Pension Surplus Report to the December General Meeting (1999)
by A. L. Robb
I have been involved on your behalf with negotiations concerning the surplus in our pension plan for over a year now. Discussions about the pension surplus go back to the mid-1980’s when the surplus first emerged and the University sought to use the surplus to ease pressures on University budgets. To make it as simple as possible, the University began to take pension contribution holidays (paying less than the current service cost into the pension plan) and indicated an interest in revising the Pension Plan text to allow it to actually remove funds from the Plan. MUFA led a challenge to these attempts to use the surplus and engaged in a court challenge (Maurer vs. McMaster) to prevent the University from doing all that it intended. At the end of the court challenge the University was granted the right to continue to take pension holidays but was denied access to the surplus in the plan.
Since that time, the surplus has continued to grow and now stands at about $300 million. This growth has been in spite of the fact that the University has not paid anything into the plan for some years and in some recent years employees have been given partial pension contribution holidays as part of salary settlements. It is likely that the surplus would continue to grow even if no further monies were paid into the pension plan ever again.
It is in this context that we have been discussing the surplus over the past year. The committee involved is appointed by the President and has representatives from 5 Plan groups (MUFA, MUSA, Clinical Faculty Association, Managerial Employees (exempt group) and Retirees, as well as three Administration representatives. We were provided advice by the University’s actuary in all these meetings.
John Platt reported in the September newsletter that the committee was close to recommending an agreement that involved pension improvements for employees and cash withdrawals for the University to be used for endowment funds and to fund retiree benefits (the University has an obligation to pay these but no fund from which to pay them at the moment)..
As that newsletter went to press, the Plan group representatives had concluded that the agreement was now clear enough in its outlines that we should seek independent professional advice. In late September we met with a lawyer from the firm of Koskie Minsky and an actuary from Eckler Partners to review the offer. They immediately identified serious problems with the agreement we had arrived at which have subsequently led us to abandon that approach and start a new one.
The key issue our advisors identified is that in order to get approval to withdraw surplus from the Plan we will need to get about 95% support of all plan members eligible to vote � current employees, current retirees and surviving spouses. Our agreement was based on the mistaken notion that we had simply to get a reasonable proportion (say 2/3) of those voting to agree to the deal.
Their professional opinion is that the only way we are likely to get the degree of support necessary is in the context of a “cash settlement”. By cash settlement is meant an agreement where every individual is asked to vote on whether he or she will vote to accept a particular amount of cash. The agreement we had reached was quite complex and failed to benefit every individual in an equitable manner. Cash is simple and a reasonably equitable form for distribution is available. The cash may come in a tax sheltered form, but the essential thing is that it can be taken as cash. Pension improvements by their nature defer taxes until receipt so it will be a challenge to us to try to devise a tax efficient scheme.
As a consequence of the view of our advisors that we need to look at cash deals, we have been examining such possibilities for the last few weeks. We do not as yet have a specific offer from the Administration, and do not expect one before mid to late January, so I am not in a position to outline any possibilities to you. However, what I can say is that we have been advised that the most equitable settlement would be one in which individuals were offered a payment in proportion to their share of liabilities in the Plan (basically the amount owed to them). This seems about as equitable an approach as is possible. Individuals will benefit according to the amount “owed” them from the pension plan at the time of distribution.
The only other method of distribution that has been used in like circumstances is a contribution based method. That is, distribute according to accumulated contributions. In this approach, though, it is necessary to adjust for pensions received. Suppose two individuals have each contributed the same amount but one retired earlier and already has received $50,000 from the Plan while the other has yet to receive any benefit. Clearly it would be inequitable without an adjustment. Even with adjustments, however, there are other difficulties with the contribution based approach, not the least of which is that it requires more data, and data which may not be readily available. It would be misleading, however, to suggest that the liability distribution method is without flaws, though it seems to be the better of the two approaches available.
I know the question burning in your minds is how much cash are we talking about and I know you won’t let me leave without getting some indication of the magnitude involved? Suppose we are distributing $60 million to employees/retirees and someone had an average share of the liabilities, then if there are 4000 plan members, the rough share would be worth ($60m/4000 =) $15,000. Our consultants indicate, in fact, that about $150 million in cash could be withdrawn from the pension plan in any agreement so we might be talking $75 million rather than the $60 million in the example above. Also, the 4000 is a very rough estimate of the Plan members.
Finally, let me say a few words about timetable. First we must get an agreement with the Administration. Their lawyers have indicated that they are unlikely to get something to us until the latter part of January. If we reached an agreement almost immediately, which I have to think is unlikely, it is possible that we could gear up for a vote this spring. However, there will be considerable work to do before a vote and the requirements of getting 95 plus percent means we must ensure there are no slip-ups. It will be tight to get a vote by mid-May, in my view, and if we don’t vote by mid-May, I can’t see vote happening before the fall when faculty have returned to campus. Once the vote is complete and the University through the Board of Governors has approved the agreement, we will need to take the matter to the Financial Services Commission of Ontario. Realistically, a pay out is probably a year away, in my view.