APSA Pension Advisory Committee

On the Phasing Out of Early Retirement Optionsand the Commuted Value Option

Rev. 1

One of the questions posed by the Administration’s negotiating team at our meeting on December 2, 2014 was in regards to the elimination of the early retirement options. Specifically, they inquired as to how the EJPC envisions the handling the cases where a plan member is not vested into a specific existing rule. More generally, how do we manage the phasing out of the early retirement options? And it is this question and the issue of phasing out the commuted value option that I’ve given a lot of thought to and would like to address here.

To date, the approach to the phasing out of the commuted value option has beento suggest the implementation of some “window of opportunity” that would be open once the new plan came into effect, in which any member having attained the requirements for an un-reduced pension would be able to retire and take the commuted value. CUPE 3338 suggested that window be six months. APSA suggested 12 months. I contend, and will demonstrate, that thisapproachis fundamentally flawed for two reasons:

a)It is inherently unfair, and

b)It will put undue pressure on the plan fund.

Long-term employees of Simon Fraser University are deserving of respect and recognition for their service. As such, it is unfair to “cut a member off at the knees” when they are in sight of attaining the requirements necessary for an un-reduced early retirement and the option of taking the commuted value. I would like to put forward a proposal that will somewhat mitigate the arbitrary nature of a “window of opportunity” and at the same time is designed tohelp mitigate the financial impact eligible members have bydeciding to take the commuted value option.

The two goals that my proposal attempts to attain are:

a)Provide a method of phasing out un-reduced, early retirement options and the commuted value option ina fair and respectful manner, and

b)Mitigate the impact on the plan fund of a member choosing to take the commuted value option.

The Proposal

Any member who has attained the requirements under the existing pension plan for retirement with un-reduced pension benefits, either

a)at the time the new plan text comes into effect, or

b)within a time period starting when the new plan text comes into effect and equal in duration to the members years of credited service multiplied by a Reduction Factor,

shall at any time henceforth be entitled to retire with un-reduced pension benefit.

Upon retirement of a member meeting the requirements of A. above, that member may elect to take their pension benefit in the form of a commuted value payout

a)for the benefits earned up to the time the new plan came into effect with the rest in the form of monthly payments or “small benefit commutation” asprovided for in the plan, and

b)only if the bond yields upon which the commuted value is calculated are greater than or equal to that which it was on the date the new plan text came into effect.

Notes

Subsection b) introduces the notion of a “window of eligibility” as opposed to a “window of opportunity”. The key differences between the two are:

a)The “window of eligibility” is different for each person and is proportional to the years of credited service that member has put into SFU thereby mitigating some of the arbitrary nature of a “window of opportunity” and the inherent unfairness that goes with it, and

b)A “window of eligibility” only defines the period in which a member must have met the requirements of an un-reduced early retirement option in order to be eligible to retire at any time henceforth with an un-reduced pension and the commuted value option. That is, they don’t have to retire in that window (and, in fact, we’d prefer it if they didn’t!).

The Reduction Factor noted in subsection b) is a constant that. In the examples below, I have used 1/12. This translates into one month of window for each credited year of service. Yes, this value is arbitrary. I don’t know that there is a way to remove the early retirement and commuted value optionswithout some level of arbitrariness. However, using the years of credited service factor mitigates that to some extent.

Examples for use in Discussion

At the time the new plan text comes into effect, Karen is 53 years old and has 25 years of credited service. At that time, she is two years short of her Magic 80. Under subsection b) above, using a Reduction Factor of 1/12 (i.e., one month per year of service), Karen would have a window of eligibility of (25 years * 1/12 =) 2.08 years in which to attain her Magic 80. And, in fact, she would just make it by 0.08 years. Therefore, Karen would be eligible to retire at any time will full pension benefit and have the commuted value option for her benefits earned up until the new plan came into effect.

At the time the new plan text comes into effect, Ralph is 60 years old and has 9.5 years of credited service. Ralph is six months short of the 60+10 rule. Under subsection b) above, using a Reduction Factor of 1/12 (i.e., one month per year of service), Ralph would have a window of eligibility of (9.5 years * 1/12 =) 9.5 months in which to attain his 60+10 early retirement requirements.

Discussion and Rationale

Fairness

In the examples above, an inherent unfairness of a “window of opportunity” is exposed. Karen and Ralph are both close to being eligible for early retirement with full pension benefit and the commuted value option. Under the notion of a “window of opportunity” of six months or one year, Ralph would be able to retire with his full pension benefit and would be able to take the commuted value. Karen would not. To be able to retire with an un-reduced pension, Karen would have to work another seven years (from age 53) in order to reach the new Magic 90, and she’ll have lost the opportunity to take the commuted value. Yet, when the new plan came into effect, Karen had spent almost half of her life, 25 years (47%), working for SFU compared to Ralph’s 9.5 year (16%); an almost a three-fold difference. I contend that this is grossly unfair. Under the “window of eligibility” approach that I am proposing, Karen’s long-time serviceprovides her with a broader window of eligibility and consequently she too would be eligible to retire at any time with full benefits and the commuted value option.

Eliminating the commuted value more softly

Under a “window of opportunity” methodology, if eligible members wanted to take the commuted value,they’d have to do so while that window was open. That window opens when the new plan text comes into effect (which we all hope is fairly soon) and they meet the eligibility requirements. With the bond yields upon which the commuted value is calculated at historic lows and with the member being as far away from their expected date of death as they can be, thatwill translate into a large chunk of money coming out of the fund. The “window of opportunity”, being a fixed time frame, will have the effect of pushing people in that direction – “This offer won’t last!”, so to speak. On the other hand, if members are, or become eligible for unreduced early retirement during a “window of eligibility” but we allow them to carry that eligibility forward indefinitely, I highly suspect that many of the otherwise ship-jumpers will stay longer; especially if they first become eligible while in the “window”. With that, the pressure on the fund is reduced because as retirement is delayed:

a)The number of pension payments between retirement and death is reduced (which is precisely why we are eliminating the bulk of the early retirement options), and

b)It is very likely that the bond rates will rise over time thereby reducing the commuted value. (Note that my proposal does not allow for taking the commuted value if the bond rates drop below the level they are at when the new plan text comes into effect.)

Conclusion

The merits of the commuted value option will remain forever moot. Moreover, whether or not taking a commuted value option is good for a member or not is neither for the EJPC to decide nor judge. The fact remains that for all of the current members’ working lives it has been a promise under which they have worked. Now we, the EJPC and the Administration, are prepared to take it away because of the impact it is having on the plan. And while that is a prudent thing to do for the health of the plan, we also have to recognize and act on our obligations to represent our membership with respect.

There are many tweaks that can be made to this proposal and I’d like to hear some. But overall, I think this proposal provides a healthy framework for a fairer and more fiscally responsible methodology to phasing out early retirement options and the commuted value option . The advantages of this methodology are:

Providing a “windows of eligibility” that is based on years of credited services is less arbitrary than a simple “windows of opportunity”.
Allowing members to carry forward their eligibility for taking their earned un-reduced pension andcommuted value options will reduce the financial impact of the phase-out as compared to tempting them to “jumping ship” at a younger age.

Richard Blackwell
Chair, APSA Pension Advisory Committee
4 December 2014