Administration responds to pension questions
With contract talks continuing between the university’s administration and representatives of employees who belong to the Canadian Union of Public Employees (CUPE) and the Queen’s University Faculty Association (QUFA), many questions are circulating about one of the key issues at the table – the Queen’s Pension Plan (QPP). And now, the administration is continuing its efforts to respond to these questions.
Proposed changes to the QPP have been a source of much discussion in recent months.
The problem of the underfunding of the plan has been growing in recent years, as it has with most private- and public-sector pension plans. The problem has become so acute in the post-secondary sector that the Ontario government has mandated reform of the plans to return them to solvency.
Queen’s has been working with employee groups for several years to bring changes to the QPP but has, so far, been unsuccessful reaching agreement on how to move forward. Now, the pension changes have become closely tied into ongoing contract talks. But the heightened awareness has also led to questions about some of the details.
“The heightened interest is completely understandable,” said Bob Silverman, Provost and Vice Principal (Academic). “The plan is a key part of the compensation package for Queen’s employees. For most, it will provide the main source of retirement income. Of course people want to see it well-taken-care-of.”
In an ongoing effort (for a comprehensive summary, see the April 18 Financial Update) to address some of the questions and help inform the discussion, the administration has prepared its responses to some of the most recent and frequent questions being asked. These are the top five:
1. Why is the university proposing increases in employee contributions to the pension plan?
Short of reducing the minimum guarantee formula, this is the only option that would reach the savings targets required under the province's solvency relief plan. That being said, the Queen's Pension Plan (QPP) is primarily a money purchase plan, so increasing the contribution rate would accelerate individual members reaching an account-based pension that exceeds the minimum guarantee, which is a main goal of the plan.
2. How much would these proposed increases mean to me and my take-home pay?
The increases would be phased in gradually over several years, with each contribution increase being less than 1% of gross salary. The impact on take-home pay would actually be less, since the income tax deduction is factored in by payroll: each additional dollar contributed to the plan would "cost" 69 cents or less after tax depending on income and tax brackets.
3. How do these increased contribution rates compare to other public sector plans?
Increasing employee contributions appears to be the option of choice for other university plans facing similar significant funding shortfalls:
- Guelph's CUPE 1334 local recently negotiated changes that will see contributions increase to 7.6%, up to the Year's Maximum Pensionable Earnings (YMPE, currently $48,300), and 9.9% on salary in excess of the YMPE (Queen’s has recommended its target be 7% up to YMPE, 9% in excess);
- Trent's faculty plan has increased contributions to 7% permanently and to 9% for a three-year period (2010-13);
- McMaster's plan has increased to 6.5%, up to YMPE, and 8.75% above for all employee groups.
To compare with another public sector plan outside of the university sector:
- OMERS has announced increased member contribution rates for 2012, which will range from a low of 8.3% up to YMPE to as high as 13.9% above YMPE.
- The Ontario teacher's plan rates are now 10.2% up to YMPE and 12% above -- the plan, which is a jointly sponsored pension plan, requires the funding responsibility to be shared equally between the employer and pension plan members and, as such, contribution rates are set annually by the plan actuary.
Currently at Queen's, the employer's total contribution rate (employee money purchase account contributions, minimum guarantee current service cost, and additional special payments) is more than double the employee's.
4. I have heard that the Queen's Pension Plan (QPP) had a significant surplus in the 1990s. What happened to that surplus? Did the administration use the money for something other than pensions?
In the early 1990s, the QPP, like many pension plans at that time, had an actuarial surplus on its defined benefit (minimum guarantee) side of the plan: $24.7 million at the time of the August 31, 1991 valuation. But new tax regulations that came into effect in 1992 limited the amount of surplus that could be carried forward as a reserve, and required pension plans to use a portion of that surplus to fund regular defined benefit contributions if the surplus exceeded a certain threshold. The QPP was in the position of having to deal with potential excess surplus from January 1, 1992 through February 29, 2004.
After consulting with all employee groups, the “savings” (funds from operations that would have been contributed to the QPP if not for the tax regulations) were allocated to employees in several ways – some received additional salary, while faculty created a dental plan. This period also saw a number of plan changes – recommended by the Pension Committee and agreed to by all employee groups – including improvements to the minimum guarantee formula, increases to the university money purchase contributions, and a reduction in the factors applied to the minimum guarantee on early retirement (6% per year was reduced to 2% for the five years prior to normal retirement). The net impact of these improvements reduced the surplus by several million dollars.
In addition, employee groups agreed to temporary employer contribution holidays on two occasions. During Ontario's Social Contract years (1993 through 1996), employer contributions to the QPP were reduced by $2 million annually, and these funds were used to negate potential income and position losses resulting from the province’s wage freeze and unpaid holiday requirements.
Money from a second holiday (1997 through 2003) was used to pay for plan improvements proposed in part to mitigate Canada Pension Plan (CPP) changes, which led to higher contributions and lower pensions through the CPP.
5. What is the rush? Why does the university seem to be in such a hurry to implement changes to the QPP?
Quick action is required to reverse the underfunding of the plan and make the most of the solvency relief options that have been put forward by the Ontario government. The plan's actuaries have confirmed that the university needs to have a remediation plan in place as quickly as possible to help prevent the problem from escalating to unmanageable levels.
The law requires the valuation of pension plans every three years.
The QPP is due for its next valuation at the end of next month – on August 31, 2011. The valuation is a “snapshot” of the financial state of the plan on that date. August 31 is, therefore, critical because the state of the plan on that date will determine what additional contributions the university will be required, by law, to make over the next three years. Those additional contributions are required to bridge the gap between what the plan has in it and what the provincial law says must be in it – and the larger the payments, the greater the impact on the university’s operating budget.
If nothing is done, and the government’s solvency conditions aren’t met, the university's contributions would have to rise to over 30% of payroll to meet our funding obligations (right now, the university contributes about 10% of payroll while employees contribute 5% of their pay). That would mean an additional $70 million annually would be drawn away from the Queen’s operating budget. The current total operating budget is just under $400 million.
Regular updates on all negotiation activity at Queen’s will continue to be distributed through eQueen’s and can be found, anytime, at http://queensu.ca/labournews.