Proposal for the Payment of Canada Pension Plan Bridge Benefits between 1996 and 1997 Early Retirees and Improvements to the Pension Plan

MUFA Commentary

As you will have noted in earlier communications, discussions have been underway between the administration and representatives of members of the Pension Plan concerning the ‘bridge payments’ in the Special Early Retirement Plan (1996-97). The administration indicated in Directions II that it wished to pursue the possibility of making these payments out of the Pension Plan and thereby saving some $4 million from the Operating Budget. The employee (and retiree) groups agreed to these discussions on the understanding that they might expect improvements of the same order of magnitude. After a number of meetings, including some with the Pension Plan Actuary, we have reached a tentative agreement which has been approved by the MUFA Executive and we are now putting to our members in the attached ballot. The details of the agreement are spelled out in the following memo dated May 15, 1997 from A. L. Darling to the Finance Committee of the Board of Governors. Timing issues required the Finance Committee to consider the matter quickly, but their approvals are subject to approvals of this balloting and those of other groups represented in the Plan. [SUBSEQUENTLY, MUFA MEMBERS VOTED IN FAVOUR OF THE PROPOSAL CONTAINED IN THE MAY 15/97 MEMO.]As a background to this memo, I would like to draw your attention to the fact that this is a compromise that provides `something for everyone’, at least everyone at the table. The following groups were represented in the discussions (in addition to the administration and ourselves): MUSA (staff), MURA (retirees), CFA (clinical faculty), and the Exempt Group. The agreement provides for: an improved guarantee of indexing (of special interest to MURA and to all of us once we retire); an improvement to pre-1983 pensions that lost purchasing power due to incomplete indexing (of interest to MURA); and improvement to retirement benefits (of interest to all who expect to retire with a McMaster pension); a bridge benefit for early retirees (of interest to those who expect to retire early under the Rule of 80); and finally, improved termination and death benefits (primarily of interest to those who expect to retire before reaching the Rule of 80 when the commuted value of the pension tends to be larger than contributions plus interest).

Your representatives (Doug Welland and myself) on this Committee met a number of times with the MUFA Pension Committee (which included Catherine Beattie, Sherman Cheung, Wayne Lewchuk, Bernadette Lynn, Daphne Maurer, and Mike Veall) during the negotiations. The Pension Committee favoured mainly the bridging payments and the improved pension guarantee discussed above and in the attached memo from A. L. Darling. However, the Committee accepted the need for an equitable solution in which all gained some benefit. Thus, the Pension Committee approved the broad outlines of this agreement before we agreed at the bargaining table.

Les Robb
May 26, 1997

Memo from A. L. Darling to the Finance Committee of the Board of Governors
dated May 15, 1997

In 1996 McMaster University introduced an Early Retirement Programme in response to the large reduction in operating grants from the Government of Ontario. In the Early Retirement Programme the University used the provisions of the Rule of 80 that exist in the salaried pension plan. In addition retiring allowances and Canada Pension Plan bridge payment benefits were paid to those who accepted the early retirement offer. These payments are being paid from operating funds. The total expense of the retiring allowance and the present value of the CPP bridge payments was captured in the 1995-96 expenditures of the University. The CPP payments extend to the year 2008 and have a cost in nominal dollars of $4.5 million. A present value cost of $3.7 million was shown in the 1995-96 expense.

In the fall of 1996 the administration and the appropriate employee and retiree associations started to discuss the possibilities of these bridge payments being paid from the pension plan in view of the large surplus within the plan. The President established a group to explore these possibilities and it included representation from the Faculty Association, the Staff Association, the Clinical Faculty Association, the Retirees’ Association and a member of the exempt group. The President named the Vice-President (Administration), the Provost, the Chief Administrative Officer of the Faculty of Health Sciences and a representative of Human Resources to represent the administration. The group worked with the plan actuary who made presentations about the plan and a variety of options.

In the short term, the focus of discussion was on an approach that would allow the University access to the surplus to pay the bridge payments from the plan and some compensating improvements to members of the plan. The group also agreed that, if these discussions could lead to a successful conclusion, it would be appropriate to examine other issues and in particular the potential cost of health and dental benefits that have been promised to retirees. It is recognised that such health and dental benefits cannot be paid from the pension plan, but the participants are willing to explore arrangements whereby the University’s costs might be covered and that retirees and potential retirees might have a greater sense of security regarding the provision of such benefits.

In the short term it was agreed to seek improvements in the pension plan that would increase the liabilities by approximately $4 million so that the University might pay the remaining CPP bridge benefits for those who retired in 1996 and 1997 from the salaried pension plan. In seeking to identify improvements the group was careful to assess the balance of interests. For example, it was necessary to pay attention to those already retired, those who will retire in the future, and those whose membership in the plan will end through leaving McMaster or death. Similarly, it was necessary to achieve a balance among groups of different salary levels and of different ages, because some of the possibilities would favour one group over another. The group also looked at the liabilities involved and the impact on the current service cost; the proposals presented have a relatively small impact on the current service costs.

PROPOSAL

1. The University pay the remaining CPP bridge benefits from July 1997 onwards to those who retired in the early retirement program of 1996 and 1997 from the salaried pension plan.

2. Five plan changes be approved a follows:

i) Pre-1983 Retirees
Former employees who retired before 1983 had contributed to the plan, but indexing within the plan did not start until 1997. Since 1983 earnings of the plan have been sufficient to pay full indexing using the excess earnings approach.It is recommended that pensions for this group be improved effective July 1, 1997 by providing 50% of the increase in the CPI for which provision was not made prior to 1983.

The estimated increase in liabilities is $577,000, and there is no impact on the current service costs.

ii) Indexing of Pensions
Currently pensions are indexed to the extent that earnings on the fixed income part of the fund exceed the assumed interest rate following retirement, that is an interest rate of 4.5%. Revenue Canada limits the maximum indexation to the value of CPI. In the event that the indexing in one year falls below CPI, currently this shortfall can be made up in the following year under the provisions of the McMaster plan without retroactivity, provided the earnings are sufficient. It is recommended that this period of “memory” be extended by one year.

Because the “excess earnings” approach is used, there will be no increase in plan liabilities nor is there an impact on the current service cost.

iii) Retirement Benefits
Currently, the plan provides a normal form of pension with a 50% survivor benefit and a guarantee of five years. It is recommended that the guarantee period be increased from five years to seven years. This will benefit both single and married retirees. It might be noted that a member can elect to reduce the guarantee period in exchange for a higher survivor pension. The increase in liabilities is $1,639,000 and the increase in current service cost would be $110,000 per year.

iv) Bridge Benefits
One of the concerns expressed by the associations was the fact that the University has had two early retirement programmes, and some people qualified whereas others did not, so that a difference of a few months could have a significant impact. A concern expressed by the administration members, however, was that conditions can change over time and it might be imprudent to put in place a permanent bridge. It is proposed, therefore, that a bridge benefit be introduced that counts service up to June 30, 1996 with a maximum of 20 years of service. The benefit proposed would be $19 per month for each year of credited service for employees who retire under the Rule of 80. Payment would commence at the later of attainment of the Rule of 80 or the age 60. This proposal removes the hard line between those who qualified for a previous early retirement programme and those who did not, and the entitlement will be phased down over the time.

The liabilities associated with this are $1,664,000 and there is no impact on the current service cost.

v) Termination and Death Benefits
Some members of the plan will not collect pensions, because of death or leaving McMaster. In recognition of this it was recommended that members’ contributions be credited with an extra 2% of interest on the balance at June 30, 1996. The estimated increase in liabilities would be $382,000 and there would be no impact on the current service cost.

PROCESS

It is recommended that the Finance Committee endorse this proposal for approval by the Board of Governors subject to approval by the pension Trust Committee and the participating employee and retiree associations. The opportunity provided by these discussions has been valuable in other ways. It has enabled the administration and the employee groups to address some related issues, and the discussions have also led to a commitment to have further discussion regarding the payment of retiree health and dental benefits.