Pension Plan Under Increasing Pressure
In a recent email to the community, Provost Masi and I outlined some of the growing expenditures that are putting pressure on McGill’s increasingly limited finances.
As we will table our 2014 Budget to the Board of Governors on April 26, I would like to talk today about the first of these expenditure challenges: the growing cost of pension plans.
Pensions are an important part of McGill’s commitment to the well-being of our staff. They are also a key element of our employees’ total compensation, which includes health coverage, insurance, and additional benefits. This competitive package, and other advantages, contributes to our University regularly ranking among the top employers in Quebec and across Canada.
However, pension plans at organizations across North America are under increasing financial pressure. A CBC Montreal story recently reported the government’s efforts to rein in soaring pension plan deficits across Quebec. The situation at McGill is no different, as we are forced to adapt to two major challenges:
- Pension plans are paying out more money as large proportions of the workforce reach retirement age. As life expectancies increase, these retirees are also enjoying longer retirements than previous generations.
- At the same time, pension plans are earning lower returns on investments (ROI).This table illustrates how low interest rates have affected ROI over the past 10 years:
Simply put, the money coming in is not keeping pace with the money going out. In December 2009, our pension deficit was $46 million. It is now projected to be as high as $110 million. That’s a significant increase in a very short time.
When revenue from investments is not adequate for replenishing pension plans, an employer has a limited number of options: increase contributions, decrease benefits, or both.
Prior to 2012, McGill employee contributions were frozen at 1972 levels, the year the plan was designed. During that time, the University steadily increased employer contributions. As a result, by 2011, the University’s pension contributions were twice that of its employees:
To pay for these increased employer contributions needed to fund the pension deficit, McGill has had to use money from its operating budget. These contributions are paid over and above regular staff compensation. This table shows how McGill’s extra contributions have increased since 2008:
We cannot continue to dip into a shrinking operating budget. This is why we have had to make some changes to our plans, last year, this year and next year, to make them more sustainable in the long-run for all employees. For more details please visit the Plan Changes page on our HR website.
But given foreseeable economic, financial and social realities, even increased employee and employer contributions coupled with low interest rates will not manage to fill the growing gap. As a growing number of our employees are set to retire, pension deficits will continue to be a challenge and an issue McGill will have to manage very closely in the future.
Next time, I’ll discuss another area of growing expenses: deferred maintenance of McGill’s physical infrastructure.