Current plan

Below, we describe some aspects of our plan that are relevant to the pension reform. Additional information can be found on the HR website. UTFA prepared a neat handout with a summary of the most important features of our plan.

Our plan is a single-employer, single-sponsor and defined benefit.

Single-employer

There is a single employer involved. There are other plans out there in which multiple employers are involved (for instance, HOOP). One of the changes considered is to involve multi-employer, Queens and Guelph to start with.

Single-sponsor

Single-sponsor means that the University is solely responsible for the management and the health of the plan. The University essentially promises that it will provide a certain benefit (see below) and it is the University responsibility (and not that of the employees or the government) to keep its promise. The University collects contribution from members. One of the changes considered is to form a jointly sponsored plan, in which the responsibility for benefits as well for the management is equally shared between employers and employees.

Defined-benefit

Defined-benefit means that the plan promises each member a certain benefit that is independent of the financial standing of the plan. The benefits of the current plan are described below. The new plan under consideration intends to stay as defined benefit and keep roughly the same benefit as we have now.

For the purpose of the discussion on this website, it is worthwhile to point few important features of the defined benefit plan:

    • The most attractive feature of the defined-benefit plan from the point of view of a current employee is that the employee knows how much pension she or he is going to receive. There is no risk for the employee (Well, not exactly - see below. That is why we are where we are.). An alternative is a defined contribution plan, in which the employee saves and invests his or her own money (plus the employer’s contribution), and bears the full risk of the investment.

    • Because the plan invests in risky assets (investing purely in safe assets would bring too small a return), the risk (say, of bad stock market performance) remains.

    • In the employer-sponsored plan, the risk is supposed to be completely absorbed by the employer. In our case, it means that the risk is absorbed by future generation of students in the form of their tuition, future employees of the university in terms of their future salaries/benefits/offices/research funds, maybe future taxpayers, future whoever will write a check to the UofT or allow the UofT to save some money. That leads to inter-generational transfer of risk, where the younger generation bears the risk of the pensions of the older generation.

Current contributions

Currently, each member contributes on average 7-8% of their salary to the plan. More precisely, we contribute

    • 6.3% of a salary below the Canada Pension Plan (CPP) Earnings Ceiling (currently at $55,300), and

    • 8.4% of a salary above the CPP Earnings Ceiling, but below the ITA Salary Cap (currently around $160,000),

    • 0% above the Cap .

The contribution rates are scheduled to increase to 7.15% and 9.5% as of 1 July 2017. HR website has more information about pensions.

The reasons for different rates of contribution are as follows. The pension benefit gained for the part of the salary below CPP Ceiling is smaller (see Pension Formula below) so we pay less in contribution. (The reason why the plan's benefits are designed this way that each one of us pays some amount of money to CPP, and it will receive some amount pensions from this source. The difference between the first two rates is chosen to balance out the CPP pension.)

The reason why we don’t contribute above the Cap is due to the limits imposed by the federal Income Tax Act.

Employees contributions cover less than half of the cost of financing of the plan. The actuarial value of the current benefit is calculated at 20% of the salary. Given that the employees contribute 7-8%, the rest, 12-13%, comes from the University.

Pension formula

The main benefit is a pension. The size of the pension depends on (a) the length of the service and (b) the average of the 3 highest salary years over the employment (i.e., the Highest Average - for most of us, that means the three last years of the employment) and it is equal to

service length × earned pension per year of service,

where earned pension per year of service is equal to

    • 1.5% of each $1 of the Highest Average below Canada Pension Plan Earnings Ceiling (currently at $55,300), plus

    • 2% for each $1 of the Highest Average above Canada Pension Plan Earnings Ceiling, but below the ITA Salary Cap 7↓ (currently around $160,000),

    • 0% above the Cap.

The most important feature of the above formula is that the size of the pension is not directly connected to the size of the past contributions. To see an extreme example, notice that a person with $0 salary for the first 27 years and $100K salary for the last 3 years will receive the same pension as the person with the same $100K salary for 30 years. Of course, the latter person contributed every single year to the pension fund, whereas the former contributed only for the last three years.

This has redistributional consequences. It is possible that two members pay the same amount to the plan and receive different benefits. The redistribution does not necessarily go from richer members of the plan to the poorer members. In fact, wealth (or income) has nothing to do with redistribution. The redistribution moves funds from members who receive (relatively) more of their rises when they are young towards members who receive (relatively) more raises when they are old.

More details about current benefits

There are some other benefits that are important from the point of view of the pension reform:

    • indexation: Our current plan guarantees that the pension grows each year with inflation. Roughly, for each 1% of inflation (as measured by CPI), the pension grows by 0.75%. (This is a bit more complicated There are few formulas, the indexation occurs whichever gives a higher option. In the past years, it happened that UTFA negotiated raising the indexation to full 1%.) The guaranteed indexation will disappear from the new plan, or more precisely, it will be replaced by conditional indexation.

    • survivor benefit: A survivor benefit is a (part of ) pension that is paid to a designated person, typically a spouse. Possibly, if you die very early, the plan may transfer a certain amount to your estate. For details, see HR website.

  • early retirement: The current normal retirement age is 65. Early retirement means retiring before the normal age. Our current plan has three early retirement options.

    • If you retire between 55 and 59, your pension is equal to the amount computed according to the pension formula (i.e., the Highest Average Earnings times the years you worked times percentage) reduced by 5% for each year below 65. So, if you retire at 56, your pension is reduced to 55% (which is 100% - 9 years x 5%). The idea for the reduction is that people who retire early are going to collect their pensions for many more years than people who retire at 65.

    • If you retire after 60, you get unreduced pension calculated according to the same pension formula as people who retire after 65. In particular, if you choose this option, you are going to collect your pension for many years longer than people who retire at normal time without any penalty. That is a very nice benefit to folks who end up choosing it. That benefit is also relatively costly for the plan.

    • commuted value: if you retire before 60, you can choose to get the solvency present value of your future benefits in the form of the lump sump transfer. The form of the transfer is regulated by the law. As long as the value of your benefit is not larger than certain excess value, it gets transfered to a registered savings account (like RRSP) and it is not taxed. Any payout above the excess value gets taxed during that particular year, and goes to your private account. In such a case you may loose some of the deferred tax benefits of pension savings.

There are small differences between pension plans that are applicable for different bargaining units of UofT, including small differences in the contribution rates and benefits. These differences reflect the fact that the pension plans are negotiated through collective bargaining.

HR website has more information about pensions.

Is there really no risk for employee?

In theory, there is no risk for employees in a employer-sponsor plan. In practice, employees bear some risk, but its amount is not transparent.

    • If the plan is doing well, the university is happy. If the plan is doing really well, the University may choose to skip some of the contributions that it was supposed to do to the plan. This is called contribution holidays. If the University is really happy, or feels generous, or faces otherwise difficult bargaining round and it does not have money for raises, it may let members skip their contribution as a way of temporarily raising their salaries (this is called pension holidays). In such a case, employees can benefit to some degree from the good standing of the pension fund. This has happened in the past and led to under-funding (see why did we get into trouble).

    • If the plan is doing really badly, the university is forced to make special payment. If the University does not have any magic source of money ready (the taxpayers are unwilling to help, and they don’t let the University raise tuitions), the University will be forced either to ask the employees to raise their contributions, or to squeeze money out of units (hiring freeze, staff fires, less money for programs, etc.). This is what is happening to us for the last 3-4 years.