University pension plans across Canada are generally in such condition instability that they will increasingly affect the proportion of budgets available for the classroom.
Due to the 2008 market decline, many universities’ plans were hurt by declining investments and nationwide, the Globe and Mail reported that university pension plans have reached a collective deficit of $2.6 billion.
Jim Butler, VP of finance at Wilfrid Laurier University explained that the university’s pension situation is, while not as poor as other schools, not good. He cited the $30 million solvency deficit – an amount required to maintain the plan if the university were to stop contributing to it – as only one issue. Some universities may be exempted from making solvency payments in the short term based on a pension relief package the government of Ontario is developing, though details have not been finalized.
“While we have about a $30 million solvency issue, we have a $60 million ‘going concern’ issue,” said Butler.
“Going concern,” he clarified, “essentially says ‘is there enough money in the plan to meet the pension promises on an ongoing basis?’”
The university is required to meet the going concern threshold, which means finding funds elsewhere in the budget. “$60 million dollars is a lot of money,” Butler continued. “It has to be put into the plan and built into our budget assumptions going forward and takes away money that would normally go into the classroom.”
Plans like Laurier’s finance professor Brian Smith said, “Expose the employer to the risk of any sort of market downturn or low interest rate environment.”
Laurier’s pension plan is a hybrid model that is both ‘defined contribution’ and ‘defined benefit’, meaning that employees receive the greater value of two benefit options. Benefits are either guaranteed based on a formula taking into account their income level, length of employment and other factors or they receive variable benefits based on their contributions and the investment performance of the plan.
Smith said that Laurier has a few options to remedy its pension situation.
“There’s two ways to settle this, you can have budget cuts from the operating budget or you can have the actual pension beneficiaries pay more into the plan,” he said.
He assessed the plan, saying, “It really is a deluxe pension plan. In fact, Revenue Canada would not let such a plan be set up currently.”
“It’s too rich, my understanding is that it provides a double benefit,” he said, explaining that retirees receive a guaranteed amount along with potentially additional funds if the plan performed well over their period of employment.
Butler said that changes may be necessary to alter the plan and make it more affordable. “This is large enough and serious enough that you have to ask yourself the question of is there enough going into the plan.” He added that in recent years, the University of Waterloo reached an agreement with its employees to increase contributions to their plan.
Smith was skeptical that much change would come in the form of contributions to Laurier’s plan. “This isn’t going to change because people come here and it’s part of the employment agreement,” he said, noting that despite reluctance, “At some point the faculty and the school have to increase contributions.” The university currently matches employee contributions at seven per cent and adds an additional four per cent.
According to Butler, Laurier know needs to examine its plan through negotiations with its faculty and staff as well as in light of government’s response. “We’re waiting for the details of the government package and we need to talk to our employee groups – but that’s something that’s collectively bargained.”
