Staggering pension shortfalls erode university operating budgets

January 23, 2012
By

Erin Millar

22 January 2012

Facing staggering pension plan shortfalls, some universities in Canada are struggling to continue funding plans and are resorting to desperate measures including dipping into operating budgets and negotiating higher employee contribution rates.

Collectively, pension plans at Canadian universities have bled billions.

At the University of Toronto, the pension plan has posted a deficit of close to C$1 billion (US$981 million). In October Dalhousie University, which has one of the most serious pension problems, disclosed that its pension deficit had doubled in a year to C$270 million, leaving the plan less than 60% funded.

These rising liabilities have critics crying foul.

“In effect, the students and taxpayers are on the hook for generous promises made to faculty, staff and retirees,” Globe and Mail columnist Margaret Wente wrote in December. “The bigger question is how much longer we’ll be willing to keep transferring wealth to relatively affluent gray-haired professors at the expense of the next generation.”

WD Smith, an independent researcher and former long-time general manager of the University of Alberta students’ union, said that his analysis of 20 years of university spending data suggests that an increasing chunk of operating expenses are being diverted to paying for employee benefits.

“There are only three real ways to fund the increasing cost of benefits: more government funding, programme cutbacks (and things such as higher class sizes), and increased tuition and other fees,” Smith wrote in an email. “Two of those impact students in an adverse way.”

Neil Tudiver, assistant executive director of collective bargaining at the Canadian Association of University Teachers, said that universities have asked employees to help with the pension shortfalls by accepting higher contribution levels and reduced benefits.

Although unions have been open to negotiating contribution rates and benefit formulas, Tudiver said that critics misunderstand the nature of pensions.

“Pension is deferred compensation. Employees have chosen to put aside part of their compensation for retirement,” he said. “If they hadn’t negotiated that, their other compensation would be higher. To say now, ‘You can’t have your pension’, that’s not right.”

Both Smith and Tudiver agree that the bulk of responsibility for the pension crisis lies with universities.

A decade ago, when the stock market was posting healthy gains, most pension funds enjoyed sizeable surpluses and employers (and, in some cases, employees) took contribution holidays. “What would have happened if they hadn’t take those contribution holidays? Certainly the shortfalls wouldn’t be as great,” said Tudiver.

Pension funds took a terrible hammering during the 2008 financial downturn. Investment losses at the top three universities were significant – C$168 million at the University of Alberta, C$196 million at the University of British Columbia, and C$587 million at the University of Toronto – and pension funds accounted for much of that loss.

“It was an utterly needless hammering if they were investing their public funds prudently and cautiously rather than chasing big returns with high-risk investments,” said Smith.

Both universities and unions need to get serious about reforming pension plans like the private sector has done in the past decade, said Bill Tufts, pension critic and author of Pension Ponzi: How public sector unions are bankrupting Canada’s health care, education and your retirement.

“It seems unfair that we are impeding our university system to pay these gold-plated pensions that are better than what is offered in any other sector.”

According to Tufts, possible solutions include raising the retirement age, not allowing retirees to collect full pension and come back to work, and basing calculations on average career salary instead of end-of-career salary.

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