The University of Toronto, University of Guelph and Queen’s University are proposing to combine their respective pension schemes into one jointly sponsored defined benefit plan.

The plan, coined the University Pension Plan Ontario, would also include certain unions and other staff organizations not currently part of the universities’ academic pension plans.

“This is an opportunity for us to make sure we maintain and protect the retirement benefits we know are so important for our employees,” said Angela Hildyard, special adviser to the president and provost of the University of Toronto, in a press release. “This is a chance to reshape and sustain the retirement income system in the Ontario university sector.”

The move to a jointly sponsored arrangement reflects the overall direction defined benefit plans are going in, says Bita Jenab, principal at RetirementWorks Services Inc. Moving to such a structure, she points out, would provide immediate relief from the current solvency funding requirements. “That’s why they’re going to a JSPP: to escape the solvency rules,” she says.

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While Jenab believes that to be the main driver for the move, there are both benefits and trade-offs for the employers and plan members involved, she says. For employers, in addition to relief from solvency funding requirements, forming a jointly sponsored plan creates the potential for more stable contribution rates in the future, as well as the opportunity to spread losses from plan investments across a broader base. In addition, the pooling of several organizations reduces administration and investment costs.

An often-overlooked factor for employers, Jenab notes, is that pensions would no longer be part of the collective bargaining process with staff under a jointly sponsored arrangement.

There are, however, certain disadvantages for employers, according to Jenab. For example, each individual university would lose its autonomy. As well, it’s quite difficult for one entity to extricate itself from a jointly sponsored plan once it signs on, she notes. In addition, there are initial costs from the transition to the new plan, she adds.

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The arrangement would also effect surpluses, according to Jenab. “While before, the sponsoring universities may have had discretion in terms of the use of surpluses, now on a go-forward basis, any future surpluses would have to be equally shared with plan members.”

As for plan members, for those who are inactive, nothing should change, notes Jenab. However, it’s important for active plan members to understand the trade-offs of such a transition, she says. The advantages include increased sustainability of their plan’s defined benefit promise. As well, the joint decision-making inherent to a jointly sponsored plan can mean greater transparency for plan members.

For employees, the fact that individual entities can’t use surpluses for anything other than the plan itself might prove to be a boon as it could mean potential contribution reductions or benefit improvements, says Jenab.

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Plan members should be wary, however, of the removal of the pension factor from their collective bargaining agreements, according to Jenab. At the same time, plan members would forgo whatever contractual indexing they may have had before, she notes. Instead, a summary of the key features of the new university plan notes it would provide conditional indexation equal to 75 per cent of the annual increase in the consumer price index.

Organizations are likely to continue to migrate towards different plan configurations with the defined benefit regulations being what they are, says Jenab. “All of this could be avoided if the pension regulators moved to a risk-based model where plan sponsors with a high credit rating in certain industries, such as universities, would receive relief from solvency funding rules,” she says. In the current environment, in order to survive, defined benefit plans need to morph into other forms like a jointly sponsored or a target-benefit arrangement, she notes.

“If universities go bankrupt, we’ve got bigger problems than their pension plans,” she says. “But the regulators do not differentiate between an entity like a university and a mom-and-pop shop.”

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As to when the new university plan will take effect, the process to implement it is a work in progress. The organization’s website projects it will come into being this winter. Once it’s up and running, the plan intends to open its doors to other Ontario universities interested in joining. In a release, the organization noted the decline of defined benefit plans in Canada, low interest rates, volatile markets and increasing member longevity as drivers to make a move to a jointly sponsored plan now.

The release also noted how Ontario’s funding rules for single-employer defined benefit plans have been onerous for Ontario universities. “For several years now, the Ontario government has encouraged universities and staff groups to consider establishing a JSPP as a long-term pension solution for the sector,” the release noted.

“Adopting this model now will give us more control over the direction and outcomes of our pensions in the future.”

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Copyright © 2019 Transcontinental Media G.P. Originally published on benefitscanada.com

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