MEMO/FINAL REPORT
From: Marilyn Silverman
To: Executive Committee, YUFA
Re: Initial Investigations into setting
up a Self-Funded Retirees’ Benefit Plan
Date: 22 April 2002.
I am writing this Memo, and compiling various materials, so that YUFA’s
Executive Committee can consider what action, if any, it wishes to take on the
issue of setting up a self-funded retirees’ benefit plan. As Chair of a
Sub-committee set up by the Executive in the Fall of 2000, in order to look into
the problems and, most importantly, the possible solutions, I want to document
our research and thinking over the past 18 months so that Executive, in making
any further plans, does not need to re-visit the places we have already been.
The medical/dental benefits which YUFA Retirees under YUFA’s Collective
Agreement with the employer are inadequate B both in terms of the limited
coverage which they provide and in terms of how this coverage is funded. At
present, retirees’ benefits are paid for both by users’ fees (deductibles)
and by our Employer who contributes, in each Collective Agreement, a fixed sum
of money “to buy” whatever benefits can be bought with that sum. Retirees
are, in effect, almost totally dependent on the outcome of collective bargaining
and, therefore, on active members’ concerns to negotiate strongly (and thus
give other items away) for their benefit. On the other side of the coin, the
Employer’s unwavering commitment to this negotiated outcome, as opposed to a
more moral concern, became clear in late 1993 when the Employer informed YUFA
that, based on their projections, the monies for providing retiree benefits
given the amount allocated in the Collective Agreement were insufficient. YUFA
was called in to discuss and help implement reductions. An opinion from our
legal counsel (22 November 1994; copy in this file) advised us that the Employer
could do this.
The political fall-out from this situation, which retirees immediately labelled
a “take-back,” alerted many of us in YUFA to the fact that retirees’
benefits B our future benefits B were vulnerable: (1) to the commitment of YUFA
actives to bargain for funding them and (2) to the determination of the Employer
to keep its own costs low and never to exceed them. At the same time, (3) the
costs of providing medical benefits are continually escalating even as (4) the
number of YUFA retirees are increasing and will continue to do so.
In September 2000, I proposed to Penni Stewart, then chair of YUFA, that I would
be interested in looking into the possibility of establishing a self-sustaining
fund which would provide improved benefits for YUFA’s retirees. The ideas at
the time were to generate, somehow, sufficient monies so that retirees’
benefits could (1) be made commensurate with those of YUFA actives and (2) be
independent of the Employer. There were two problems - financial and
organisational. First, where could we find or generate the money to do this,
outside the collective bargaining process and, therefore, independently of the
Employer? Second, how could such a fund be set up and managed?
YUFA’s Executive set up the Sub-committee to look into these issue. It was
made up of myself, Penni Stewart, Oona Padgham (succeeded by Brenda Hart, YUFA
staff) and a member from ARF, Margaret Knittl (and later, Mary Williamson).
1. How to fund a self-funded retirees’ benefits plan
Our first step was to approach Eckler Associates, YUFA’s actuarial
consultants, to try to get an idea of what kind of money we would need. At that
point, Penni and I already had in mind three substantial chunks of money which
might be made available as start-up money. The first, which was never explored
in any way by the Sub-committee, was the idea that pension surpluses could be
somehow made to service retiree benefits. Second, there was the money
(approximately $1,000,000) which was located in the York University Retired
Faculty and Librarian Benefit Trust Fund (see Appendix A) and , third, the
$50,000 per year generated through the now-depleted YUFA Trust Fund
(see Appendix B). Our idea, in this earliest phase, was that both current
retirees and YUFA actives could be put into a single benefits plan B paid for by
the two Trust Funds, perhaps some pension surpluses and, most importantly, by
on-going contributions to the fund made by current YUFA members from their
salaries. The latter would also be making, at the same time, contributions
sufficient to buy their future benefits after they retired. The amount they
contributed per year would depend on how many years until their normal
retirement dates: the closer to retirement, the higher the contribution. We also
assumed, at this time, that the vast majority of current YUFA members would join
such a plan. We asked Charlene Milton and David Short (of Eckler Partners) to
prepare cost projections based on these assumptions.
Milton and Short provided us with spread sheets and projections, over 25 years,
of cost and contribution Tables (these are in the file). They also provided YUFA
with the data base which allows us to project further costings, should we wish
to do so. Several points immediately became clear. First, the costs of such a
plan are enormous. Second, the costs vary according to the design of the
benefits plan. YUFA actives now have a FIXED BENEFIT PLAN, with a particular set
of benefits available to them. This level and type of coverage is very expensive
to maintain and would be even more so if extended to a retired, older
population. For example, the cost of providing unlimited medical coverage
outside Canada for seniors, which is what YUFA members have, is prohibitive.
Conversely, the current YUFA plan has no coverage for convalescent-home care;
yet, that is an item generally of concern to older rather than younger
colleagues.
On the assumption that the YUFA plan was too expensive and, in many ways, not
suitable for an older group, we began to look at the idea of designing a
separate benefits package for retirees and to digress from our original idea of
rolling YUFA actives and YUFA retirees into a single benefits plan. This
divergence became firm as we looked at the two types of benefit packages which
are currently possible. First, a so-called FLEX-PLAN gives each member a certain
number of dollars with which to buy items from a menu of benefits. Second, a
FIXED-BENEFITS plan, like the YUFA active plan, provides specifically defined
benefits for all. We learned that as medical costs increase, employers in
general try to withdraw from providing benefits and, if they cannot, they try to
get employees onto Flex-plans. Flex-plans are cheaper than Fixed Benefit plans,
and the costs can be easily monitored and controlled. What it often means for
employees is that with each contract, they have to bargain hard for money from
the employer to keep up with escalating costs; if not, their coverage declines.
At the same time, cost-wise and management-wise, the most efficient way of
delivering benefits is through a Flex-plan. Indeed, Milton’s cost projections
showed clearly that the Flex-plan was the cheapest. This had an important impact
on our thinking. It meant that it would be extremely foolish for YUFA actives to
give up their Fixed Benefit Plan, which is exceptionally good, in order to
create a joint plan with retirees for whom the best bet, and only bet given the
costs, is a Flex-plan. It therefore seemed clear that YUFA should look to
setting up a benefits Flex-plan solely for retirees which would be distinct from
the YUFA active plan. However, a key issue remained unclear:
[1.1] If a Flex-plan for retirees were to be set up, should it cover
current retirees as well as future ones (i.e. YUFA actives who retire after the
plan is set up)?
The answer to this question is important for several reasons.
First, YUFA now negotiates a lump sum from the Employer to pay for retirees’ benefits, such as they are. How will a separate plan for new retirees impact on this particular bargaining need?
Second, current retirees have, on the face of it, a lot of money (even if it does not buy that much in terms of benefits). Not only do they have the lump sum which is negotiated in each Collective Agreement, they also have, although YUFA in fact controls, the monies in the York University Retired Faculty and Librarian Benefit Trust Fund (see Appendix A). How could the Trust fund capital best be used? To provide start-up monies for a comprehensive retiree plan? Or to continue to boost the coverage for current retirees, as it does now.
Third,
current members of ARF are, quite rightly, very protective of whatever benefits
that they have managed to extract and are very concerned about their dependence
on others (the Employer; YUFA actives) to continue them. At the very least, any
planning for, or thinking about a comprehensive plan for all retirees, would not
only have to promise improve the benefits which they have now but would also
have to assure them they cannot lose in the future what they already have.
Other questions which emerged from Milton’s cost projections, led to some
discussion around other questions:.
[1.2] A benefits fund for retirees would require a quick and large
build-up of capital in the very early years of the fund. How could this best be
done?
The contributions of current YUFA members could do this; so could the two YUFA
Trust funds (see Appendix A and B), and perhaps, some pension surplus. What are
the political, moral and financial implications of using these monies for this
purpose? Moreover, although it was clearly intended that the proposed benefits
plan would be financially and managerially independent of the Employer, the
possibility of a commitment from the Employer, perhaps for one-time only
funding, could be considered.
Regardless of whether current retirees are included in the new benefits plan or
not, any benefits plan would depend on the contributions of current active YUFA
members who, in effect, would be banking money for a pay-out in medical/dental
benefits when they retire. This raised a key issue:
[1.3] A retirees’ benefits plan, with voluntary contributions from
members, requires that the benefits be “vested,” that is, there has to be a
mechanism or institution which will insure that the fund pays out what it has
promised.
This problem was exacerbated because the spread-sheets of costings, regardless
of the particular assumptions on which they were based (inflation rates,
interest rates on capital, amount of current YUFA active contributions, and
possibly, current retiree contributions, etc.), and regardless of plan design
(flex-plan or fixed benefit) all reached a point down the line when outgoings
were greater than income. The plan eventually crashed. Obviously, outcomes could
be changed by changing the variables. However, this raised several questions:
[1.4] What should be the time frame for our proposed plan? Should it be
a plan only for the current cohort of YUF” members?
If not, how could the benefits plan be made to perform satisfactorily for a
longer period, and for as yet non-existent faculty members, given that the
modelling process, and cost projections, become less and less reliable the
further they are projected.
This problem was exacerbated because the plan was to be voluntary; at the
present time, there seems to be no way to make it compulsory. This not only
makes projections more difficult (impossible?), it also raises another issue:
[1.5] Given that the plan is to be voluntary and, yet, given that its
success will depend on maximum participation from current YUF” members, how
can such participation be obtained?
Milton’s cost projections were based on “full participation.” Why,
however, should a young YUFA member participate? Such a member could rightly
argue that s/he will invest his/her own money and then buy his/her own benefits
at age 65 or, simply, pay for whatever is needed when required. This means that
any YUFA plan has to provide, and be seen to provide, better benefits or lower
costs, for the average YUFA member.
What, though, is the average YUFA member? The goal of full participation from
YUFA actives also means taking into account the fact that individuals, and life
courses, vary.
[1.6] What will happen if a YUFA member leaves the bargaining unit or
leaves York University, before age 65? Should s/he be able to cash out? Continue
to contribute? When must a member join the plan? Could a person simply leave it?
The situation became more complex when Eckler Partners brought to our attention
the fact that there exists an Ontario Teachers Insurance Plan (OTIP) into which
any individual teacher can buy at retirement and so obtain extended medical
coverage with the option of dental benefits. The description of this plan is in
this file, although our documentation is both incomplete and somewhat confusing.
The benefits, although basic, appear affordable for an individual. This document
did, however, raise the following questions:
[1.7] Should YUFA investigate OTIP as a possible alternative to our own
self-funded retirees’ benefits package?
[1.8] Could YUFA perhaps join the OTIP as a “group,” thereby
allowing us to craft variations in the coverage which we could have as well
being more cost effective.
The OTIP plan is underwritten by Johnson’s Insurance which, in 1999, provided
costings for retirees’ benefits during YUFA’s negotiations with the
Employer. This material, now somewhat outdated, is in the file. Their data,
however, made it again clear that retiree benefits are expensive. Moreover, on
the surface, it appears that Johnson’s “plan,” is not as good as when
bought through OTIP’s. These tangents require further investigation.
However, given that, at the present time, more than 50 per cent of YUFA members
are over the age of 50 (Appendix C) it seems likely that there will be great
interest in any plan which YUFA can come up with.
2. How could a self-funded retiree’s benefit be structured and
managed?
The feature which will have the most severe impact on the costs of
setting up and maintaining the fund, and which also will have a severe impact on
obtaining full participation, is how the fund is legally structured and,
therefore, its tax status.
[2.1] Will members’ contributions be pre- or post-tax dollars?
[2.2] Will the interest from the fund which is set up to pay for the benefits be
tax-exempt?
[2.3] Will the benefits paid out from the fund be tax-exempt?
Clearly the most economical and popular structure would be one in which
everything is tax-exempt. However, this is not simple. For example, if YUFA set
up a simple trust fund, the interest earned would be taxable. This is a serious
a problem given that a large fund is required during the early years and much of
the interest earned on it would be dissipated in taxes. As another example, if
the benefits are to be tax-free, then, according to tax law, they have to be
paid either wholly by an employer; otherwise, they are taxed against the
employee. As a final example, if the employer paid into a YUFA fund with pre-tax
(non-taxable) dollars instead of paying the money to members as their salary,
then members’ pensionable earnings, and their pensions, would be would be
lowered.
To pursue what could be done and the possibilities, the Sub-committee met with
Michael Kainer (Sack, Goldblatt and Mitchell), who prepared an Opinion which is
contained in this file. Dated 12 July, 2001, Kainer explored the tax
consequences of establishing a post-retiree benefit plan in relation to a (1)
“fraternal benefit society” and a (2) “health and welfare trust.” In
addition, subsequent discussions with Kainer, Milton and Short also led to
explorations of (3) a “captive insurance arrangement”(i.e. off-shore trust)
and, finally, (4) an “internal fund held by the employer.” These options ,
their advantages and disadvantages, are excellently described in a report
written by Charlene Milton, 7 February, 2002 (in this file). Other options, such
as “a dollar bank” or “an internally-restricted fund” were not pursued.
In the former, the University would give dollars to retirees, according to years
of service, so that they could purchase what they want. This, however, is
“likely to attract adverse tax consequences.” From YUFA’s perspective, at
the moment, it also implicates the Employee too much in what ideally should be
an independent plan. In the latter case, the Employer would reduce
compensation/salary in order to fund future benefits. This too implicates the
Employer too closely and also attracts tax, either paid by the employer or
employee.
The fourth option, outlined in Milton’s letter, is managerially the simplest
and very tax effective. To pursue it, however, would require some basic
organisational co-operation (but not necessarily funding) from the Employer.
Because of this, several members of the Sub-committee (Marilyn Silverman, Penni
Stewart), YUFA’s treasurer (Perry Sadorsky) and Brenda Hart (staff), as well
as Charlene Milton and David Short (Eckler Partners) B with the approval of
Executive and Steering Committees B met with President Marsden (on 22 April
2002) to explore possibilities for the University co-operating, given its
tax-exempt status, with YUFA’s efforts. (The parameters which govern these
efforts, and some of the issues raised in relation to the University holding the
monies, was addressed in a letter from Michael Kainer, 4 October, 2001. These
are also addressed by the Milton’s above- mentioned letter.)
At the meeting with the President, David Short handed out a written summary of,
and spoke to, the issues surrounding our concern to deal with “the
concept of pre-funding retiree benefits via ear-marked assets of the
University.” How this might be done can be found in his document in
this file.
The Administration was represented by Lorna Marsden, Sheila Embleton (VP
Academic), Norm Ahmet (AVP Human Resources & Employee Relations) and Gary
Brewer (VP Finance). The issues/questions which they addressed were:
(1) the
impact of a sitting pot of money, with growing interest income, on provincial
grants;
(2) the liability for the pay-outs;
(3) the portability of the benefits so as not to constitute barriers to faculty
mobility;
(4) the possibilities that CAUT and AUCC could press for legislative changes
which might make
such pre-funded benefit plans more tax friendly; and
(5) whether the plan would sit inside the Collective Agreement.
In response to (5), YUFA said that it did not envision the plan inside the
Collective Agreement, as the aim was to make it independent of the bargaining
process. YUFA agreed that (4) would be desirable. YUFA also made it clear, as
per item 2.7 of Short’s memo, that governance and administration of the fund,
by YUFA members, was extremely important.
It was then agreed (a) that the President would check with AUCC, and that YUFA
would check with CAUT, to see if there are any other retiree benefit plans being
contemplated or in progress which are similar to the idea being proposed by
YUFA, and that this information would be exchanged with the Employer; (b) that
Brewer and Ahmet would explore the issue as soon as possible and get back to
YUFA; and (c) that Brenda Hart would serve as the liaison for the exchange of
information.
After the meeting, the YUFA contingent agreed that nothing more could be done
until we had heard from the Employer. It should be noted that at the above
meeting, discussion was centred on the general concept, not any of the details.
We are waiting for the Administration’s view of the concept. It should also be
noted that, regardless of the Administration’s response, there are other
models and possibilities which could be used for structuring a retirees’
benefit plan which have not been discarded by the Sub-Committee.
3. Conclusion
The Sub-committee has now completed its work; and I am preparing this
as a final Report for Executive should it wish to pursue the issue. My main
concern in this Report has been to avoid the technicalities of such things as
tax law and benefit plans and, instead, to provide an overview of the questions
which we asked and the problems which ensued.
In that vein, there are two further issues to append. First, according to Kainer
and Milton, YUFA, in trying to set up an employee, self-funded benefits package
for retirees is treading on unexplored ground. It was suggested at some point in
our deliberations that CAUT might be interested in our efforts.
We in fact collected data from OCUFA on post-retirement benefits at other
universities (in this file). Given the very limited coverage offered, it is our
conclusion that faculty members everywhere, as current or future retirees,
should be extremely concerned. Whether or not to approach CAUT formally was not
discussed.
Second, as we the Sub-committee was doing its work, we were made aware of other
YUFA members who shared our concerns with retirement benefits and who were
troubled that the work of the Sub-committee was not sufficiently transparent. A
copy of their joint e-mail is in the file. My response, at the time, was that
there was nothing as yet to be transparent about; that the Sub-committee’s
efforts were simply exploratory. Second, some current retirees, that is, members
of ARF, are extremely suspicious of our efforts. They are concerned that our
actions, or the outcome of our actions, will take away what they already have.
Given these two constituencies, I would recommend that the Executive Committee,
if it decides to pursue this matter, to take into account these concerns.
4. Recommendations
(1) That YUFA continue to pursue the possibility of a self-funded
retiree benefits fund;
(2) That YUFA explore with CAUT how to take up this issue in relation to current
tax law and possible changes in it;
(3) That YUFA simultaneously explore a liaison with OTIP, as mentioned above;
and
(4) That YUFA find ways of reaching out to a broader membership in order to
explore the response which establishing such a fund might have.
APPENDIX
A:
The York University Retired Faculty and Librarian Benefit Trust Fund.
Known generically as the “YUFA Retirees’ Trust Fund, this fund was
set up on 1 October 1999. It was funded by a part of YUFA’s share of the
monies received from its share of the Administration’s pension-contribution
holiday. Some of the money ($1,121,809) which YUFA received at the time were
allocated to retirees, through ARF (Association of Retired Faculty of York
University), by setting up the above-named Trust Fund. Its aim was to provide
supplementary health and welfare benefits. The fund is managed by five trustees,
three from YUFA and two from ARF.
The documents in this file include:
(i) The agreement setting up the Trust Fund, 1 October 1999, as executed by
YUFA. The agreement also notes that actions taken by the Trustees of the fund
“are subject to approval by YUFA” (p.20). This means that, legally, the fund
and its monies belong to YUFA, not to ARF nor to the retirees.
(ii) A document prepared by Mary Williamson, ARF, which amalgamates numerous
references to the Fund (1998-2000) which can be found in various ARF documents,
such as Minutes of meetings and its Newsletter. The general tenor of this
material suggest that members of ARF regard the monies in the fund as their own,
to dispose of as they see fit.
APPENDIX B:
The YUFA Trust Fund and the YUFA Foundation
The YUFA Trust Fund was set up on 16 March 1982 with monies which, each
year, the Board of Governors pays into the fund. These monies are the
Unemployment Insurance rebates for all members of YUFA. Since the beginning of
the Trust, rebates have been received in the amount of $885,500. At the
moment, the Fund receives about $50,000 per year; but this amount will
continually decline.
According to the Trust’s founding document, the funds are to be used
“for the purpose of providing benefits of any kind to or for the welfare of
Faculty members which may include donations to the YUFA Foundation in
the name of the Faculty members” (p.4). It also notes that the recipients of
the benefits may be “Faculty members and former members and the
beneficiaries” (p.7)
Some small sums over the years have been spent on, for example, providing
Faculty Club services. However, the bulk has been dispersed otherwise. In 2000,
the YUFA Trust Fund, though the YUFA Foundation, established
the York University Faculty Association Endowment which, with matching
funds from the provincial government, set up a scholarship/bursary fund for
undergraduate students. That same year, the YUFA Trust, via the Foundation,
paid $800,000 into the Endowment Fund.
There are many in YUFA who believe that the funds should be spent on ourselves -
particularly on retiree benefits.
Relevant Documents in the file:
YUFA Trust Document, 16 March, 1982
YUFA Trust, Report of Trustees, 2000-1.
YUFA Trust Fund, financial statements, 30 April 1999.
YUFA Foundation, financial statements, 30 April 2000.
APPENDIX C:
Age Distribution of YUFA Members, October 2000
Source: YUFA database.
>65 5
61-65 144
56-60 273
51-55 216
46-50 169
41-45 147
<=40 196