Dalhousie pension shortfall: Taxpayers must demand relief

November 12, 2011
By

Chronicle Herald

October 15, 2011

Recently, Dalhousie University disclosed that its pension plan is in serious financial difficulty. The unfunded liability or shortfall has risen to over $270 million, leaving the plan less than 60 per cent funded. A plan funded at this level is considered extremely underfunded.

The university has tried to reduce previous losses in the plan by using some fancy accounting in the past, but now serious changes need to be made to the plan. Options to deal with the pension crisis are limited. The university can reduce services, raise tuitions, borrow money or change the benefit levels for employees.

Last year, the university got a special exemption from paying what it owed on the pension plan. It is counting on the government creating special rules this year to avoid paying the pension costs. Without the exemption, the pension costs would increase this year by $40 million in addition to the regular payments, which were $19 million last year. This total contribution of $59 million would account for almost 11 per cent of the total revenues of the university.

The shortfall has more than doubled from last year, when it was $129 million.

Dalhousie claims the shortfall in the pension plan is a result of circumstances outside its control. This is partially true as the markets have had poor performance and interest rates have fallen, driving up the costs of providing pensions. Our analysis of pension funds across Canada and the world shows that, frankly, these types of gold-plated pensions are no longer sustainable. They are based on a defined benefit, which is a portion of the employee’s salary at retirement.

Contributions into the plan are far short of what is required to keep it solvent over the long term. Currently, the employees fund about 6.15 per cent of annual wages into the Dalhousie pension, when the true cost is over 30 per cent. It is left to taxpayers to pick up the current shortfalls, as well as any future shortfalls. This situation is not sustainable.

The Chief Actuary of Canada has stated that changes need to be made to these plans and recommends the options noted in a recent report on pensions from the U.K.

Pensions need to be changed from a final salary calculation to a career average, such as the private sector uses. Retirement ages need to be changed to reflect those of average Canadians, age 65. Limits need to placed on the amount of money taxpayers are expected to funnel into these plans.

To look at an example from the university’s plan, there is one employee who at the last valuation was under age 55 getting a pension valued at $70,000 per year. The life expectancy for plan members is 84.4 for males and age 86.8 for females. So the pension member, at age 55 getting $70,000 a year, will collect for 30 years and earn over $2.8 million when indexed to increase at two per cent annually.

In this example, the employee would have contributed less than $100,000 into the plan.

Dalhousie is not the only university facing this pension crisis. Most universities across Canada are facing serious shortfalls. McGill changed its pension plan so that new employees are enrolled into a defined contribution plan. It also looked at changing the future pension accrual rate for existing employees. These are the minimum steps the university needs to take to protect taxpayers.

With about 2,900 members in the Dalhousie pension plan, the shortfall works out to almost $100,000 per member. The plan had already accumulated $672 million, or about $231,000 for each member working and retired in the plan. This contrasts with the average Canadian, who retires at age 65 with a $60,000 RRSP.

Now comes the hard part.

Changes will have to be negotiated with employees by management. Management, however, benefits even more generously from the pension plan than employees do and will not be very motivated to make the changes. Most university presidents in Canada retire with a pension valued at over $300,000 per year. They know that any changes they make to the plan will affect their pension as well. As they have done in the past, expect them to kick the can down the road for future taxpayers and university management to deal with.

Don’t expect any relief to be forthcoming from the premier’s office. He is happy with the way pensions run in the province and sees no problems. It may have to do with the fact that for every dollar politicians put into their plan, taxpayers contribute $22, as estimated by the Canadian Taxpayers Federation.

The only changes forthcoming will be those demanded by taxpayers. You need to make your voice heard.

Bill Tufts is the founder of Fair Pensions For All and co-author of the book Pension Ponzi.

 

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