Canadian university pension plans have fallen into a collective $2.6-billion hole, and may have no choice but to cut services to begin climbing back out of it.
Most faculty and staff have defined benefit pensions, which promise a set retirement income based on service and salary. But those funds suddenly cratered when markets crashed in 2008, most losing 15 to 30 per cent of their value.
Now, provincial laws will force schools to find money to plug those holes – sometimes tens of millions of dollars a year – an untimely headache for institutions already warning of cuts to come due to static government grants, limits on tuition hikes and shaky endowment returns.
A Globe and Mail survey of more than 20 Canadian universities shows a combined pension plan solvency deficit of at least $2.59-billion, and since some schools last crunched their numbers before 2008, that figure could still grow.
Pension investments rebounded somewhat in 2009, but the long-term horizon is hardly any brighter. With a large proportion of long-serving faculty members across Canada nearing retirement, keeping plans fully funded costs more. Meanwhile, longer average lifespans have combined with rising wages and low interest rates to impose structural strains.
“I think [defined benefit] plans are suddenly going to cost more than they historically did,” said Virendra Gupta, executive director of the Universities Academic Pension Plan (UAPP), which manages pensions for all Alberta universities.
Two years ago, Dalhousie University’s $726-million pension plan lost 16 per cent of its value, leaving a $129-million solvency deficit – the amount that needs to be added so that if the university suddenly folded, it could honour the plan.
To comply with Nova Scotia law, Dalhousie would need to pump $12-million into its plan on top of regular contributions in 2011. That prompted university and faculty leaders to jointly ask for an exemption from solvency rules earlier this year. The province said no, instead granting a payment-free 2011 and ten years to make up the deficit, instead of the usual five years.
That still means some cuts are likely unavoidable, said Dalhousie assistant vice-president Katherine Sheehan.
“The only place that [money] could come from is our operating budget,” she said.
The University of Toronto’s pension fund was the hardest hit, losing 29 per cent in 2008. As a result, the school expects to owe an extra $50-million a year on top of $100-million it already contributes from a $1.5-billion operating budget. Since an arbitrator recently ruled against a proposed premium hike for faculty and librarians, cuts to services are the likely solution again.
This fall, Ontario temporarily eased pension requirements on universities to give them time to regroup, but U of T argues solvency tests make no sense for universities.
“We’re not going to go out of business unless the government decides to put [us] out of business,” said Cathy Riggall, U of T’s vice-president of business affairs. “We can’t just raise our prices to raise our revenue: The government controls our tuition levels, the government controls our grant funding, so they hold all the cards.”
If exempted, U of T would only have to meet a potentially lower “going concern” threshold, which assumes the fund’s continued survival when estimating how much money it needs. But its faculty association argues an exemption won’t solve the problem.
“All that does is kick the can down the road,” said George Luste, president of the University of Toronto Faculty Association.
Saskatchewan is in the midst of a three-year moratorium on solvency payments, while Manitoba and Quebec universities already enjoy permanent exemptions. So does Alberta’s UAPP, which the employers and employees run jointly, making employees “part of the problem, part of the solution,” Mr. Gupta said. But because UAPP lost 20 per cent in 2008, its employees now fork over nearly 2.4 per cent more of their salaries than they did two years ago.
Diane Urqhart sent me this article and she also forwarded me a list of Canadian universities with non-bank asset-backed commercial paper (ABCP) exposure (click on image to enlarge):Pension Tsunami today and right at the top was Ed Mendel's Calpensions blog entry, UC pensions: from free lunch to years of pain:
UC Regents may vote on a costly retirement reform plan next month that officials say will not only lower benefits, but could squeeze faculty recruitment, research and medical centers for two or more decades.
An institution known for its prized collection of intellects did something two decades ago that in hindsight now seems unwise. It stopped making employer-employee contributions to the pension system, getting by on strong investment earnings.
A staff report to the Regents in September said that if normal contributions had continued since 1990, the University of California retirement system “would be approximately 120 percent funded today.”
But as of last July the system was 73 percent funded using the market value of assets and 87 percent funded on an actuarial basis, which spreads gains and losses over five years and won’t fully reflect the 2008 stock market crash losses until 2013.
“The idea of having a defined benefit and not paying into it is insanity,” Richard Blum told his fellow Regents at a meeting this month. He said he began urging that contributions be restarted several years ago.
A Regents faculty advisor, Dan Simmons, said the current problem is the result of failing to resume contributions seven or eight years ago. He said a faculty task force and others urged a restart “I think even before Regent Blum began pushing that issue here.”
Action by the Regents restarted contributions last April with 2 percent of pay from employees (if bargained with unions) and 4 percent from the university, expected to grow respectively to 5 and 10 percent by 2012.
Read the entire entry here. It's clear that this university's pension plan was heading towards disaster, as were others. The pension squeeze on these plans will have severe repercussions on higher education, especially here in Canada where tuition fees remain relatively cheap (of course, they've been creeping up and relative to the US everything looks insanely cheap!).
So what are Canadian universities going to do? Start exclusive MBA programs that charge outrageously expensive fees? Good luck. It won't make a difference. There will be pain at Canadian universities, impacting staff and students. Ultimately, society will bear the brunt of these cuts.