MYTHS ABOUT OUR PENSION PLAN (5)

cupe1975Pensions

MYTH

“This pension plan is in a deficit and running an annual shortfall”

 FACT

After nine years of being in deficit, the interim 2017 valuation revealed that the plan is now back in surplus (103% funded, $12 million surplus) on the actuary’s best estimate basis. If a 5% funding buffer (or “margin”) is added to artificially inflate the plan’s liabilities, the plan has a very slight deficit (98% funded). In either case, the funding level has improved materially over the past decade.

Virtually all pension plans fell into deficit after the 2009 financial crisis – the worst market crisis since the Great Depression. Our plan fell to a low funding level of 86% in 2011. The important point is that the plan has been steadily improving its funding level since this low point. The existence of a deficit in any given year does not mean the plan is broken or in crisis. The pension system is designed to bring plans back into balance over time.

The plan is also not “running an annual shortfall.” This suggests that the required contributions to the plan are not being made and that the plan has a structural funding problem. This is not the case. The “annual shortfall” the University refers to here seems to be a reference to the fact that the University contributes more than members do for the ongoing cost of the plan. The legal plan document says that members pay 8.5% of earnings into the plan, and that the employer must pay the remaining required contributions to the plan (and must at least match what members put into the plan). Currently, the ongoing cost of the plan is 19.87%. Members pay 8.5%, leaving the University to pay the remaining 11.37%. The University calls the difference between the member and employer rates (11.37% – 8.5% = 2.87%) an “annual shortfall.” There is no legal or actuarial principle that says that employers and members must equally share the ongoing cost of the plan. Our plan text does not say that members must pay the same as the employer. It is quite common for member contribution obligations to be fixed, as ours is, leaving the employer responsible to fund the remainder, which is often a larger amount, again, as it is in our plan currently.

So this is not an “annual shortfall.” All of the required annual contributions to the plan are being made. The language used has likely been chosen (and left unexplained) by the University to advance their bargaining agenda: to convince you that your pension plan has a structural problem that does not really exist. This being said, we understand that the Employer does not like the fact that they currently contribute more to the plan than members do. Our pension proposal would reduce member benefits slightly on a go-forward basis and increase member contributions slightly to eliminate this differential. Ongoing costs would then be shared 50/50 in our proposal (eliminating what they call the “annual shortfall”). The University rejected this proposal.