution (DC) plan retroactive to January 1, 2000.
The proposal is as follows.
a) All active contributing members of the plan except those who, at December 31, 1999, were eligible for an immediate early retirement pension may elect to convert to a new defined contribution arrangement retroactive to January 1, 2000, or date of joining the plan, if later. For the year 2000, those who convert will have their accounts credited with interest at the rate earned by the fund in 2000, net of expenses, and their Pension Adjustment (PA's) for the year will be based on a DC plan.
b) Active members who are eligible for an immediate early retirement pension at December 31, 1999 (essentially those age 55 or over at that date) as well as pensioners, deferred pensioners and inactive members at that date, will remain in the current defined benefit plan.
c) All other employees of the University at December 31, 2000 who are not members of the plan may elect to join either the current DB plan or the new DC arrangement when they satisfy the membership eligibility conditions. All employees hired on or after January 1, 2001 will join the new DC arrangement.
d) The DC arrangement will provide for the same contribution levels as the current plan. Members may choose to keep their funds in the same "balanced" fund as currently structured or to transfer them to a new DC fund which will have a number of different investment options.
e) The amount to be transferred to the DC arrangement in respect of a member will consist of the value of the member's benefits in the DB plan at December 31, 1999 as determined by the plan's actuary plus the member's share of the current surplus distribution plus the member's share of the remaining surplus and investment reserve. To the extent that a member elects to receive some share of the surplus in cash, the amount to be transferred to the DC plan will be reduced accordingly.
f) If the Pension Committee decides to proceed on this basis, information will be provided to each member by the end of November and the member will be given until the end of December to make his or her election. Descriptive material will be supplied to each member and public meetings will be arranged at which independent experts will be available to answer questions.
Discussion:
The most significant advantages to plan members to making January 1, 2000 the effective date of the conversion is that converting to a DC plan would result in higher Registered Retirement Savings Plan contribution room starting with the 2001 calendar year (see table 1) and, those who convert would be able to transfer to the DC plan their current surplus entitlement, thereby tax sheltering it. However, in order to convert effective January 1, 2000, the process must be completed by the end of 2000, hence the somewhat limited time for feedback and decision.
The process is subject to the approval of the Pension Commission of Manitoba but we believe that the above proposal satisfies the requirements of an information letter that they have published about conversion from a DB plan to a DC plan. One of the requirements of the circular is that no member's benefit on conversion should be less than the benefit that they would have received if they had terminated membership in the plan on the date of conversion. This does not present any problems for those members not eligible for early retirement, since their transfer values to the DC plan are greater than the termination benefits. However, the early retirement provisions of the plan represent a substantial subsidy to those who elect to retire early - so that the reduction on early retirement is considerably less than the reduction to provide the same value as the same pension payable from age 65. Thus, for those who are entitled to retire early at December 31, 1999, the value of their immediate pension is worth more, and in some cases considerably more, than the proposed transfer value to the DC plan. Accordingly, the option to transfer to the DC plan is not being extended to these members. If it were, they would effectively have access to the benefit of the early retirement subsidy without having to retire.
A discussion paper on the relevant merits of DB and DC plans was distributed in April of this year and a copy may be found on the web page under "Comparison of DC versus DB". Also see Table 2 for some examples of the amounts available for transfer to the DC plan and a table showing the additional RRSP contribution room for 2001 if the member converts to the DC arrangement retroactive to January 1, 2000.
Establishment of a trusteed plan:
In the event that a Defined Contribution plan is implemented effective January 1, 2000, the University is proposing to make a change in the governance of the Defined Benefit plan as follows:
a) With effect from January 1, 2001, or as soon as practicable thereafter, the current plan will be changed to a "trusteed" arrangement under which the operation of the plan would be in the hands of a Board of Trustees made up of representatives of employees, pensioners and the University. The structure would be such that the number of member representatives and University representatives would be equal with either an independent chair or a mechanism for dispute resolution built into the trust agreement. All decisions, except those that would cause an increase in the University's contribution rate, would be made by the Board of Trustees of the plan and would not be subject to the approval by the Board of Regents of the University. Any possible increase in the University's contribution rate would be subject to the collective bargaining process.
b) Under this arrangement, the University would have no claim on any new surplus arising from plan experience other than as described below. In the event of a deficiency in the plan which required additional funding, the University would be responsible for making these additional payments and, in the event of a subsequent surplus, would take a full or partial contribution holiday until such time as the additional payments plus interest at 7% per annum have been recouped.
Discussion:
Under a DC plan, the role of the University is considerably reduced and the proposed changes to the governance are a logical extension of that principal to the existing DB plan. With the closed end nature of the DB plan, pensioners will form an increasing percentage of the plan liabilities (they already account for 37%) and their representation on the Board of Trustees will be increased compared to that on the Pension Committee.
Conclusion
The Committee recognizes that some members are anxious to implement a DC plan and that there are advantages to making it retroactive to the start of the year, if at all possible. In order to achieve this, the Committee feels that, if the decision is made to proceed with the proposal, it must give members at least a month to decide whether to stay in the DB plan or move to the DC plan, and that decision must be made by the end of the year.