by Les Robb, your Representative to the Pension Trust Committee for the Salaried Pension Plan

Notes from the presentation to the 2010 AGM

Today I thought I would talk about some big picture items concerning our Plan. However, I know a number of you are most interested in the finances of the Plan and, in particular, whether the earnings are such that we can look forward to indexing next January. I wrote in an earlier article that the earnings would need to be more than 18% to give rise to indexing next January. The first three quarters of the year (to the end of March) have earned about 12%. Given the turmoil recently in the markets, I think we can agree it is highly unlikely we will make the 18% and so I think we will have our pensions held constant next year. I suspect those of you who had read my earlier estimate of 18% had already reached this conclusion.

Now to the big picture items!

First, things are changing in our salaried pension plan more rapidly than ever.

Not many years ago we all (in the salaried Plan) had the same benefits and because the University wanted to keep it that way it was hard to make changes by any one group. Groups were told – if we did that for you we would have to get agreement from all the others. The status quo consequently prevailed.

More recently, we are in the mode of “different strokes for different folks". This may be associated with the unionization of staff but I can say from my past life that MUFA at times wanted to go its own way. In any case, we now have some folks with rule of 80 and some transitioning to the rule of 85. We have some folks paying one set of contribution rates and some with another set. We have some salaried employees now excluded from joining the plan upon being hired. We have some new salaried employees paying the same as longer serving employees and getting a fraction of the benefits. In short, our Plan is becoming more and more fragmented.

In addition to contribution and benefit differences, there are also different agreements between the Administration and various groups about what will happen should a surplus ever arise again (though don’t hold your breath!). The CAW has an agreement that if a surplus arises, that portion of the surplus attributable to their members would be the subject of negotiations as to how it would be used. MUFA also has an agreement about surplus: if the University takes certain sized pension holidays due to a surplus, MUFA members would also get specified holidays. It is unlikely we will ever run up a big surplus in the future.

If the Administration and the employees divvy up any surplus as soon as it arises, it is pretty obvious that there won’t be much room for retirees. The kind of dealing that has been going on is not a bad thing in itself but it is important for us to remind the players not to forget about retirees.

I also hear talk in some circles that perhaps it is time to set up separate plans for different employee groups with a common investment pool. I don’t see this idea as having much traction at the moment, but it might have more traction if more fragmentation of benefits and costs continues. This might not be a bad thing – with the separate deals already in in place it is almost the case that we have quite different plans informally in any event. Formalizing the structure would force the parties to keep track of the benefits and contributions of the various groups separately. One group might be in surplus while another was in deficit, for example.

The other big picture item is the state of the deficit in the Plan. The market collapse following 2008 put our plan into a serious deficit position and this has been requiring a larger part of the University budget to be devoted to the Pension Plan. This is a very serious concern for the budget committee and is a major focus of the Administration in its thinking about pensions. While this serious deficit state continues, there can be no hope of improvements in our indexing formula, in my view.

Related to this deficit position is the investment strategy for the pension plan. The Administration has indicated that once the deficit in the plan is eliminated they may want to go to a more conservative investment strategy – more bonds, fewer stocks, less variance and lower returns. The thinking is that it would be better to pay a bit more over time from the operating budget in order to avoid being “whipsawed" as we are at the moment when the stock market goes awry.

The implications are not pleasant for our indexing. Lower average returns that would be associated with a conservative investment strategy would lead to us more frequently failing to get any indexing (let alone full indexing). So this is another issue for us in the future. Perhaps when the Administration becomes aware of the increased average cost of this strategy in the long run, they may reconsider.

These are two big picture issues that I thought it useful to bring to you today.