The consequences of the plan will depend on your age. The following table summarizes pros and cons of the new plan relative to the current plan, according to the age category.
Table: Comparison of the new plan relative to the current plan
Arguably, the new plan is worse than the current plan for the employees, makes no difference for retirees, and it gives a great deal to the University.
Unfortunately, it does not seem that the comparison between the new plan and the current plan is our choice. Although we do not know what will happen if we don\t do anything, we can speculate. A possible threat-point may be forced upon the University if it does not reform its pension plan. In that case, the right comparison is between the new plan and the threat-point. See the Table below.
Table: Comparison of the new plan relative to the threat-point
Comparing to the current plan, the new plan is good for the University because
there is an expectation that the government will modify the rules for permanent solvency exemption so to include the new plan,
the new plan is jointly sponsored, which means that the University responsibility for the risk associated with future benefits is reduced from 100% to 50%,
moreover, the old plan liabilities are transferred onto the new plan in 15 years, which implies that the risk associated with the old plan benefits will be reduced from 100% to 50% in 15 years.
Under the threat-point, the University is not responsible for any risk of future benefits. Hence, we assign the fact that the new plan is jointly sponsored as an argument against the new plan from the point of view of the University
There is no change for the earned benefits. Because the employer is on hook for the solvency deficit of the old plan liabilities in case of the new plan wind-up (see Special contributions on wind-up of JSPP), the retirees won't suffer from the reduced pension protection.
Comparing to the current plan, the new plan is bad for senior members, because
it is jointly sponsored, which increases their participation in the risk associated with future benefits from 0% to 50%,
Comparing to the threat-point,
defined benefit under the new plan reduced the risk associated with pensions, and
the fact that the new plan is jointly sponsored means that the members will have a role in the governance and their risk is shared 50% with the employers.
The facts that contributions are more volatile and pension security is reduced remain on the “Cons” side.
Comparing to the current plan, the new plan is bad for younger members, because
it is jointly sponsored, which increases their participation in the risk associated with future benefits from 0% to 50%,
Additionally, the old plan liabilities are transferred onto the new plan in 15 years, which implies that the risk associated with the old plan benefits will increase from 0% to 50% in 15 years.
Comparing to the threat-point,
defined benefit under the new plan reduced the risk associated with pensions, and
the fact that the new plan is jointly sponsored means that the members will have a role in the governance and their risk is shared 50% with the employers.
The facts that contributions are more volatile and pension security is reduced and the way that old liabilities are treated remain on the “Cons” side.
The most important consequence is that all alternatives increase our exposure to risk relative to the current plan. Under each of the plan, our income will become more uncertain, either because pension contributions become more volatile, or because our pensions after the retirement become dependent on uncertain market conditions (as it is the case with defined contribution plans).
The degree of the exposure depends on the plan and on how close you are to the retirement. We will illustrate risk exposure for different age groups with a chart below. The horizontal axis is labeled with how many years to the normal retirement (i.e., 65) you have at the inception of the new plan. Thus, 0 corresponds to an individual who is 65 years old. Because pension plans are made to last, we are also interested in what will happen to future generation of employees, including those that are born this year (and who have 65 years to the retirement).
The vertical axis measures the risk of the pension plan as a fraction of the risk of a pure defined contribution pension plan. (We choose defined contribution as a benchmark because it is considered one of the most risky designs of pension plans, where all the risk from the stock market investment falls on the employee.) Our measure of a riskiness of a pension plan is designed to capture overall risk to our income over lifetime of the employee.
The chart compares four different plans:
the current plan (green line). Because it is an employer sponsored plan, it does not have any risk (that is an approximation - see is there really no risk for the employee?),
the new plan (red line). The current design of the new plan assumes that the employer transfers the old plan liabilities into the new plan after 15 years.
a hypothetical plan that we call the clean JSPP (blue line). It is essentially the same plan as the current JSPP, but in which the employer never transfers the old plan liabilities. The employer runs the old plan until all liabilities incurred under the old plan expire (that may take approximately 70 years).
the possible threat-point (yellow line).
If you are close to the retirement, your risk increase is almost none under any of the four plans. The main reason is that your exposure is limited by the fact that most of your pension was earned under the current, risk-free, plan.
The two JSPP plans have a defined benefit, which means that pension is fixed and there is no risk when retired. However, the contributions can be volatile. That means risk to future contributions. The exposure to this risk increases with years to retirement. The reason is that initially, each JSPP plan will have a very small amount of liabilities. (Recall that the liabilities are created while working.) Because the deficits are amortized across the whole employed population, the (small) risk from few liabilities is spread widely across a large employee group. As the plan matures, the liabilities grow, and the larger liabilities are spread across the same number of employees. The amount of risk per person increases.
The big difference between the new plan and the clean JSPP is that, under the latter, the liabilities grow steadily but smoothly. Under the new plan, there is a jump 15 years from now, when the University dumps all remaining old plan liabilities. The old plan liabilities generate risk until they expire, approximately 70 years from now. Because each deficit is amortized over 15 years, this risk affects generations between 15 to 85 years to retirement. Eventually, after 80-90 years, the risk generated by the two jointly sponsored plans converges to steady state.
According to our calculations, the new plan is significantly better in terms of the total riskiness than the possible threat-point. The riskiness of the possible possible threat-point grows steadily for employees from 0 to 34 years before retirement.All such employees will receive pensions from a misture of the two (DC and DB) plans). The riskiness becomes equal to the riskiness of the defined contribution (i.e., the benchmark level) for an employee who is 35 years from the retirement. This is because we assume that employees begin their career at the UofT at 30 and retire at 65, after 35 years. Such an employee will spend her entire life under the defined contribution plan. Any subsequent generation of employees will only see the DC plan.
In order to generate the above chart, we made a number of assumptions on the life expectancy, retirement age, interest rates, etc. If you want to check what happens when the values of the parameters are changed, you can play with this spreadsheet. More technical details can be found here.