Member FAQs about the Shared Risk Plan (SRP) model

Transcription

1 Member FAQs about the Shared Risk Plan (SRP) model October 28, 2013 [Updated 29/10/13] Disclaimer: These explanations are being provided to assist members in their deliberations about the proposed conversion of the current pension plan to a Shared Risk Plan. They do not have any legal force and do not affect the meaning of the Plan text now or as amended from time to time. Any discrepancies between the following definitions and the Plan documents are to be resolved in favour of the Plan documents and ONLY the Plan documents should be referred to as correct. We have compiled the most commonly recurring questions and comments of the past few days and offer brief responses here. For a fuller discussion, please be sure to attend one of the meetings this week. How would the 85 factor work in the SRP? The approach to designing the SRP was to create neither an incentive nor a disincentive for retirement. Consequently all credits earned to date remain. Any actuarial reduction of a pension would be only for service after July 1, Two examples will help to illustrate how this works: 1. If you meet age + service = 85 now and decide to retire on June 30, 2014, you would receive the full pension earned up to July 1, 2013, and the extra pension earned from July 1, 2013 to June 30, 2014 would be reduced by 7.2% per year for each year prior to age 65. While the following numbers are hypothetical they provide an illustration. Suppose your pension at July 1, 2013 would have been $80,000 and that working the following year provided an additional $2500 in pension. If you were 64 at retirement, your pension of ostensibly $82,500 would be reduced by 7.2% of $2500 (which is $180), so that your actual pension at retirement would be $82, If you were 55 and have 25 years of service by July 1, 2013, you would continue to accrue age + service and would be eligible to retire in 2.5 years. At that time, you would have an unreduced pension on 25 years of service and an actuarial

2 2 reduction on the 2.5 years. Again, a hypothetical example: if your pension on the 25 years was $60,000 and on the additional 2.5 years was ostensibly $6000, the pension at Dec. 31, 2015 would be $66,000 if it were not actuarially reduced. But since you would be retiring 7.5 years early, the reduction would be 7.5 X 7.2% X $6000, which is $3240. Consequently, your actual pension would be $62,760. What happened to the best 5 years? And how would PTRs be accounted for after conversion? Under both the existing pension system and the proposed SRP, a member s annual pension upon retirement can be calculated as the product of the number of years of service times an accrual rate times an enhanced career average salary. For the existing system, the accrual rate is currently 1.7% per year and the enhanced career average is the average salary earned in the best five years. Thus, this enhanced career average implicitly accounts for most, but not all, inflation and progress through the ranks (PTR) increases during a member s career. Under the proposed SRP, the accrual rate would be 1.8% and the enhanced career average would adjust for inflation and PTRs conditional on the performance of the Plan. With respect to performance, under neutral actuarial assumptions as opposed to either positive or negative ones the goal is an enhanced career average that would account for 80% of the inflation that occurred during one s career, as well as most of the effects of PTR increases on salary. Specifically, for pension calculations, the current PTR would be targeted to increase each year by 80% of inflation. Thus, as an illustration, under neutral actuarial assumptions, someone completing 30 years under the SRP would earn a pension that would be roughly between 79 85% of what would have been earned under the current system. I feel that there is not enough time scheduled between the release of information about the proposed conversion, the information sessions and the vote. What is the rush? There are several reasons why we have limited time for ratification. Most importantly, the data on which the current plan conversion proposal was calculated dates back to March of Since the actuarial work on this data was complex, we were able to get agreement from the Superintendent of Pensions that we could use this data set as long as our contributions were higher than the expected contributions will be upon conversion. If we wait much longer, the data will be stale and additional actuarial expenses would have to be incurred to redo the calculations. Making the higher contributions currently being paid also means that any overpayments have to be refunded in the current taxation year. We were

3 3 able to get agreement for a further extension to mid- November, permitting the two additional voting days on Monday and Tuesday, Nov. 4 and 5 respectively. Would I lose benefits already earned? No. Pension benefits for service up to July would be calculated under the existing Academic Employee Pension Plan (AEPP). Only service after that date would be calculated under the SRP. What would a wind up of the current plan mean? When a pension plan is no longer financially viable, legislation requires it to be wound up and assets divided among plan members. Note that it is the plan s financial viability and not the financial situation of the employer that determines whether or not the plan is wound up. Wind- ups tend to have catastrophic impacts on most members of a plan, particularly active employees. In practice, as the law protects retirees first, a wind- up would mean a significant loss to active members: they would lose their future pension as well as most of the money invested in the plan. Winding up a plan is expensive, which would further reduce the money available for distribution. Often, lengthy litigation further causes expenses and prolongs the process. What would happen to the spousal benefit? Nothing. The New Brunswick Pension Benefits Act requires pension plans to provide spousal benefits. Porting the current arrangement to the SRP would ensure that members continue to receive the employer s contribution on this benefit. Why will retirees not be voting? Retirees are no longer active members of AUNBT and so are precluded from voting in an AUNBT ratification vote. That being said, AUNBT recognizes that former member retirees have important interests in the pension plan. For this reason, the Pension Committee did its utmost in reformulating the plan to balance their interests with the interests of active members. Retirees have also been kept informed throughout this process and invited to meetings to discuss the SRP. These meetings are being jointly coordinated with the Employer.

4 4 I am worried that we are ignoring the interests of retirees. We assure you that we are not. In order to make certain that we had the best expertise as well as ensuring that the interests of retirees were represented, the Pension Committee counts four retirees among its members, including the former chair and one of the current two co- chairs (the remaining five on the committee are active members). I feel like I am subsidizing retirees. The Pension Committee committed itself to the principle of intergenerational equity, and while exact equity would be difficult to achieve or even define, the provincial Shared Risk Plan legislation allows for a far greater balance than in the past. Specifically, pension legislation has traditionally protected retirees from having earned benefits clawed back. While this remains the case, the new provincial legislation allows some flexibility in indexing. Retirees under the SRPP would lose guaranteed indexing, a loss that is balanced by the promise of increased stability for the plan overall, the possibility of better than promised indexing if the plan performed well and better expectations for newer and mid- career colleagues. I worry about whether conversion would be fair to our junior colleagues. Under the SRP, junior colleagues could expect much more stability in their plan and would pay lower premiums than under the current plan for quite some time. Most importantly, they could expect to have a pension when they retire. With a wind- up of the current plan or a significant redirection of contribution to cover past service cost as the only alternatives, the SRP would mean better outcomes for junior colleagues. Has our pension been mismanaged? No. Along with many others, our pension plan is a casualty of the global recession. To further complicate matters, the most recent actuarial tables indicate that people are living longer, and people in our occupation in particular. The Pension Board submits regular reports and any members seeking information about the specifics need only ask. Can I take my money out of the plan and manage it myself? No. Membership in the pension plan is part of your employment contract.

5 5 Every few years it seems there is a problem with the pension. How can I be sure this will not continue? While we can make no promises, the SRP is based on updated actuarial tables and designed with great conservatism so as to cushion members from market instabilities. It is designed to provide only benefits that are affordable, and to minimize risk. Would I have to work longer to achieve the same benefits that I would have received under the old plan? If you are close to retirement, the changes would be very small. The closer you are to retirement, the less you would have to change your expectations. The SSR represents a trade- off of a somewhat lower pension in exchange for greater stability. If retirement is still a ways off, this may mean that you may wish to work longer to achieve a higher pension. However, the level of underfunding of the current plan means that it is highly unlikely that you would have received the pension you could have expected if the plan had been fully funded, and you would face much greater cost and less stability Provincial civil servants are protesting against pressure to convert to a SRP. Why is AUNBT recommending acceptance? Provincial civil servants have a true defined benefit plan, where the employer is responsible for any shortfall. Part of the position of civil servants is that the government did not pay its full share. Our plan is not a defined benefit plan in the same sense. Our plan is not a defined contribution plan. Rather, it is a jointly administered plan for which both parties share responsibility, and to which both parties contribute equally. Bottom line: how does the SRP compare with the current Academic Employee Pension Plan (AEPP)? Which is better? Upon conversion to an SRP, active members would not enjoy the same benefits as current retirees, although the more service an active member has under the AEPP, the closer their benefits would resemble their previous expectations. However, it is of little use to compare the SRP to the AEPP, because our current AEPP is no longer a viable option. The pertinent comparison is between the SRP and a pension wind- up. The question before you is not which would you prefer, the AEPP or the SRP? Rather, the question is, The AEPP is no longer supportable. Shall we replace it with the SRP?

6 6 I can t seem to find the solvency or wind- up ratios in the presentation that was circulated. What will they be after conversion? The health of the current plan is typically measured by metrics such as going concern deficit and solvency ratio. The metric used for the new plan is the open group funded ratio. The new plan would be expected to have an open group funded ratio of 114%. It is the level of funded ratio that would trigger actions. If the funded ratio exceeds 105%, part of the excess will be available for providing contingent benefits. If the funded ratio were below 100% for two consecutive years, then corrective actions would need to be taken as per regulations. Would the bridging benefit disappear? This benefit would be treated in a manner analogous to the 85 factor. The accrued bridge benefit would be calculated as at the conversion date (based on earnings and service as at that date). This amount would be subject to future conditional indexing. It would be payable if the member retires early and meets the unreduced early retirement criteria for pre- conversion service (i.e., the 85 points rule). No bridge benefit would accumulate for any service after the conversion. We were promised case studies. When will we get to see them? The presentation at the membership meetings will have extensive discussions of case studies showing how the conversion would affect the members pensions. While it is impossible to provide calculations for each member s individual circumstances, the scenarios cover new hires, early, mid- and late career situations. What would be the effect of conversion to a Shared Risk Plan on delayed retirement (i.e. retirement after the normal retirement age of 65)? There would be no change. The requirement to draw a pension comes from federal legislation and is not affected by the change in the provincial pension benefits legislation underlying the conversion. What would be the effect of conversion on CPP integration? There would be no impact, though the new federal rules regarding CPP may result in a higher pension if the member opts to draw on CPP late.

7 7 What would be the effect of conversion on severance? There would be no change. Would past service be affected by conversion? The answer is substantially no. The only impact would be that future indexation of past service is dealt with differently. How can conversion make sense in light of the ongoing complement reduction? Complement reduction has been taken into account actuarially in the framing of the SSRP model. I have more questions. Bring them to the meetings this week or contact us at aunbt@aunbt.ca with Pension in the subject line. AUNBT.ca