A proposal to Ms. Nora Sanders, General Secretary,
The United Church of Canada
by Unifaith Unifor Community Chapter July, 2019
Ways and means to honour the pension covenant
between The United Church of Canada and Pension Plan members,
achieve an upgrade for pensioners, and protect members from inflation
1. The Covenant
The Pension Plan is a crucial feature of compensation for United Church of Canada employees and their families, and therefore both a justice for retirees, especially those retired since 2009, and a com- ponent of the Church’s recruitment of new personnel. Personnel who have been retired for the last ten years have been more and more stressed to see their pensions remain flat throughout that time. Meanwhile, those being commissioned and ordained are required to sign the pension covenant, as you know, and many starting ministry then harbour the vague, and comforting, idea that while com- pensation for ministers is modest, the Church is looking after their retirement years. The Pension Plan is not a vague concept to the Pension Board or the General Council, but rather a strict, legal obligation of the employer. And these days, it may be an obligation that seems to be more and more onerous and precarious, as the number of retirees has greatly overtaken that of active personnel. Unifor Unifaith Community Chapter offers the following analysis and recommendations to you, the Pension Board and the General Council Executive (as Plan Administrator) in partnership and hope.
Despite its success in growing the Fund in recent years, the Board has not granted a pension increase (or “upgrade”) since 2009, when prior to that pension increases had been routine, usually every other year. While no increases in this period has been true for some private sector plans, Unifaith has learned that some plans have found ways to protect retirees from inflation (by granting increases). Unifaith would be pleased to connect United Church of Canada Pension Plan officials with the experts we consulted to discuss the options for the Plan listed below. Unifaith believes that this ongoing fund- ing challenge need not, and should not, be borne by the Administrator or Pension Board in isolation. Unifaith Executive Board members, with hundreds of years of church leadership among us, know that awareness of the experience of retirees by congregations at the local level is mixed, but on the whole low. Most church members will not realize the real and growing stagnation of the retirement income of Plan members. Congregational treasurers and Finance Committee members, though they are more familiar with the Plan as they budget for premiums for their staff each year, may not realize the cur- rent pressures faced by pensioners or longer-term challenges for the Plan itself. Since the pension plan is a component of remuneration, then it is only reasonable that the congregations who negotiate terms of employment with their clergy be aware of the state of the pension plan.
In other words, Unifaith believes the wellbeing in retirement of United Church ministry personnel and other workers is a concern that needs to be brought to the Church as a whole. If the Plan is unable to offer upgrades, Unifaith believes that this funding challenge must be made clear to everyone –
retirees, those still working, and especially participating congregations. Unifaith is aware that the Church has other, historic obligations and commitments that require substantial resources, such as those to Indigenous peoples. We do not suggest that the needs of ministry personnel take precedence over them. Rather, we encourage the General Council Executive to present its ongoing commitments to the whole Church, in the belief that members will seek to honour them all. The wider Church rallied in an earlier era to aid retirees struggling with inadequate pensions. It is likely to answer that call again, if asked.
Unifaith recommends that the current challenges to the Pension Plan be shared with all participating Communities of Faith, and their Regional Councils.
2. Characterization of the Plan
a. Defined or targeted?
The United Church Pension Plan is a Defined Benefit (DB) plan registered in Ontario. (Also, the Church registered it as a Multi-Employer Plan. We return to the implications of this designation in section 2. b. below.) While this Defined Benefit designation is still technically true, Unifaith discov- ered changes to the Pension Plan over the past decade and a half that have reduced the obligation of the Administrator such that it feels more and more like a Defined Benefit plan in name only. We un- derstand the context: the Board and the General Council are anticipating adverse financial conditions for the Church as a whole in years to come while seeking to fulfill its continuing obligations through a sustainable Pension Plan. The effect of the Administrator’s various changes to the Plan in recent years, however, is to shift the risk to past, present and future employees away from the employer and to the financial market. (Permission to reduce United Church pensions if the need arose was intro- duced in 2003. Permission to reduce pensions “at the discretion of the Board” was sought and granted several years later.) This type of shift seems to Unifaith to be antithetical to the Pension Plan’s State- ment of Beliefs and Guiding Principles, adopted in April, 2019: “#10. Demographic, market and interest rate risks should be borne by the pastoral charges and other participating employers.” Pension pay- ments now rely mainly on performance of Plan investments with the employer contribution being modest, in percentage terms. Employees don’t make investment decisions for the Plan, of course; they are made by the Pension Board and the Plan Administrator. Unifaith believes that things could be different, and urges the Pension Board to recall that it is not alone in facing financial pressures on the Plan.
Unifaith recommends that the Pension Administrator uphold guiding prin- ciple #10 such that the risk of low investment returns of the pension funds be borne by the Pension Administrator and participating employers.
We believe that United Church members will embrace this Guiding Principle and make provisions so that their ministers and other faithful staff will receive the livelihood in retirement they have been promised.
b. Single or Multi-Employer?
Characterization of a pension plan as a multi-employer plan may mean different, perhaps weaker, responsibilities for the Plan Administrator than those of a single employer plan under pension law. (Pension law governing multi-employer plans is more vague than that governing single employer plans.) Also, Unifaith is concerned about the protection Plan members have if the Plan were to wind up due to bankruptcy since the Ontario Pension Benefit Guarantee Fund applies only to single em- ployer plans. Unifaith believes that United Church workers actually have a single employer given that it appears that all participating employers are affiliated and/or related to the United Church such that a possible insolvency of the United Church would adversely affect all other sponsoring employ- ers immediately and directly. Unifaith is concerned that the Plan sponsor (The United Church of Can- ada) is using the Plan’s multi-employer designation as an excuse to reduce accrued benefits. (This designation also prompts consideration of a call for a jointly sponsored governance approach with collective representation or an 'aggregator' of plan member preferences on majoritarian principles. After the Board has considered how to achieve an increase in pensions and some provision for infla- tion protection for Plan members, governance would be a topic for a subsequent discussion between Unifaith and the United Church with a view to improved representation of Plan members’ interests.)
3. Funding future pension liabilities
a. In surplus or in deficit?
Is our Pension Plan in surplus or in deficit? The Pension Board has worked hard to get the Fund back above 100% of anticipated liabilities despite refusal of the General Council Executive to contribute any more than the modest $14 million coming from the employer (through congregations and other employing units) collectively. The Board’s strategy to include 60% equities in the asset mix has been lucrative in recent years, but it is also potentially risky, should there be another market reversal. The December 31, 2016 valuation of the plan as being in surplus, however, is dependent on no allowance for cost of living increases to pensions (PCOLA). The 2015 Fund valuation includes a note from the actuaries explaining that they were specifically instructed not to include a cost of living increase in pension benefits. Unifaith recommends a change in this practice for the next valuation. The Pension Board can only gauge the affordability of any possible pension increases (and the possible need for additional contributions) if the valuation it requests is prepared with inflation protection in mind.
Even though routine pension increases are not mandated in the current Pension Plan, there is a long history of granting pension upgrades, usually biannually, until 2009, ten years ago. With the passing of Unifaith-sponsored Proposals by the 43rd General Council, the Church has been asked to consider options for a cost of living increase going forward. A new valuation including inflation protection such as a cost of living allowance would, perhaps, reveal a much smaller surplus, or even a deficit. This would preserve the original and underlying promise of the Pension Covenant by permitting ad- ditional contributions by the employer within current Pension Regulations to make up a deficit.
Unifaith recommends that the next actuarial valuation of the Pension Plan be carried out with a cost of living allowance included, at various levels of indexing (for example, 50% and 100%).
b. If our Pension Plan is in deficit
The Board has stated in its communications with members that it is not permitted by pension law to inject funds from other sources into the pension fund. Unifaith discovered that the Church does have the option, in compliance with government guidelines and as noted above, of adding to the Fund if a valuation reveals a potential shortfall. In fact, as the Board now acknowledges in a recent communi- cation to members, it is mandated to do so, and pension law allows this to happen by “any affordable means”. Also, Unifaith believes that The United Church of Canada has the ability to make changes to the pension constitution to allow for further sources of contributions, other than member and em- ployer, as currently stated in our Basis of Union (16.3)
c. If our Pension Plan is in surplus
Where the plan has an actuarial surplus, paragraph 147.2(2)(d) of the Income Tax Act permits an excess surplus (anything greater than 125% of going concern funding requirements) to be used to:
• fund new or improved benefits;
• offset against the employer's obligation to fund benefits; and/or
• provide a refund to the employer or members.
The 2016 valuation showed the Plan at 129% of going concern funding, a healthy surplus, and it is entirely possible that the next valuation will also show an excess surplus. If this is the case, the Church can afford a “new or improved benefit” of inflation protection (such as a PCOLA) for pensioners. Uni- faith seeks to serve the mutual interests of both active plan members (through bringing adjusted pensionable earnings up to current levels of inflation) and retirees or beneficiaries (in a conditional or formulaic approach to indexation). These are considered in section 4, below. Such improvements are likely to require both changes to the funding policy of the Plan and by its redesign.
d. Other options
Outside the registered Pension Plan there are still further valid options for the church to give retirees an increase in their income:
a supplemental plan, or it’s close cousin,
a Retirement Compensation Arrangement;
a group RRSP/TFSA (for clergy to add to their own savings for retirement with very low management fees, perhaps under one half of one percent, based on size of the pool and negotiation by the Church.)
Unifaith suggests that new money (such as a share of proceeds of sales of church properties) be allocated either to supplement the existing Pension Fund or develop additional funds for distribution to retirees, and that this be explored urgently, with the need for innovation on pensions being pre- sented to the Church as a whole, together with the most likely options for achieving upgrades.
4. Improving Retirement Pensions
a. Increasing monthly Pension Benefits
The facts are revealing: at year end in 2015 the average monthly lifetime pension of pensioners or survivors was $1,074.92. And with no pension increases since 2009, that amount remains unchanged for those retired at that time. If the history of increases to pensions had continued past 2009, at the rate of 2% bi-annually, that pension amount would be over $1,185 by now, an extra $1300 per year. And if pension increases had kept up with inflation (using the Bank of Canada’s consumer price in- dex), that pension amount would be closer to $1,280 per month, or $2600 more per year.
Their precarious financial situation leaves many retirees who are dependent on United Church pen- sion benefits feeling exposed and vulnerable, and often very willing to share these feelings. No in- crease for ten years now has made the situation more and more dire. Learning that pension income would not, in fact, be sufficient for their later years has been a rude shock for long time servants of the Church who signed up to the Pension Plan decades ago with a very different understanding. This goes to the issue of trust between Plan members and the Administrator, explored in section 5, below.
Unifaith recommends a commitment by the United Church of Canada to consistent cost of living increases for retirees, even if only a portion of an- nual inflation.
The pension experts advising Unifaith have the advantage of familiarity with many plans. They point out to us that some employers use an indexation reserve account while others implement conditional indexation of retirement benefits to achieve inflation protection for their retirees. In other words, there are various ways of providing increases for our retirees on pension; what’s needed is the Pen- sion Administrator’s willingness to openly explore such ideas.
b. Upgrading adjusted pensionable earnings
In calculating retirement pension benefits as a hoped-for percentage of income, prior pensionable earnings of those still working are adjusted for inflation. However, the inflation adjustment of the Plan has not been updated since 2006. So for the average member retiring this year, a retirement benefit goal of $1,074.92 would have been closer to $1,275 if the adjusted pensionable earnings had been kept up with current inflation. (Accrued pensions have, indeed, risen since 2006, thanks to sal- ary increases.)
The stagnation of the reference point year means that the Board’s target for income replacement with one’s pension of 50-70% of pre-retirement salary is actually in steady decline. Leaving the reference year fixed seems to Unifaith one more strategy to soften the Pension Covenant by avoiding an obli- gation to maintain the purchasing power of the Plan. Active Plan Members continue to tell us they are upset when they discover this slow deterioration in the pension. If the Board is asking Plan Mem- bers to accept a gradual lowering of the target for income replacement, it should communicate this to members and employing units in a straightforward manner.
Unifaith recommends a commitment by the United Church of Canada to re- sume updates of the salary reference year on a regular basis.
Despite the erosion of pension purchasing power, Unifaith heard from many pensioners that they are comfortable in retirement. This tends to be true when they have more than one source of household income, such as the pension or savings of a spouse. Others, however, especially those living only on the United Church pension and government-sponsored retirement income told us they are struggling
more each month to make ends meet. We have been saddened to hear their stories, and believe the whole Church would share our dismay about distress being experienced in retirement by those who had served it faithfully.
c. Going Concern and Solvency Funding
The affordability of pension increases and upgrades depends in large part on how well the Pension Plan is funded. To avoid surprises, pension plans are valued in two ways: one, in the expectation that the Plan is part of a “going concern” that will continue to operate (and receive premiums from plan members in years to come), and the other as if the Plan will have to stand on its own as the organiza- tion that set it up winds up its operations—a solvency valuation.
i. Going Concern Valuation
At December 31, 2016 the Plan was at 129% funded ratio, meaning it had a $350 million funding excess on an ongoing basis (and 110% funding on a solvency basis). The going concern liabilities for accrued benefits were just above one billion. Unifaith understands that a one-time increase in ac- crued pensions of 10% would cost about $100 million, leaving an ongoing surplus of $250 million. While these amounts will have changed since the end of 2016, it would seem that the Church has room to move on a significant upgrade.
A substantial increase would do much to ease the finances and suffering—in some cases severe suf- fering—of United Church pension recipients and would serve to uphold the covenant with members by providing a significant source of retirement income. The Administrator’s reliance on solvency val- uation may be one reason that there has not been a pension increase.
ii. Solvency Valuation
At December 31, 2016, the Plan’s solvency ratio (110%) equalled threshold for Plan funding the Board set itself to deliver a benefit increase. While we don’t know the 2018 ratio, markets have con- tinued to rise, and yet there has been no pension increase. The regulatory environment has changed in recent years, though. We have learned that some Canadian jurisdictions (including Ontario) have shifted from reliance on solvency valuations to a reliance on a now more regulated going concern valuation as the cornerstone of their funding legislation. In this new regulatory environment, funding of solvency deficiencies by the employer is only required when the ratio drops below 85%.
A new valuation will confirm how comparable the Pension Board’s approach is to that of the regula- tors. While solvency funding is not now required when the solvency ratio drops below 100% we do see some merit in keeping the ratio at or above 100%. Solvency ratios will start to increase as the economy moves away from a low interest rate environment. It is possible that a good portion of the lost decade of pension increases can be recovered. Even using a 100% ratio (not 85%, as now legally permitted) gives the Administrator a sizable surplus with which to be creative in the delivery of an upgrade.
5. Maintaining Trust
The Pension Plan commits the United Church to very specific obligations toward its current and re- tired personnel. The Board’s Statement of Beliefs and Guiding Principles, adopted in 2005, and in par- ticular principle #11 and principle #16, spelled out this commitment: “The Plan should provide a life-
long retirement income for the member…”; “Retirement income from the Plan should maintain its real value over the long-term subject to available funding.” These seem to Unifaith principles to which United Church members and adherents would readily agree even in the face of the current invest- ment environment. The 2019 version of the Statement of Beliefs and Guiding Principle, however, has pulled back from the assurance of the former principle #16 about maintaining real value over time. The 2019 Statement is silent on inflation protection, and emphasizes that responsibility for a Plan member’s retirement income is now shared (between the Plan, government pensions and members’ individual savings).
Our investigation into earlier versions of the Plan revealed that despite the clear 2005 beliefs and principles, the Board had been changing the language of the Plan for many years in response to the pressure of anticipated future liabilities rather than exploring ways to grow the Fund. It made all but one of these changes without consultation with Plan members, or even advising them, as far as Uni- faith can discover. As noted earlier, the Board interrupted its practice of updating the reference year for pensionable earnings adjustments in 2006, meaning that the retirement benefit calculation stayed frozen at the 2006 inflation level even as salaries for active ministers (and inflation for pen- sioners) continued to rise. Various other unannounced changes to Plan language seem to experts we consulted intended to avoid future legal claims by Plan members. Unifaith is disappointed that the Plan Administrator chose this course of action, rather than sharing the problem and challenge with members and the Church as a whole. Learning after the fact, for instance, that the Board can now reduce pensions “at its discretion” (as permitted by a recent change to the Plan) diminishes trust, even if it is permitted in law. The Board did consult with Plan members when it sought to increase premiums and decrease the rate of post-2013 pension accrual to ease pressure on the Fund. (When asked to direct a phase-in plan for the ensuing single year large contribution increases, however, the General Council decided to “take no action.” GC41 ROP p 209: HAM4 – Pension Plan Changes.)
The Board’s response to Unifaith’s disclosure of these changes has been puzzling. Instead of explain- ing why it sought permission to reduce pensions at its discretion, the Board asserts that the changes are permitted by pension law, and adds that there is no plan to reduce benefits (even if only, accord- ing to a recent issue of Connex, because this cannot be done legally in all provinces). In response to our call for more creativity in protecting Plan members from inflation, it has up until now insisted that pension legislation forbade it adding any funds to the Plan. We believe the Board when it says it wishes to protect existing pensions. We believe it has the interests of Plan members at heart, but so does Unifaith, an association of those members. We also believe that it would be preferable for the Board and the Administrator to explain both their fiduciary responsibility and the fiscal challenges they foresee in order to maintain trust between it and Plan Members, and engage the wider church (including associations of ministers) in a search for creative solutions. We believe that there needs to be a more meaningful explanation of the need for this change, other than that it had become legally permissible to do so. If there is a good explanation, let members hear it. If there is not:
Unifaith recommends the Pension Board begin to rebuild trust by going back to the 2003 language of the Pension constitution whereby pension en- titlements may only be reduced where necessary to avoid revocation of the Pension Plan’s registered status.
6. The Spirit Not the Letter
The original goal of the Pension Plan was to give United Church employees an adequate and reliable income in retirement. Amendments by the Board that weaken this commitment or shift risk to Plan members may be legal, but they seem to Unifaith to breach the spirit of the Covenant. As an associa- tion of ministers and other employees, we care about the United Church as a whole. Lifting up the interests and wellbeing of Church employees is to us a valid and necessary contribution to the inter- ests and wellbeing of the Church itself.
Unifaith has been receiving analysis and interpretation of the Plan and ever-changing pension legis- lation from experts experienced in both. While the Pension Board declares that it is following the only course of action permitted by law and the state of the fund, Unifaith has discovered and the Board now acknowledges there is latitude, permitted by legislation, in characterizing the state of a pension, making up a shortfall, and changing pension plan language. We encourage more openness on the part of the Board about choices it is permitted, together with the reasons for its choices.
Unifaith asserts that some solution (or solutions) can and must be found to allow the United Church to uphold the Covenant with its nine thousand Plan Members, restore the trust of those members, and ease the worry and dis- tress of those relying on the Plan by improving pensions.
Unifaith believes that our recommendations would lead to an overdue correction after a ten-year absence of inflation-related upgrades, enhance inflation protection in years to come, and restore con- fidence in the Pension Plan on the part of members. This will benefit Plan members, and also The United Church of Canada. We wish the General Secretary very well as she prepares her report to the General Council Executive on these important matters.