Information for employees in the hybrid pension plan (hired before 2009)
At McGill, employees hired before 2009 have a hybrid plan, a Defined Contribution plan (DC) with a Defined Benefit Minimum (DBM), which gives members the best of both worlds. To learn more about this type of plan, please refer to the Hybrid Pension Plan brochure. Employees pay a set amount (a fixed percentage of salary), and McGill as an employer contributes to the pension plan as well. In return, members accumulate savings. Upon retirement, members can then convert these savings into retirement income through the purchase of an annuity and/or life income fund.
Historically, employees who retired when the financial markets were great and interest rates were high the employees received more than the Defined Benefit Minimum (DBM) amount. When the market is bad and interest rates are low we still have a DBM to rely on.
How the market affects hybrid plans
A Defined Contribution (DC) plan works very well in a boom market. However in the case of a Defined Benefit plan (DB) it means more money has to be put into the plan to sustain it when times are tough, so that the plan has enough money to fund the DBM payments to departing employees. In past years, the Pension Plan didn’t need significant extra contributions. Recently, investment returns have been down for a long period of time, interest rates have been at a record low, and the fact that people are living longer is putting more strain on the plan. As a result, the University is obliged to make supplementary contributions to the pension plan in order to meet the defined benefit minimum obligations owed to departing employees. This supplementary annual payment is expected to grow substantially in coming years.
Pension plan deficits
Our pension plan deficit (the gap between the assets currently in the plan and the funds needed to meet the plan’s obligations to its members) has increased rapidly. An independent actuarial firm calculated the deficit in 2009 to be $46 million. With the December 31, 2012 valuation the deficit jumped to $97 million. For more information on how an actuarial firm calculates deficit, click here.)
Often, defined benefit plans have the employer and employee agree on a percentage (most commonly a 50-50 split) of contribution needed to keep the plan sustainable. So the contributions to the plan, for both employer and employee, change over time, according to the return on investment, interest rates and demographic circumstances.
However, in McGill’s hybrid plan, the level of employee contributions hasn’t changed since 1972. As a result, the University has needed to make special payments recently to ensure the sustainability of the plan.
McGill’s additional contributions to cover the pension plan deficit
It should be noted that the design of the plan has been maintained; for employees hired prior to 2009 only the contributions have been modified.
Adjusting the plan
After 40 years, there was a need to adjust the contribution rates to meet today’s financial realities. A number of measures have been introduced, and employees have been notified in mid-2011.
First, the University stopped making contributions to the plans of employees past the normal retirement age of 65.
Also, some in receipt of stipend income under the hybrid segment will see a change in the way future DBM calculations are undertaken.
Second, contributions to the plan increased, on January 1, 2013, by 2 or 3% for all MUPP members older than 40 years of age, whether they belong to the hybrid or defined contribution segments:
- Members 40 to 49 years of age have paid 7% of their gross salary to their pension, less 1.8% on the earnings subject to the Quebec Pension Plan (QPP).
Members aged 50 to 65 years of age have paid 8% of their gross salary to their pension, less 1.8% on the earnings subject to the Quebec Pension Plan (QPP).
- There was no change in contribution rates for members 39 years and younger. Members 39 years of age and younger will continue to contribute 5% of their gross salary to their pension less 1.8% on the earnings subject to the Quebec Pension Plan (QPP).
Third, effective January 1, 2014, a 2/3 employer (totalling $12.6 million)-1/3 employee (totalling $6.4 million) cost sharing of deficits, for employees in the hybrid segment, will be introduced for the employees and employer:
- Members 40 to 49 years of age will paid 9.2 % of their gross salary to their pension, less 1.8% on the earnings subject to the Quebec Pension Plan (QPP).
- Members aged 50 to 65 years of age will pay 10.2% of their gross salary to their pension, less 1.8% on the earnings subject to the Quebec Pension Plan (QPP).
- Members aged 39 or younger will pay 7.2% of their gross salary to their pension less 1.8% on the earnings subject to the Quebec Pension Plan (QPP).
- McGill will cost-share this increase in contribution from employees with $6.6 million and top it up with an estimated $6 million to continue providing departing employees with their full benefits.
For more information on this change please click here.
Should additional amendments need to be made to the pension plan in order to ensure the long term sustainability of the plan, we will consult with members of the plan on such changes before they are brought forward for approval through the various governance structures.
Why did the pension deficit increase from $46 million in 2009 to $97 million in 2012?
The Régie des rentes du Québec sets norms for calculating the health of a pension plan. The norms apply to a series of factors such as projections of what a given plan owes in today’s dollars, reasonable assumptions on mortality and on the rate of return on investment, amongst others. The majority of the increase results from the application of the revised assumptions as required by the Régie since our last valuation in 2009.
Why can’t McGill cover the deficit in full?
Before the December 31, 2012 valuation, the average of McGill’s additional contribution was $6.1 million over each of the last three years. The University covered that amount in full from its operating budget. With a total of $19 million now required per year, we are not able to add any additional strain on our already thinly stretched operating budget.
Am I affected by these changes if I am not a member of the Hybrid Plan?
No. If you’ve joined McGill after January 1, 2009, you have a Defined Contribution plan which is not affected by the cost-sharing provisions of Amendment 24.
How long will Hybrid Plan members have to pay the 2.2 % increase in their contributions?
The cost-sharing contributions have been established based on the December 31, 2012 valuation and will be revisited at the time of the next valuation, which must be performed no later than December 31, 2015. If conditions improve at the time of a future valuation, the rate of cost-sharing contributions may be lowered.
Was it financially savvy for the University to offer the VRP since it increases the amount of individuals claiming pensions while it reduces the number of employees contributing to the plan?
The impact of the VRP on the Pension Plan will be minimal since employee contributions stop at age 65 and the VRP was offered to members who were at, near or past 65 years of age.
Did McGill mismanage its Hybrid Plan?
Most pension plans today are facing the same economic realities which are a direct cause of the drastic increases in pension deficits across North America and Europe. See related news stories. McGill’s plan was designed in 1972 based on a different set of economic and socio-demographic realities and projections. Prior to January 1, 2013, McGill maintained the employee pension contributions at the same level for 40 years while taking on the deficit funding obligations when it was still manageable to do so.
With the volatility in the financial markets since 2008, along with a prolonged low interest rate environment and notable changes in the plan’s demographics, the status quo could no longer be maintained. The changes we must implement are required to ensure the stability and sustainability of the Hybrid Plan for its members, notwithstanding the plan’s relatively strong investment performance over recent periods. For example: as at June 30, 2013, the plan’s Balanced Account recorded an annualized rate of return of 8.0% (before fees) over each of the past 10 years. This placed the plan in the top 11% when compared against a universe of 74 Canadian pension plans. An 8% annualized rate of return, although reasonable, is still not enough to offset the effects of low interest rates and the plan’s changing demographics.
Why is the deficit evaluated at $13 million per year while the total additional contributions amount to $19 million?
$13 million represents the additional amount required each year to fund the benefit for current and past employees. This portion of the deficit will be cost-shared between McGill ($6.6 million) and employees ($6.4 million). McGill will top-up its $6.6 million share with an additional $6 million, paid from its operating budget so that departing McGill employees can receive 100% of their pension payouts.
Why does the University propose to eradicate the pension debt over 15 years?
Pension legislation in Quebec requires that ongoing (going concern) deficits be amortized and repaid over a 15-year horizon while pension funding requirements are reassessed following each actuarial valuation.
In Budget 2014 it was projected that additional pension plan payments would total $15 million over the next 5 years. How and why has the December 31, 2012 valuation changed that projection?
The $15 million estimate was based on the financial position of the plan at December 31, 2011. The financial performance of the plan in 2012 contributed to reducing future annual funding requirements to $13 million. However, the University must add an additional $6 million per year to be able to pay its departing employees their pension benefits in full. This means the total annual bill for additional payments is $19 million.
The pressures of increasing life expectancy on pension plans have been predicted for well over a decade, if not more. Why did the size of the problem only become apparent to McGill with the 2009 valuation?
Our valuations are based on the Régie des rentes du Québec’s standards. The mortality tables used in performing valuations are prescribed by the Régie and are influenced by the recommendations of the Canadian Institute of Actuaries (CIA) which looks at overall trends in North America. However, increases in life expectancy are only one factor used to evaluate the health of a plan. They are not the determinant factor. But more changes loom on the horizon. Following the results of a recent study performed by the CIA, the use of Canadian-only life tables will be recommended in the near future because it will more accurately take into account the increased life expectancy of Canadians over Americans. Such a change is likely to further increase pension liabilities in Canada.
Is Amendment 24 legal?
Amendment 24 is legal. The Board of Governors is permitted to amend the pension plan and most, if not all, plan sponsors have had to make significant changes to their pension plan arrangements in recent years. McGill is not alone in this regard.
Given the financial costs of a Defined Benefit portion of the Hybrid Plan, does the University plan to eventually terminate this plan?
The changes introduced in this and prior pension plan amendments are intended to maintain the hybrid arrangement for employees who joined McGill before January 1, 2009. As of January 1, 2009, new employees participate in a defined contribution plan and as members retire from the hybrid arrangement, over time, it will come to an end.
Are other universities sponsoring Hybrid Pension plan arrangements also opting to decrease their portion of the Defined Contribution (DC) in order to make the pension arrangement sustainable?
This mechanism is being used by other universities who sponsor hybrid pension plans. This approach facilitates the administration of the cost-sharing measures.
Who conducted the December 31, 2012 valuation?
The valuation was conducted by Eckler Inc, an independent actuarial firm.