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Universities Sinking in Pension Abyss?
James Bradshaw of the Globe & Mail reports, Universities facing service cuts to climb out of ‘pension abyss’:
Canadian
university pension plans have fallen into a collective $2.6-billion
hole, and may have no choice but to cut services to begin climbing back
out of it.
Most faculty and staff have
defined benefit pensions, which promise a set retirement income based
on service and salary. But those funds suddenly cratered when markets
crashed in 2008, most losing 15 to 30 per cent of their value.
Now,
provincial laws will force schools to find money to plug those holes –
sometimes tens of millions of dollars a year – an untimely headache
for institutions already warning of cuts to come due to static
government grants, limits on tuition hikes and shaky endowment returns.
A
Globe and Mail survey of more than 20 Canadian universities shows a
combined pension plan solvency deficit of at least $2.59-billion, and
since some schools last crunched their numbers before 2008, that figure
could still grow.
Pension investments
rebounded somewhat in 2009, but the long-term horizon is hardly any
brighter. With a large proportion of long-serving faculty members
across Canada nearing retirement, keeping plans fully funded costs
more. Meanwhile, longer average lifespans have combined with rising
wages and low interest rates to impose structural strains.
“I
think [defined benefit] plans are suddenly going to cost more than they
historically did,” said Virendra Gupta, executive director of the
Universities Academic Pension Plan (UAPP), which manages pensions for
all Alberta universities.
Two years
ago, Dalhousie University’s $726-million pension plan lost 16 per cent
of its value, leaving a $129-million solvency deficit – the amount that
needs to be added so that if the university suddenly folded, it could
honour the plan.
To comply with Nova Scotia law, Dalhousie would
need to pump $12-million into its plan on top of regular contributions
in 2011. That prompted university and faculty leaders to jointly ask
for an exemption from solvency rules earlier this year. The province
said no, instead granting a payment-free 2011 and ten years to make up
the deficit, instead of the usual five years.
That still means some cuts are likely unavoidable, said Dalhousie assistant vice-president Katherine Sheehan.
“The only place that [money] could come from is our operating budget,” she said.
The
University of Toronto’s pension fund was the hardest hit, losing 29
per cent in 2008. As a result, the school expects to owe an extra
$50-million a year on top of $100-million it already contributes from a
$1.5-billion operating budget. Since an arbitrator recently ruled
against a proposed premium hike for faculty and librarians, cuts to
services are the likely solution again.
This fall, Ontario
temporarily eased pension requirements on universities to give them time
to regroup, but U of T argues solvency tests make no sense for
universities.
“We’re not going to go out of business unless the
government decides to put [us] out of business,” said Cathy Riggall, U
of T’s vice-president of business affairs.
“We can’t just raise our
prices to raise our revenue: The government controls our tuition levels,
the government controls our grant funding, so they hold all the
cards.”
If exempted, U of T would only
have to meet a potentially lower “going concern” threshold, which
assumes the fund’s continued survival when estimating how much money it
needs. But its faculty association argues an exemption won’t solve the
problem.
“All that does is kick the can down the road,” said George Luste, president of the University of Toronto Faculty Association.
Saskatchewan
is in the midst of a three-year moratorium on solvency payments, while
Manitoba and Quebec universities already enjoy permanent exemptions.
So does Alberta’s UAPP, which the employers and employees run jointly,
making employees “part of the problem, part of the solution,” Mr. Gupta
said. But because UAPP lost 20 per cent in 2008, its employees now
fork over nearly 2.4 per cent more of their salaries than they did two
years ago.
Diane Urqhart sent me this article
and she also forwarded me a list of Canadian universities with
non-bank asset-backed commercial paper (ABCP) exposure (click on image
to enlarge):
And this isn't just a Canadian problem. I was skimming through Pension Tsunami today and right at the top was Ed Mendel's Calpensions blog entry, UC pensions: from free lunch to years of pain:
UC
Regents may vote on a costly retirement reform plan next month that
officials say will not only lower benefits, but could squeeze faculty
recruitment, research and medical centers for two or more decades.
An institution known for its prized collection of intellects did
something two decades ago that in hindsight now seems unwise. It stopped
making employer-employee contributions to the pension system, getting
by on strong investment earnings.
A staff report to the
Regents in September said that if normal contributions had continued
since 1990, the University of California retirement system “would be
approximately 120 percent funded today.”
But
as of last July the system was 73 percent funded using the market
value of assets and 87 percent funded on an actuarial basis, which
spreads gains and losses over five years and won’t fully reflect the
2008 stock market crash losses until 2013.
“The idea of
having a defined benefit and not paying into it is insanity,” Richard
Blum told his fellow Regents at a meeting this month. He said he began
urging that contributions be restarted several years ago.
A
Regents faculty advisor, Dan Simmons, said the current problem is the
result of failing to resume contributions seven or eight years ago. He
said a faculty task force and others urged a restart “I think even
before Regent Blum began pushing that issue here.”
Action by the
Regents restarted contributions last April with 2 percent of pay from
employees (if bargained with unions) and 4 percent from the university,
expected to grow respectively to 5 and 10 percent by 2012.
Read the entire entry here.
It's clear that this university's pension plan was heading towards
disaster, as were others. The pension squeeze on these plans will
have severe repercussions on higher education, especially here in Canada
where tuition fees remain relatively cheap (of course, they've been
creeping up and relative to the US everything looks insanely cheap!).
So
what are Canadian universities going to do? Start exclusive MBA
programs that charge outrageously expensive fees? Good luck. It won't
make a difference. There will be pain at Canadian universities,
impacting staff and students. Ultimately, society will bear the brunt
of these cuts.
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they should just do a GM IPO with the pensions, it worked so well for them in the states.
"There is a prestige involved here. It is bad enough to be in some cow college in the lower rungs of the UofW system, but if we lose the cutting edge sociology giants we will become the laughing stock of intellectual backwaters in the USA, but even in Canada.
LOL.
Oh...wait...you were serious?...lying on my back...LMAO!
I fear for the University of Wisconsin system if the grubby and invincibly ignorant taxpayer cows get uppity and make some noise to our board of regents.
There is a prestige involved here. It is bad enough to be in some cow college in the lower rungs of the UofW system, but if we lose the cutting edge sociology giants we will become the laughing stock of intellectual backwaters in the USA, but even in Canada.
It is time that we fight to the limit and beyond to maintain the indispensible Womens Studies, the Black Studies programs and all that we have fought for in my generation.
The disgraceful attitude of the voters in this last election just shows how ill informed the foolish masses are when they do not heed what we have carefully laid out to them through our National Public Radio explanations of why things are the way they are and why we must continue our work in smashing the insensitive.
There isn't one in ten thousand of those that voted for unnecessary frugality, or should I say "cheapness" that has a single thing published in an academic journal, let alone the dozens to hundreds that myself and my neighbors have written in the past five years. Who are these people that savage their last chance at understanding our world?
Nobody survives. Sad tale.
$2.5 Billion Hole......Ha ! that is nothing......some states in the US Republic have 10-20 times that amount that their public employees foolishly believe is coming to them one day
Are you going to cut the pensions or cut classes/educational opportunities for the youth of America?
Cut the Pension cord by 1/2 - 2/3 - 3/4 and give the kids a chance. Stop GIVING to the old at the expense of the young.
There is no perfect plan but if you have to default to something it MUST be to give the youth what they need to succeed and lead this country into the future.
Cheers
ps I'm mid-40s... Let these kids have a CHANCE of having at least as much fun and success in the USA as we all have had. I'm tired of seeing them getting hosed by the senile old guard.
geez......the communists are every where
Yeh, the commies purge 1951.. Now, aside from THAT irrelevancy, the supposed Private Initiative FUNDS...'Funded Pensions...' had been actuarily assumed at 8% compounded, based on simple stock/bond paperclaims....
not Real Estate, as the Insurance Companies often did, to 'Fund their fund, for insurance...' and assemed to compound at say 12% for the asset or say 8% for the mortagage liens...
The generalized implementation of pension promiss, funded or not...generally assumed 'industry' or 'city/state/federal government LIKEWISE would grow at say 6-8% tax base from nEW hUMAN BEINGS population growth...etc..
And even simple small owner Private Real Estate Rental/Leases 'profit' after costs/vacancy was expected at 12%, with any 'capital value/appreciate' ON TOP OF THAT..
Of course THESE WERE 'nominal' profits, and after subtractinn the FED RESERVE engineered inflation/devaluation of about 4%, the Pension compound growth would HAVE BEEN A net of 4% REAL GROWTH => curiously, about WHAT THE TYPICAL risk-free 30 year Govt used to yield 1950-2004 or so..averaged UNDER THE OLD, non-depression economic reality.
NOW, THE NEW ECONOMIC REALITY/IN THE USA/EUROPE (BUT NOT CHINA/JAPANESE PARTNERSHIP) OF 2010 it is assumed that Real Returns will be 0% for quite some time, rigged to look-like 4%...so that Pension Funds will actually not grow at all....
Hence the presumption is that ALL pension funds are/will be permanently underfunded relative to current 'promises' All Pensions, not funded, nor fundable...
What is implied here? Well Keynes 1936 had the answer...dont jiggle the numerical wages/pensions...numbers same, but jiggle the Devaluation/Inflation rate, as needed... How to make the 8% assumption satisfy the promises? Well you just inflate at, not 4% but 8% just as long as needed at the zeero 'real-return-rate'... The 'haircut' for the common USA worker, will be a hit of 4% EXCESS devaluation (=8%) year/year probably for the next 20-30 years..assuming no game changer technology, famine, disease, change in birth/death ratio...
Implication for the stock market...where companies real return will be 0%...but APPEAR to be making 8%, a P/E of 12 for those stocks that used to be P/E 24... The expectation, for USA non-multinationals...would seem to be about 60% based on 0% profit and 0% growth...6500 on the dow This would be CHEAPER than replacement/rebuilding with new plant/equipmnet/trained employees...
So, THEN, lots of 'Going Private', lots of purchasing whole companies as the standard means of expanding market while killing competition..BUT not much stocks/realestate bought excepting for 'break even with inflation'
Hum, whatever that all means regards retirement planning?? Seems that, actually, no planning is possible....Wonder what China's 'planned economy' is going to do, about 'planning'
And, of course, the necessary 'inflation solution' means that bond vigilantes will expect the USA 30year (at the standard 0% REAL RETURN)...the 30 year will need to be, for a long long time, yielding 8%...so that all 'secondary market bond trading will be at a 50% discount from present resale price, and NEW issues at 'par' would be 8%..
Well, it has been done, 1980-81 the 20-30 years could be had new issued at 14%....and Capital Gains in secondary market of 3+ (4 x 3.5%) year 2003...secondary market resale price....
No, the U-crowd of mostly bureaucrats will bear the burden of expecting the public to fund their lavish pensions-to-be that are not to be.
China Solars Blooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooowwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww
Best investment since the Schrader Valve...ROTFL.
Pension money can and should be used to bailout failing banks...
Take Ireland for example.
This can only force their pension plans into riskier and riskier asset classes.
And you can also be sure that, because of Canada's rapidly slowing economy, university operating budgets themselves will take a hit beginning right about now...
Here's an Australian anecdote for you Leo.
I graduated from Wollongong University, a regional uni, in 1997. During the time I was there the University expanded considerably. I've been back a few times since graduating & the place is unrecognisable. Billions must have been spent on the place.
Anyway, last year I toyed with the idea of doing more study & so the uni got hold of my contact details. Next thing they are ringing me asking for donations! Me, a biology major! What am I going to give them, 50 bucks!?
Methinks Wollongong University's pension money might have disappeared with Lehman Bros too. And interestingly, the state government here actually recommended the high yield investment 'products' of Lehman etc to councils & other institutions before '08.
Hey let's just take away private pensions to cover the sovereign debt funding gap!!
Fucking brilliant!!
Oh wait, there is no money left in the pension account bitches.
There will be pain, believe me and not just for Canada.