Universities face 'staggering' pension fund losses
|Dalhousie University’s VP finance Ken Burt says the university needs to reform its pension plan to make it sustainable over the long term. Dalhousie is one of many universities feeling the squeeze from the rules governing pension funds. Photo credit: Dalhousie University
Some universities, facing big losses in their pension funds as a result of the downturn in financial markets, are investigating ways to overhaul those plans, from lobbying governments for regulatory changes to consolidating plans to seeking new agreements with their faculty.
“University pension plans have been seriously impacted by the financial crisis,” said Paul Genest, president of the Council of Ontario Universities. “These have been regarded as generally well managed plans prior to the meltdown but the crisis has changed the situation quite dramatically.”
The market dive has affected mostly those universities with defined-benefit plans, which guarantee faculty members a set benefit at retirement. The Canadian Association of University Teachers estimates that about one-third of Canadian universities have defined benefit plans, one-third have defined contribution and one-third have hybrid plans.
All defined-benefit pension plans, not just those of universities, are facing big deficits in their pension valuations as a result of the market drop and record low interest rates, said Paul Forestell of the human resources consulting firm Mercer.
The problem is serious for defined-benefit plans because when the value of their assets falls below its liabilities, federal and provincial regulations require the plan to make up the shortfall in a set time, usually five to 10 years. Mr. Forestell, who leads Mercer’s Canadian retirement professional group, said universities and other federally and provincially regulated plans have petitioned governments for relief from funding obligations, and most provinces have granted it.
For example, the Ontario government in its March budget introduced measures that would allow pension plans to spread their solvency payments over 10 years, instead of five. Whether 10 years is enough time will depend largely on how quickly financial markets recover, said Mr. Forestell. “I think this is really about buying time and hoping that investment markets come back and help fill in some of the deficit without requiring contributions from the sponsors.”
Dr. Genest of COU estimated that as a result of the longer amortization period, Ontario universities face combined payments of some $330 million a year, down from about $560 million.
“It’s still a problem of staggering proportions for the universities,” he said, noting that $330 million represents about 10 percent of the operating grant universities receive from the provincial government to pay for salaries, research costs and other expenses. “We are now in a position of having to contemplate diverting over 10 percent of that to managing our pension plans.” (The COU figures are based on two different pension valuations that are required by law. A going-concern valuation assumes the plan will continue indefinitely and a solvency valuation assumes the plan will wind up.)
Nancy Sullivan, vice-president, finance and administration, at the University of Guelph, said in an e-mail, “While these one-time measures are helpful, they do not go nearly far enough in addressing our pension funding requirements.” The university has said that its pension plan must be restructured in the long-term to reduce its liabilities to “manageable levels.”
Seeking more relief
Ontario universities have called on the provincial government for additional relief, asking for an exemption from solvency payments altogether. That’s a move already taken by several provinces, including Quebec, Alberta, British Columbia, Saskatchewan and some of the Atlantic provinces.
But Neil Tudiver, assistant executive director of the Canadian Association of University Teachers, said the faculty union association has concerns that the push to ease pension plan funding rules across Canada could create more serious problems for university plans down the road.
“One of our concerns, and certainly the concern of the trade union movement in the private sector, is that a lot of the financial mess we’re in has been attributed to deregulation of all sorts. It’s not clear to me that lowering standards is the best solution.”
Meanwhile, the Ontario Expert Commission on Pensions (chaired by former York University president Harry Arthurs) issued a report late last year recommending, among other things, that small pension funds be encouraged to consolidate into larger plans. The report argues that larger plans spread the investment risk across more people which results in more predictable returns and less volatility. They also pay lower investment fees and have access to a wider range of investment vehicles.
Dr. Genest acknowledged that Ontario universities “are actively examining such options” at the request of the Ontario government. While universities see the merits of such arguments, he said, they would like consolidation to be voluntary.
Dr. Tudiver said CAUT doesn’t support a consolidation of smaller university plans, arguing that the performance of some of the large public-sector plans hasn’t been substantially better.
Hurting outside Ontario
It isn’t just Ontario pension plans that are feeling the squeeze. Dalhousie University vice-president finance and administration, Ken Burt, estimates that the university’s defined-benefit pension plan has a deficit of about $200 million (on a solvency basis); under the province’s current rules, it must be repaid within five years. University leaders have urged provincial regulators to extend the time to 10 years but no decision has been announced. Even if provincial authorities agree to lengthen the repayment period, the university will be looking at payments of $20 million a year, equal to about seven percent of the university’s operating budget.
“That would be a huge cut for us, since 80 percent of that would have to come from salaries, which means layoffs,” Mr. Burt said. “There needs to be pension reform at the university if we are going to have a sustainable pension through time.” Mr. Burt said the university has already initiated talks with employee groups on overhauling the pension plan.
Speaking in general terms, Dr. Tudiver of CAUT said that any changes to pension plans will have to be decided at the bargaining table. “I’m still of the mind that this is going to play out institution by institution, because their fortunes are quite different. And it should be played out at the negotiating table, where there’s full disclosure and where everything is on the table.”
Some critics have argued that pension plans are facing funding problems now because the investment decisions they made were too risky. But Mercer’s Mr. Forestell retorts that no one was complaining about risk levels before 2008, when investment returns were very good. Still, he predicts pension plans will shift some of their investments to less risky instruments like bonds and infrastructure funds. Ontario’s large public-sector plans have already done so, and other pension plans, including those of universities, are likely to follow, he said.