By Randy Barkhouse
Did you notice a change in your January pension payment? Retirees who are members of the Dalhousie Pension Plan may wonder about the new amount deposited on January 27th. (Note that a few former Technical University of Nova Scotia employees and former Nova Scotia Agriculture College employees have their pensions paid from the provincial Public Service Superannuation Plan so this article does not apply to them). There are several reasons for the changes. For starters, there were increases in the basic deduction for both federal and provincial income taxes which resulted in most of the increased pension payments on January 27th. There was also the effect of indexation, as explained below.
Unlike the salaries for most of us which were paid from Dalhousie’s operating budget, our Dalhousie pensions are paid from the earnings of the Retirees Trust Fund (RTF), one of the two funds that constitute the assets of the Dalhousie Pension Plan. The other fund is the Pension Trust Fund (PTF) into which payments from employees and the university are made from the operating budget.
When an employee retires and elects to take a Dalhousie pension a transfer is made from the PTF to the RTF sufficient to cover the cost of the pension. Actuarial calculations set the amount of RTF earnings sufficient to pay one’s pension at 5.05%. There are many assumptions behind that amount which will not be described in this document. Those assumptions are included in each actuarial report done for the Pension Plan and available on the Pension Plan web site.
Earnings above 5.05% are used to provide some amount of indexation of Dalhousie pensions. These indexation amounts provide some relief from increases in the cost of living as measured by the national Consumer Price Index (CPI), but currently these are falling quite a bit behind the CPI figures.
There are two types of indexation as described in the annual “Report of the RTF Trustees to the Pensioners”. The 2022 report was emailed to most pensioners rather late this year on January 23rd. Usually it has been sent in late November or early December.
From the 2022 report:
” a) Annual Indexation The Dalhousie University Staff Pension Plan has an “excess interest” indexation provision that can increase pensions each January 1st for eligible retirees (those who retired prior to January 1 of the previous year). “Excess interest” may be available should the RTF’s 3-year annualized return net of expenses for the 3-year period ended the previous June 30 exceed a threshold of 5.05%. The maximum allowable indexation is the 1-year Canadian Consumer Price (CPI) Index change as of each June 30th. Should the RTF’s 3-year annualized return fall short of the 5.05% threshold in any given year, this shortfall must be recovered in subsequent years before any future indexation may be granted by this “excess interest” provision. Currently there is no accumulated shortfall for annual indexation determination purposes.The RTF’s 3-year return net of expenses at June 30, 2022 was 5.13% narrowly exceeding the 5.05% hurdle. CPI for the year ended June 30, 2022 was 8.133%. As the lesser of excess interest and actual CPI is granted, a pension increase of 0.0786% will be provided to those pensioners who are eligible for indexation January 1, 2023.
b) Catch-up Indexation The Plan also gives the Trustees the discretion to use up to one-half of any surplus that an actuarial valuation may have identified in the Fund to catch up on any indexation missed in previous years. The actuarial valuation at January 31, 2020 identified a surplus of $10.3 million. The RTF trustees met in March 2021 as they had deferred the decision in the fall of 2020 due to market volatility and uncertainty from the global pandemic. At the March 2021 meeting and seeing improved funded status of the plan as a result of the strong rebound in the markets, the Trustees decided to use $5,154,500, the full amount available, to award catch up on missed indexation over the 2012 and 2013 period on a go-forward basis to eligible pensioners. This was effective January 2021 and processed June 2021. The next actuarial valuation is required to be filed no later than January 31, 2023. “
Unfortunately, the next valuation as of January 31, 2023 is likely to show little or no surplus in the RTF, which likely means no catch-up indexation until after the further valuation which may not be done until after January 31, 2026.
Furthermore, due to the -3.3% returns of the RTF to June 30, 2022, the new 3-year average for 2021, 2022, and 2023 may not exceed 5.05% which makes annual indexation starting January 2024 somewhat doubtful. The amount of future annual indexation beyond that is impossible to predict.
Prior to June 30, 2021 pensions paid from the Dalhousie Plan had fallen behind CPI by about 8%. The minor indexation earned to June 30, 2022 means the purchasing power of those pensions has decreased by a total of about 14%. The negative outlook for increases in the national CPI, and for annual indexation, for the pension year ending June 30, 2023 could decrease that purchasing power by a total in the 20% range. Based on the outlook for inflation forecast by the Bank of Canada for succeeding years the decrease may eventually total over 30%.
These are difficult numbers to accept and may be overly pessimistic. Perhaps RTF earnings will improve substantially to limit further erosion by earning enough to provide some annual automatic indexation, but the likelihood of any catch-up indexation being awarded before 2027 is dependent on a new valuation being done before January 31, 2026. The Dalhousie administration at present does not seem favorable to valuations outside the standard 3-year interval.
The different rules for indexation for both Old Age Security (OAS) and the Canada Pension Plan (CPP) provide some protection for Dalhousie pensioners against increases in the national CPI as both increase by percentages close to CPI. The CPP is adjusted annually. The maximum increase for Dalhousie pensioners effective January 1 was 6.5%. OAS amounts are recalculated quarterly. The maximum increase for 2022 was about 6.3%.
The full text of the Dalhousie Pension Plan, with the detailed formal rules on indexation, is posted on the Pension Plan web site. Several other annual reports and other documents are also posted there. The web site URL is https://www.dal.ca/dept/pension.html
Randy – thank you for the comprehensive report. As a rep on the RTF, I can appreciate the complexity of the situation. Your analysis clearly summarizes where we are. As preparation for trust fund meetings routinely involves reviewing 200 – 300 pages of analysis – it has taken some time to start to become informed on the myriad of variables that impact the outcome for the fund and for us (the pensioners). I detect a desire among the trustees to do “the right thing” for the fund and for the pensioners. Your analysis here advances my understanding of implications and informs my contributions as a trustee.
Thanks for the comment Andy.
One hopes the slight rebound in equity markets during January has a favorable effect on the actuarial valuation, enough perhaps to offset the effect of Bank rate increases on fixed income valuations.
If interest rates are able to be reduced in 2024 the favorable effect on both fixed income and equity markets could give some reason for optimism respecting Dal pension funds improvement.