Pension shortfall presents challenge

No matter how you cut it, the Dalhousie Pension Plan will be severely challenged by the two tests it will face this summer.

Like pension funds everywhere, Dal’s has been ravaged by stormy markets. Despite recent stock market gains, significant shortfalls remain regardless of whether the funding test is on an immediate solvency or “going concern” basis.

The best case scenario – possible only if provincial pension regulations are changed to exempt Dal from the solvency test slated for June 2010 - still leaves a $7.3 million annual gap to be filled by the university, the plan’s members or some combination of the two, as well as changes in the structure of the plan itself. The worst case scenario would require additional annual contributions of $17.1 million beginning in the summer.

“This is the biggest single financial challenge we’ve faced since I came here,” says Tom Traves, now in his 15th year as Dal’s president. To meet the challenge, Dr. Traves has initiated intensive, cooperative efforts aimed at putting the pension plan on a sustainable, affordable footing, while maintaining its value to employees.

He points out that $17 million represents nine per cent of the university’s salary costs. Since salaries account for more than 70 per cent of Dal’s budget, the magnitude of the problem is clear.

“If we have to slash our budgets to meet these kinds of increased pension payments, the impact on the quality of education at Dal and on our working lives will be devastating,” says Dr. Traves.

A Dalhousie pension is the gold standard among university employees in Canada. Benefits are guaranteed. For every dollar employees contribute, the university adds about $1.60. Last year pension plan members (employees) invested close to $12 million in their Dal pensions. The university contributed more than $18 million.

The fine points of pension valuation aside, the fundamentals aren’t that complicated. Two pension valuation tests are required by the province every three years and both are applied.
 
The “going concern” test uses long-term assumptions to determine if there’s enough money in the plan to meet its obligations in the future. Against that reality check the fund comes up short to the tune of an additional $7.3 million a year. That’s the best case.

The solvency test assumes that the plan is wound-up and all benefits are paid out or settled immediately, in the event the institution closes its doors. It’s an unlikely scenario at a university that’s been around almost 200 years, but the but the provincial rules currently say that the Dalhousie plan must meet the test, even if this should devastate some of its academic program or cause a major budget deficit for the university. If it fails, annual contributions would have to be increased to cover the solvency shortfall over a 10-year period. That may be the worst case, but right now, it is quite possible that up to $17 million a year will have to be found to fill this solvency ‘hole’ which has resulted mainly from the extremely low interest rates that prevail.

“It’s like your bank calling with good news and bad news. Your mortgage payment won’t triple like they predicted. But it will double. Now you might not have to move in with the in-laws, but you still have to sell the car and load up on no-name mac and cheese.” — Ken Burt, VP finance and administration

The province recently extended the term for pension plans to make up their solvency deficit, from five to 10 years. That, in effect, cut Dal’s exposure by half. Welcome news, said Ken Burt, VP finance and administration, but it still leaves Dal with a big financial headache.

“It’s like your bank calling with good news and bad news. Your mortgage payment won’t triple like they predicted. But it will double. Now you might not have to move in with the in-laws, but you still have to sell the car and load up on no-name mac and cheese.”

Efforts to contend with the problem are in high gear. The Pension Advisory Committee (PAC) established a 16-member sub-committee to examine pension sustainability. Included are representatives from the Dalhousie Faculty Association (DFA), the Nova Scotia Government and General Employees Union (NSGEU), the Nova Scotia Union of Public Employees (NSUPE), the Dalhousie Professional Managerial Group (DPMG), the Association of Dalhousie Retirees and Pensioners (ADRP), the Board of Governors and the university administration.

"This is a real commitment to working together to identify methods or approaches to assist us in ensuring a sustainable pension plan that meets our expectations as employees at the university," said Mr. Burt. "That would be the best of all worlds."

The Dalhousie Pension Plan currently has about 700 pensioners and about 3,000 members.