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Re: Pensions vs. Mortgages
Hi
The analysis assumed various rates of return over entire careers, so I don't think that updating the report with actual rates of return, e.g., over the last 10 years, would add much value. In these analyses, as you assume higher contribution rates for the DC plan, and higher rates of return for the DC, the DC will provide more income in retirement.
However, as I mentioned before, I think that this report is limited by an assumption that the benefit formula and contribution rates of the DB plan are fixed in all scenarios. If the markets did really well over a prolonged period, contribution rates to the DB plan would probably go down (and vice versa). In other words, if you are interested in a scenario where the DC plan has a high rate of return over 35 years, a more accurate comparison would also involve reducing contribution rates for both DB and DC; if the DC plan was exposed to great markets for 35 years, the DB plan would be as well.
While the investment portfolios of the college plan and our DC plan are not the same, they both have competent people running them, so I don't see why one would expect one of the plans to have substantially better rates of return than the other, on average. The key differences between the plans are the longevity and investment risk pooling that occurs in the DB plan, and the mandatory contributions in the DB plan, both of which reduce individual flexibility in the DB plan. I think arguments based on a higher average expected income in one plan or the other rely on too many assumptions.
Cheers
Julian
________________________________________
From: Nilima Nigam <nigam@math.sfu.ca>
Sent: Thursday, November 15, 2018 8:22 AM
To: Tamon Stephen
Cc: Julian Christians; academic-discussion@sfu.ca
Subject: Re: Pensions vs. Mortgages
Dear all,
once again, thanks for the discussions, which have brought to light many issues I had not thought about because they did not (yet) pertain to me. It's actually problematic that I hadn't, and as Tamon says, served to highlight for me that some of us (including me!) are voting without a full and thorough understanding of all the possible implications.
I will be voting 'no' for my own self-interest, which is comprised of:
- ethical+personal concerns. I am deeply averse to investing in fossil-fuel companies, especially in light of IPCC reports in recent years. For me personally, the DC plan affords a mechanism to not screw over my children's future. The BC College Plan, while serving up the usual motherhood-and-apple-pie statements about sustainability, remains _heavily_ invested in the fossil fuel sector. I cannot imagine writing a check of even $500 each year to TransMountain, but in effect I'd be asked to do precisely this.
- affordability concerns: with my current situation, meeting my non-negotiable obligations towards my family while living in the greater Vancouver area is a challenge. These obligations will evolve over time, as they do for everyone (e.g. children grow up, parents die) and it is helpful to have flexibility in terms of when I invest a larger fraction of my salary.
At this present juncture, having consulted with a financial advisor - I will have precisely two options in order to afford the mandated contributions to the college plan: argue for a substantial increase in my income, or leave.
- risk/return concerns: for my personal circumstance (joined the profession at 29, got stuck at SFU's previous inane salary ceilings for 6 years, intend to retire at 67), the DC plan with sensibly structured investments which I can invest in flexibly as time progresses is better.
- the LIF/annuity issue: the LIF works better for my personal situation
- the issue of beneficiaries: much though I love my colleagues, I'd like to structure my estate in a particular manner to optimize what I leave my dependants. As Nancy helpfully points out, these are not minor concerns/
- the issue of control: I dislike intensely how much control we'd be giving up to the board of the college plan. We currently can walk up to our pension trustees, convey concerns, and have a mechanism to influence decisions.
Julian, I asked about an update of the report on the previous report comparing DB to DC plans in the hopes that such an update exists. Here's the updated information I'd hoped for:
1. A comparison similar to that in graphs 1-8, based on a pre-retirement rate-of-return (ROR) consistent with the last (say) ROR in the SFU Balanced Fund, as well as that in the other available options in the SFU DC plan. Our balanced fund is not the only fund in the DC plan, though most members are invested in it. This is the 'default fund'.
2. Is there any change to the statement accompanying these graphs on pages 7-9 of this report? From the existing version, the DB plan is better under the 3 scenarios presented EXCEPT "when the member entered at age 30 and retired at age 65". "Better" is defined as monthly pension after retirement. There are other circumstances also when the DC plan (with a 9% contribution rate) is better. I read the analysis to say:
- if someone retires at age 65 and enters at age 30, under each of the scenarios presented the DC plans are better.
- if someone retires at age 70, and enters at age 30 or 40, under each of the scenarios presented the DC plans are better.
http://www.sfufa.ca/wp-content/uploads/2014/07/actuarial-report-march-15.pdf
Possible updates would be: assuming a voluntary contribution rate of 10.5% to a DC plan (ie, the rate we'd be expected to contribute to the BC College Fund); perhaps a graph using the historical ROR from the existing SFU balanced fund as well as the more aggressive amongst the SFU options.
It is _obvious_ to me that others will have different concerns and priorities, and I respect that. Flexibility is therefore perhaps a virtue for all of us, going forward. I also understand that for some members, the DB plan is good because it takes away the need to stay on top of one's investments. There are other members who may be 'higher-information' members.
At the very least, please vote!!
thanks for bearing with this rather long message
Nilima
On Wed, Nov 14, 2018 at 11:37 PM Tamon Stephen <tamon@sfu.ca<mailto:tamon@sfu.ca>> wrote:
Hi all,
Some more comments, in particular relating to Natalia Kouzniak's questions yesterday about what the transition costs and buy back plans really are. The answer as Barbara Sanders noted, emphasized also by Ronda Arab is "we won’t have this info until after we join". I am concerned about this, especially to the extent that I see people (e.g. Lynne Quarmby and Nancy Hedberg) casing out scenarios where they buy back years in the DB plan.
To me it seems very clear that we shouldn't expect these numbers to hold even approximately. We saw in 2014-15 that BCCPP was quite willing to say what we wanted to hear (opt out) before a vote, and then take it off the table after the vote. My intuition at the time was that exactly this would happen because in some respects it seemed like a to-good-to-be-true deal (letting people opt out seems like it would lead to a bad result for the pension fund where they take on mostly money-losers) and anyway this is kind of how I expect pension fund managers to work (why I prefer the company of University people).
In part, though, they do have to keep the number a little loose, because with all the talk of 2008, we probably should consider what happens if the next 2008 starts the day after the vote. (Plausible, in my opinion, things do feel bubbly...) So then many of our DC nest eggs drop by 30%, say. But also BCCPP will surely need to adjust the tables up by let's say 20% on top of the 20% they were going to add anyway. So now the 10 years that we thought we were going to buy is more like 5. So if we are going to go through with this, it seems to me that the safety-lovers who want to buy back years is a good idea are going to be sweating for the bubble's continued expansion until the table is locked in and their DC benefits are liquidated.
On that subject, I am very happy to see that Julian Christians mentions the possibility of walking away if BCCPP goes overboard with the changes. This is something I *very much want to see* from SFUFA's team if we do end up at the table with them. I am worried about it because to me, the SFUFA team seems too enthusiastic about BCCPP. In 2015 they did what they had to when the deal changed and walked away, but then the change was so significant that no other action was acceptable.
It looks to me that the issue of negotiation is a strong reason to vote NO if you have doubts. Say we have repeat of the last vote (31% yes, 9% no). The BCCPP negotiators will see that (reported in SFUFA meeting minutes) and then when we ask them if transition costs are $40 million or $10 million, they will be $40 million. And what's an extra 20% on the tables with 77% support? On the other hand, a vote of 31% yes, 30% no looks quite different. It puts Julian in a much better position to say, "look, my membership is concerned about these costs, and they are barely favourable with the preliminary table you showed them. Make it happen or we walk". (And by the way, we should negotiate mainly against BCCPP, only mildly against SFU.)
In fact, I suspect that BCCPP needs us more than we need them, as we would diversify their portfolio within the education sector and arguably add a bit of prestige to their business. Let's say the vote ends up 31% yes, 32% no. I would not be surprised if BCCPP comes back a year later with a better offer (although I'm sure right now they're insisting that they're already doing us huge favours). Maybe at that time we could repeat this exercise with a better offer and a more thorough discussion of the implications prior to the vote.
Besides this issue, I'd like to again mention how useful I am finding all of these comments. I found Barbara's discussion of the fate of the old DC plan in a DB universe extremely informative and mildly alarming, since in some sense it seemed that a big benefit for mid-career people is the ability to be in half in one and half in the other. But I guess it is not so simple.
The fact that it is much easier to get in to the BCCPP than to get out also looks like a very strong reason to vote NO, especially given that it seems like many people are only really starting to think about this but voting has already started. It underlines the significance of the decision, as well as the lack of sufficient information. Like Krishna Pendakur, I believe that this vote is at least as important as unionization and hope that we have 85%+ turnout. On the other hand, the number of things I've learned in this thread shows me in many ways how little I understand this complex question, and it seems to me that I've actually sunk more time into learning about it than several other people have. In many ways I don't see how we can have a well-informed vote at this point.
Random point: Dai remarks that Lynne "*cannot* contribute 10% of your salary to an RRSP". I think this is wrong for the situation described since unused RRSP room accumulates. If she has been passing on contributing for the past 10+ years, then she could presumably contribute 15%+ for the next 10 years if she wants to.
George Kirczenow's question about what happens to phased retirement in the DB plan is another great question that I hadn't thought about at all and doesn't seem to been in SFUFA's FAQ. I would be interested to hear an answer to it. On retirement issues, I liked Barbara's suggestions on how to improve faculty saving rates.
Best regards,
Tamon
________________________________________
From: Julian Christians <julian_christians@sfu.ca<mailto:julian_christians@sfu.ca>>
Sent: November 13, 2018 1:26 PM
To: Natalia Kouzniak; Ronda Arab; academic-discussion@sfu.ca<mailto:academic-discussion@sfu.ca>
Subject: Re: Pensions vs. Mortgages
Hi
There is a pension estimator here
https://www.pensionsbc.ca/portal/page/portal/general_pension_estimator/cpp_general_estimator/
that you can use to estimate the impact of various guarantee periods and joint-life vs. single-life options.
The transition costs were estimated by the firm that performs the evaluations of the BC College Pension plan every three years, using our actual age and salary data. The initial, higher estimate was the produced using less data from SFU and simpler calculations.
However, if the transition costs end up being much higher than expected, SFU would not be obliged to join and, in the next round of bargaining between SFU and SFUFA, our bargaining team would not be obliged to accept that these higher costs would be borne by SFUFA members rather than the university.
Cheers
Julian
________________________________________
From: Natalia Kouzniak <kouzniak@sfu.ca<mailto:kouzniak@sfu.ca>>
Sent: Tuesday, November 13, 2018 1:00 PM
To: Ronda Arab; academic-discussion@sfu.ca<mailto:academic-discussion@sfu.ca>
Subject: Re: Pensions vs. Mortgages
Hello Ronda,
Thanks for clarification. Interesting enough, your attachment has 2018 numbers indeed. But the posted document with FAQ2(2) on SFU site with resources, still has 2014 data which I was referring to.
If we compare both documents, at the age of 65 buy back costs have increased:
Salary 2014 2018
70,000 17,684 19,549
100,000 25,263 27,927
130,000 32,842 36,305
If the trend continues, a person with 10-15 pre-retirement years will have much less buy-back power.
Also, I still cannot find anywhere costs of joint pension and no confirmation about transition costs.
If you can comment on this, will be highly appreciated.
Thanks a lot.
Regards,
Natalia
________________________________
From: Ronda Arab
Sent: Tuesday, November 13, 2018 12:28 PM
To: Natalia Kouzniak; academic-discussion@sfu.ca<mailto:academic-discussion@sfu.ca>
Subject: Re: Pensions vs. Mortgages
The costs on the current, updated FAQs are from 2018, not from 2014. Please see item 11 of the attached FAQs or consult the full web page of information here
http://www.sfufa.ca/current-issues/pensions/resources/
Dr. Ronda Arab
Associate Professor of English
Simon Fraser University
________________________________
From: Natalia Kouzniak <kouzniak@sfu.ca<mailto:kouzniak@sfu.ca>>
Sent: 13 November 2018 11:22:18
To: academic-discussion@sfu.ca<mailto:academic-discussion@sfu.ca>
Subject: Re: Pensions vs. Mortgages
Dear All,
My major concern:
a) Transition costs
In 2014, they were announced to be $40,000,000. Now, a consulting company has estimated them to be only $10,000,000, to be absorbed by us within 3 years by taking an additional 1% from our salary (this is not the actual response from the Fund though!) and - please correct me if I am wrong - by excluding the opt-out for anybody. There is no guarantee that it is exactly this lower number, just estimates. And if we say "yes", and then the actual number number turns out to be much higher, after the vote?
b) Buy-back costs
Again, there is only the estimate based on the old data from 2014. What are the exact costs now or what they will be in future (formula?).
c) Joint fees
I could not find anywhere how much it would cost, to include the spouse. Just mentioning that there are additional costs.
During the last presentation in Vancouver, SFUFA representatives promised to try to get the updated numbers *before* the vote. This did not happen. Instead, there was a calculator provided to explain the transition only.
My apologies, if I missed this info though.
Regarding medical benefits: I hope it is possible to re-negotiate with administration those measly $15,000 instead of making it an argument that new plan is better because of better medical benefits, which we do need indeed. Also, our plan with Pacific Blue Cross is not that great. My husband was enrolled in Sun Life and Standard Life earlier where they had much higher allowances for naturopath doctors, acupuncturists, chiropractors etc. with about the same fees. May be it is time to address this issue?
Regards,
Natalia Kouzniak
--
Nilima Nigam
Professor
Dept. of Mathematics
Simon Fraser University