Further Comments on the Pension Plan: by Pat Galasso

In the last Newsletter I mentioned that the members on the Money Purchase (MP)do not contribute to the pensions of those on the Minimum Guarantee (MG). Hopefully, the following information will clarify this point, because, in my view, this has split the efforts of retirees in the past to everyone's disadvantage.

The pension plan has two funds with one being called the Money Purchase Fund, and the other the Minimum Guarantee Fund. Members and the University contribute equally to the MP Fund, while only the University contribute to the MG Fund. The MP Fund currently is evaluated at $ 110,000,000, while the MG Fund is at $ 37,000,000. Both figures are close approximations. The total of the $ 22,600,000 surplus in this last contract came from the MG Fund. None came from the MP Fund.

None on the MP contributed to the welfare of those on the MG. No money leaves the MP pool other than to go toward the welfare of each member out of their own sub-fund component.

The MP pension is actually an annuity. In our case, it is a variable annuity based on a 6% assumption. This 6% factor is an actuarial assumption that the money that funds the MP plan will grow by 6% annually, on average, into the future. Therefore, if a member started out with a sub-fund of let us say $ 400,000, the amount of annual pension calculated for year one in retirement, would take into account this assumed growth. This means that the member would get more money in year one than they would if you had a variable annuity which had as its assumption an assumed growth factor of 0%. In fact, you might not be able to retire on the amount generated with an assumed growth of 0%. On the other hand, if the fund were to grow by 6% in a given year, the pension generated by the 6% annuity would go up 0%, while the pension generated by the 0% annuity would go up the full 6%.

I was told by an actuary I consulted, that the 6% variable annuity is conservative. If we examine the investment performance over the last 15-20 years, then the growth in the fund has been just over 11% per annum. This means that those on the MP have received an average annual increase of approximately 5% in their pensions. Over a 15 year period, their pensions have doubled. The rule of 72 states if interest rates or percentage increases times the number of years equals 72, then the money will double. Over the same period, the MG has increased, on average, just under 2%. If the pensions had been based on a 7% variable annuity, then the first year pensions would have been higher. But the growth would have been 4% per annum, i.e. 11% - 7% = 4%, rather than 5% under the 6% variable annuity, i.e. 11% - 6% = 5%.

You may have noticed that the Advisory Committee and the Board of Governors decided to drop one of the Fund Managers, and added other managers. The effect of this, hopefully, is that in the future the fund performance will improve. I have examined the fund performance at Queen's University, and with an average of 1-2% superior performance per annum, you can imagine how much higher their pensions are than at the University of Windsor. I was told that close to 90% of the retirees at Queen's are on the MP, whereas, about 60% are on the MP at Windsor. There are other factors involved, however, the major contributing one at Queen's is fund performance. This is the basis of what happened to us because the original fund manager was allowed by the Board of Governors to remain in place with inferior results for over 20 years, in my opinion. Perhaps the Board will ultimately recognize its responsibility here and do something about the pensions which were detrimentally affected by this.

Changing fund managers can be a double-edged sword at the beginning as they sell off securities that don't fit into their investment philosophy. If this hits at the same time as a market contraction, that could be detrimental to all of us. For example, if the fund performance were to be -3%, those on the MP would find their pensions dropping by 9% for that year unless rescued part way down by their MG pension safety net. Note: The 3% deficit is added to the 6% variable annuity factor resulting in -9% for the year. Those on the MG, under these circumstances, would retain their pension levels, plus any CPI adjustments, but the MP component would drop down further below their MG levels, and this would result in a longer time period for their pensions to rise up to the MP level. At least we know that the Advisory Committee and the Board are conscious of monitoring the fund management more closely than they have in the past.

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