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Dear Everyone;
I should apologize for intruding into your debate about the relative merits of DC (Sunlife Plan) and DB (College Plan) now that I am retired and only tangentially a colleague through SFURA. There are, however, a few small points that might be of value
to point out that became clearer to me as a result of having been retired this last year and a half.
A few years ago when we originally had the debate about converting the existing faculty pension plan from DC to DB, I was within a year or so of retirement. At the time, I remember hoping the conversion would take place in time for me to participate. However,
when I calculated the comparative value of the two plans, the DB College Plan would have produced at most a very small incremental additional income and this was entirely a function of the assumed market growth rate which cannot be accurately predicted in
advance. If the market grew at the 8% it has averaged since 2008, then probably the DC Plan was better. If it grew at the historical average of about 2%, then the DB Plan was better. This comparison also assumed putting twice as much money into the DC Plan
since the university was contributing 10% of my salary to the DB Plan, whereas with the College Plan, I would also have to contribute 10% in addition to the university contribution.
The principal value of the College Plan seemed to me at the time to be the inflation protection with its guarantee to increase my pension benefits by the rate of inflation up to 2%. It also offered that the Fund could increase the inflation protection
as/if needed. However, I should point out that a stock portfolio will also in all likelihood rise in value at the rate of inflation. Therefore, this guarantee is not necessarily the inestimable value one might think though it is considerably better than for
an annuity whose return is locked in regardless of future inflation.
One thing I didn’t know was that the money accumulating in my DC Sunlife Fund would have to be invested, upon my retirement, in either an annuity or what is called a LIF or Life Income Fund. An annuity is a particularly poor investment when interest rates
are low, and we are living in a period of historically low interest rates. The problem with a LIF is that it is designed to produce income for you until you are 90 or more. As a result, like a RRIF (what your RRSP converts to in order to produce income), there
is a minimum per year that you must withdraw, BUT there is also a relatively low maximum. The maximum exists to make sure you do not run out of money too soon.
If all you can save for retirement is 20% of your salary, you are better off having it in the College Plan than the Sunlife Plan because in the latter, the funds all go into a LIF and the amount you are allowed to withdraw is probably lower. On the other
hand, if the comparison is between 20% in the College Plan versus 10% in the Sunlife Plan, and 10% that you save in an investment account, then I would prefer the latter because I have more flexibility and control over my funds post-retirement.
This latter is approximately closer to what I have now, and I am not unhappy with it though it results in greater ambiguity. For example, eventually there will be a bear market and capital gains will be scarce and my income will be affected whereas with
the College Fund that should not be the case (unless it goes bust which is an extremely low probability unless BC goes bust). On the other hand, I can reduce the effect of a market downturn by investing in conservative dividend producing investments, whose
dividends generally remain constant even when the value of the asset itself declines. This is called a dividend strategy and I have pursued it most of my life with my investment portfolio.
So, which to choose? When we had this debate a few years ago, I was strongly in favor of the the DB College Plan. Now, I suppose it is still preferable if you do not have the financial discipline to save beyond the 10% the university saves for you. That
10% will not, in itself, provide you with a very satisfactory retirement income. If you do have that financial discipline, then you will find greater financial flexibility and control in the existing DC plan. “Know thyself,” as Apollo was reputed to have said.
One thing you might like to know that I really wished I had known, is when in the year to retire. I retired at the end of the spring term and it was the absolute worst choice. It turns out that when your Sunlife Funds and RRSPs are converted to LIF and
RRIF, you cannot draw money from them till the next calendar year. This meant that suddenly we had to have the funds to carry us through, May through December, before we could access all this retirement income. I really think the reason no one tells you this
is as a strategy to sell you an annuity because suddenly you discover you have no money unless you buy that annuity - and you never would unless you were desperate because it’s such a bad deal at today’s low interest rates - and then you are locked in no matter
how interest rates might improve, as they currently are bit by bit.
Anyway, I wish you luck in your decision-making. Honestly, it might be OK either way. In the end, it seems like the more things change, the more they stay the same. It’s all in the saving you do, and not the guarantees you receive.
All the best
Neil R. Abramson, PhD
Beedie School (ret.)
PS An ironical argument for supporting the College Plan and the 20% draw on faculty salaries is that if SFU faculty salaries are, de facto, 20% lower, then it will be extremely hard to attract new hires to live in expensive Vancouver GVRD. Salaries will
have to rise significantly to allow the university to successfully hire and that might be an improvement for everyone now that SFUFA is a union and might influence who gets what market differentials. “Short term pain for long term gain,” as Joe Clark used
to prescribe in his extremely short tenure as Canada’s Prime Minister.
Sent from my iPad
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