Human Resources
FREQUENTLY ASKED QUESTIONS (FAQs) – PENSION SOLVENCY ISSUE
Q. Why is the University proposing changes to its Pension Plan?
A. The University of Winnipeg Pension Plan faces a $553,000 annual contribution shortfall. Additionally the Pension Plan has a $15.1-million solvency deficiency according to a valuation performed as at December 31, 2004. In accordance with pension legislation, the University is required to pay the solvency deficiency over five years to put the Plan on a sustainable financial footing. Faced with the requirement to make immediate payments of $3.4 million per year, the University requested, and was granted, a temporary amnesty from the provincial government of three years from the solvency funding requirements to allow time for the University and the other pension stakeholders to make necessary changes to the Plan. This amnesty expires on December 31, 2007, following which time the University will be required to start paying for the deficiency. Without the permanent solvency exemption we have been seeking which requires some changes to the Plan, these monies would need to come from the University’s operating budget.
Q. What are the proposed changes?
A. The University of Winnipeg is proposing changes to the Defined Benefit (DB) component of the Pension Plan that will not only secure its financial health, but will also lead to a permanent exemption and relief from future solvency deficiency payments. As a result of further discussion, the Province agreed to consider a regulation change that would provide a permanent exemption from pension solvency requirements on the condition that the University and its pension stakeholders implement changes recommended in an independent report prepared by Hewitt Associates in November 2005.
The three changes, if implemented, are to be effective January 1, 2008 and include:
- Increased contributions by both the University (from 5.2/7.0% to 6.8/9.7% of salary) and Plan members (from 4.2/6.0% to 5.0/7.1% of salary);
- Elimination of early retirement provisions. The current early retirement provisions would be replaced with an early retirement “window” from June 1 to September 1 in each year when Plan members could take early retirement under the current Plan provisions; and
- Cost of living adjustments (COLA) to future pensioners tied to the financial health of the Plan.
Q. How is the University doing its share to resolve this problem?
A. The University has worked hard over the past three years to address our pension solvency challenge. The University obtained temporary relief of three years from the requirement to make pension solvency payments during which time it was to undertake necessary steps to return the Plan to financial health. It was able to get agreement from the Province on a permanent exemption from solvency payments if certain changes were made to the Pension Plan. As indicated above, one of the changes is an increase in member and University required contributions. The University now proposes to contribute 70 per cent ($386,000) towards the annual shortfall of $553,000, while members will pay 30 per cent ($167,000). In the original proposal put forward to the Pension Committee last October, Plan members would have paid for most of the shortfall.
The University recognizes the importance of resolving its pension responsibility and is responding to meet its obligations. These are difficult decisions, but we are not alone as other pension plans across the country and around the world face similar challenges.
Q. How many employees are affected by these changes?
A. The proposed changes will affect members of the Defined Benefit (DB) component of the Plan. There are currently 290 employees, or just over 43 per cent of the University’s work force, who are DB members. Following is the membership breakdown, effective December 2006, between the DB and the Defined Contribution (DC) members listed by employee group:
| AESES | DB – 93 | DC – 154 |
| UWFA | DB – 138 | DC – 153 |
| UWFA Collegiate | DB – 10 | DC – 17 |
| IUOE | DB – 16 | DC – 6 |
| CMP | DB – 33 | DC – 52 |
Q. What is the difference between the DB and DC components of the Pension Plan?
A. The DB component provides a retiree who draws a pension with a guaranteed stream of income from the time they retire to the end of their life. The DC component has no guaranteed stream of income at retirement. The employee in the DC component directs the investment of the member and University contributions into one or more of the fund choices available through Sun Life Financial, and the accumulated contributions along with the investment returns determine the amount that is available within the member’s account at time of retirement.
Q. What do these changes mean to Defined Benefit (DB) members?
A. The impact of the proposed changes on DB members is as follows:
- Increased Contributions - Under this proposal, DB members making $40,000 per year would see their pension contributions increase by approximately $330 per year. For members with an $80,000 salary, the increase would be about $760 per year.
- Early retirement – As indicated above, the current early retirement provisions would be removed from the plan. The University has proposed that instead of the current provisions, an annual early retirement window would be implemented. Any DB member who retired early would have their pension reduced in accordance with the current provisions of the Plan as long as the retirement took place between June 1 and September 1 of any year. Early retirement outside this window would be subject to an actuarial reduction of between .45% and .6% for each month between the actual date of retirement and the Normal Pension Commencement Date (NPCD).
DB members who will be within 10 years of their NPCD at the time the change is implemented will be covered by a grandfather provision for credited service they earned up to December 31, 2007. This means that if such a member took early retirement outside the early retirement window, the current early retirement provisions would be applied to their pre-2008 benefit, while the actuarial reduction described above would apply to their post-2007 benefit.
DB members who terminate employment prior to attainment of retirement age will be unaffected by the proposed change if at the time of termination they have less than 20 years of service. DB members who terminate employment with 20 or more years of service will receive a termination benefit that will be up to 25% lower than it otherwise would have been. Due to their long service means, these employees would have been expected to become entitled to unreduced pension at some point prior to their NPCD even without any additional service being accrued. The current termination entitlement calculation takes this future entitlement into account.
- Cost Of Living Adjustments (COLA) – Any DB member who retires on or before January 1, 2008, will be eligible for cost of living adjustment in accordance with the current provisions which tie the adjustments to the investment earnings of the Plan. DB members who retire after January 1, 2008 would also be eligible to receive a COLA, but only if the Plan is 100% funded on a solvency basis.
Q. What do these changes mean to Defined Contribution (DC) members?
A. DC members are not directly affected by any of the proposed amendments to the Pension Plan.
Q. How did this situation come about?
A. The December 31, 1999 actuarial valuation of The University of Winnipeg Pension Plan identified a $22-million surplus in the Plan, which placed the Plan in an excess surplus position in accordance with Canada Revenue Agency regulations. The University’s Pension Committee – which includes representatives from all unions, excluded employees and retirees – and Board of Regents, as required by law, made a decision to reduce the surplus in order to avoid a government imposed employer only contribution holiday. All parties, including the unions, jointly negotiated and signed an agreement to this effect. In the years that followed, a combination of regulatory changes, declining long-term interest rates and poor markets brought on by the events of 9/11 – which no one could have predicted – resulted in a situation where the University now faces a $553,000 annual contribution shortfall and a $15.1-million solvency deficiency as determined in December 2004. The University is not alone in this type of situation; other pension plans across Canada and the world are facing similar challenges
Q. Who benefited from the reduction of the surplus?
A. Both the University and Plan members received a benefit from the $6.8 million reduction in the Plan surplus. The University stopped making contribution payments into the Plan for a two year period for a total amount of about $3 million, and Plan members received a corresponding amount in cash and/or improved benefits totaling $3 million. On average, DB members received about $5,000 in entitlement as a result of this process. Additionally, employees who switched from the DB component to the DC component received a further surplus benefit totaling approximately $800,000 which was added to the members’ pension values transferred from the DB component to the DC component. Further reduction of the surplus was suspended, by agreement of all parties, when the solvency deficiency was confirmed.
Q. Why is the University still proposing these changes when many of the stakeholders have rejected them? A. The University has worked with the Pension Committee since the deficiency was identified to resolve the issue. Several options were explored, but the current proposal is the only one that was acceptable to government. The University continues to work with Pension Plan stakeholders to come to a solution on the solvency deficiency issue. The support of Plan members is required for any changes to occur.
This has not yet been achieved, however, the University received a mandate from the Board of Regents on Jan. 29, 2007, to take appropriate steps as soon as possible to obtain the agreement of pension stakeholders to amend the Plan and to report back by Feb. 28, 2007.
Q. Why has the University refused to transfer administration of the Pension Plan to a Board of Trustees as agreed in 2004?
A. The University has not refused to transfer administration of the Plan to a trusteed board. However, under its fiduciary responsibilities as the current Plan Administrator, it is not possible for the University to consider such a transfer until the financial stability and long-term health of the Plan is secured and no potential future liabilities are foreseen that could threaten the financial stability of the University and the long-term health of the Pension Plan. The permanent solvency exemption provides significant financial stability in this regard.
Q. Why hasn’t the University community been more broadly consulted on these issues? Why haven’t union executive members been involved in discussion with the Province?
A. The University has met frequently with representatives of Pension Plan stakeholders to discuss the proposed changes to the Plan. Several different consultations and formal meetings have taken place in the past month alone. These meetings resulted in the stakeholders refusing to accept or negotiate any changes to the current Plan.
On Jan. 24, the Pension Committee considered a recommendation to accept the modified versions of the three changes as outlined above and to officially amend the Pension Plan. The vote on this recommendation resulted in representatives from the three union stakeholders, the retirees and the UWSA regent (nine votes total) opposing, while representatives from the administration, excluded staff, and other regents (nine votes total) supporting the motion. The independent chairperson abstained from the vote, resulting in a defeated motion.
Following this meeting, union stakeholders stated they did not trust the University's representation of the government’s position regarding the three proposed changes and requested an opportunity to meet with the government directly. A meeting was organized for Jan. 29, however, the unions declined to attend this meeting at that time as they required more time to prepare.
Subsequently, on Jan. 29, the Board of Regents unanimously approved a motion to “direct the University’s representatives to take appropriate steps as soon as possible to obtain the agreement of the relevant stakeholders to amend the University’s Pension Plan in line with the conditions prescribed by the Province of Manitoba towards achieving Pension Plan solvency. Such agreement is to be achieved, if possible, by no later than February 28, 2007, in order to guide the Board’s budget process.”
Q. What other options does the University have to resolve this situation?
A. The University has no other options. Without the proposed amendments, the University will not be able to obtain the solvency exemption or make other changes to the DB component of the Pension Plan, and will have to find the required monies to pay this and future solvency deficiencies. This was confirmed in a letter from Mr. Jeff Parr, Deputy Minister of Labour, dated Jan. 26, 2007.
That means an estimated $3.5 million will need to be found in the University’s operating budget each year over the next five years to cover the deficiency. Negotiations on this issue need to be complete by the end of February because their outcome will have to be incorporated in the 2007 –08 budget which the Board of Regents will consider at its next meeting on Mar. 5, 2007. If agreement is not achieved, the administration will be required to make provisions in next year’s budget to find the resources to cover the first payments toward solvency deficiency which will be due retroactively to January 1, 2008.
Q. Why is the University still moving ahead with new capital projects and other high-profile funding announcements while this pension issue is still not resolved? Can monies from the fundraising campaign be used to help pay for the deficiency?
A. The University of Winnipeg is moving ahead with the Strategic and Academic plans developed by the faculty and staff of this University to expand and improve campus facilities and programs that will benefit our students, faculty and researchers today and in the years ahead. This growth is critical to recruit and retain both staff and students.
Funding for new capital projects, scholarships and other fundraising efforts is separate and distinct from funding for normal operating costs of the University such as contributions to the Pension Plan. When public and private donors alike make a donation, the University and its Foundation have an obligation to invest those funds into projects, scholarships or bursaries to which they were specifically targeted. Money earmarked for projects such as the new Richardson College for the Environment and Science Complex, and the CanWest Centre for Theatre and Film, cannot be diverted to pay for other operating costs at the University. It is also highly unlikely that any potential donor would be willing to contribute funds towards mitigating an issue such as the pension solvency deficiency.
Q. Would these changes be necessary if the December 31, 2007 valuation of the Pension Plan showed a smaller deficit?
A. Yes, but the amount of the required solvency deficiency payments would change. While it is possible that the next valuation of the Plan could reveal a smaller deficiency, it could just as easily reveal an amount far in excess of the current estimate of $15.1 million depending on variances in financial markets between now and the next valuation date as well as future valuations of the Plan. The changes proposed to the Plan will lead to permanent relief from such unpredictability and vulnerability. By forever eliminating the need to meet the solvency requirements, we would be putting both the Pension Plan and the University as whole on a solid financial footing for the future.