COU Ending Mandatory Retirement Paper

September 30, 2004

The Honourable Christopher Bentley Minister of Labour 400 University Avenue, 14th Floor Toronto, Ontario M7A 1T7

Dear Minister:

I am writing as Chair of the Council of Ontario Universities to provide you with our perspective on the consultation paper, Providing Choice: A Consultation Paper on Ending Mandatory Retirement, which you released last month.

In the university sector, mandatory retirement has been integral to the essence of the employment contract for tenured faculty. More recently, it has played a key role in helping to develop succession plans and, therein, to provide a quality university education for the double cohort students. It also affects both pension and benefit costs significantly. Given these facts, the elimination of mandatory retirement would have a far more acute impact on universities than on any other sector in Ontario.

We believe that, if the elimination of mandatory retirement is to be applied to universities, a seven-year transition period is essential to allow Ontariouniversities to plan for such a change so that students are not adversely affected. As you may know, in the U.S., a seven-year transition period was provided to universities before the change was applied, to allow for policy and planning adjustments such as those noted above.

The attached COU submission, Ending Mandatory Retirement, elaborates on the key issues affecting our sector. It also describes the way in which this public policy measure has been addressed in other provinces and in the United States.

It was very helpful for a COU delegation to attend the meeting on September 13 with your staff and to provide them with our initial thoughts. We would be pleased to meet you and your staff to discuss our formal submission.

Yours sincerely,

Richard J. Van Loon

Chair

c.c. The Honourable Mary Anne Chambers, Minister of Training, Colleges and Universities

Mr. Paavo Kivisto, Deputy Minister, Ministry of Labour

Dr. Bob Christie, Deputy Minister, Ministry of Training, Colleges and Universities

Executive Heads

Dr. Ian Clark, President, COU

ENDING MANDATORY RETIREMENT

September 2004

Council of Ontario Universities

Conseil des Universités de l'Ontario

180 Dundas Street West, 11th Floor, Toronto, Ontario M5G 1Z8

Phone: (416) 979-2165 Fax: (416) 979-8635

Ending Mandatory Retirement

The Ontario Ministry of Labour's consultation paper on ending mandatory retirement, Providing Choice, requests input on issues raised in each of six broad areas that could be affected by ending mandatory retirement: economic impacts; labour market issues; employment issues; pensions and benefits; social and human rights issues; and occupational and sector specific issues. The paper also asks whether a sector may require an exception or special treatment, and if the latter, what type of special treatment.

Minister Bentley, in an open letter to Ontarians, stated that the government "is committed to giving Ontario workers the right to choose when they want to retire … without undermining existing rights or entitlements to benefit and pension plans" (emphasis added).

Key Issues

The areas of greatest interest to universities relate to: employment, pensions and sector-specific issues. They cover, for example, the impact on human resources practices as well as on pension plans and benefits, the costs to employers, and the impact on specific sectors such as universities.

Universities' Unique Employment Arrangements

Mandatory retirement in the university sector, unlike any other sector, has been integral to the essence of the employment contract.

• Universities are unique among employers because of their distinctive employment and retirement arrangements with academic staff. Retirement at age 65 has been fundamentally linked to the tenure system for academic staff, and to academic renewal. The system of tenure, which underpins academic freedom and ensures the public's confidence in the research and output of professors, operates on the assumption of a mandatory retirement age.
• There have been two decisions of the Supreme Court of Canada that specifically addressed university mandatory retirement policies and found that mandatory retirement was reasonable and justifiable in the university context due to the tenure system, the need for academic renewal and the necessity of preserving academic freedom by minimizing the use of "distinctive modes of performance evaluation." University policies in this regard were found to meet the requirements for protection under s.1 of the Canadian Charter of Rights and Freedoms. The Supreme Court decisions pointed to the need for universities to be centres of excellence, constantly replenished by the infusion of new faculty, new discoveries and new ideas. In both Supreme Court cases, mandatory retirement was also identified as key to long-term planning by both universities and faculty.

Ensuring a Quality Educational Experience for the Double Cohort Students

• The immediate elimination of mandatory retirement in universities would negate some of the extraordinary efforts that the Ontario government and universities have made in the last four years to plan for providing quality postsecondary education for the double cohort students.
• Retirement at age 65 has been a key planning assumption in the preparations for the double cohort. Securing the right mix of faculty through new hires is crucial to matching program offerings with student preferences.

Costs to Employers

• Significant numbers of senior faculty members, who tend to be most highly paid, will choose to remain in employment beyond age 65. By delaying the ability of universities to replace them with junior faculty, whose salaries are lower, there will be significant additional unanticipated salary costs, for which transitional funding assistance will be critical. 
• The attached Appendix illustrates the estimated financial impact of faculty remaining past 65 at Ontario universities.
  • If mandatory retirement were eliminated, by the fifth year the annual cost of compensation (salaries and benefits) will reach about $52million, and the cumulative cost over the five years will reach almost $162 million.
  • The compensation costs of the non-retiring professors in that fifth year would represent the compensation of about 572 Assistant Professors.
  • Put another way, for each $1 million spent this way, about 7.5 senior faculty will be retained, in program areas that may not represent areas of student and employer demand. For that same $1 million, at least 11 new faculty members could be hired, in high-demand program areas. Statistically, the new hires are more likely to be women and/or members of traditionally disadvantaged groups - the very groups that the Human Rights Code is intended to benefit. Whereas women and traditionally disadvantaged groups will represent less than 15% of retiring faculty, they will represent up to 50% of new hires. 
• This estimate of the compensation costs is only one aspect of the additional costs associated with faculty remaining past age 65. There are also the long-term financial impacts on pension plans, alluded to briefly above, and health and life insurance benefits. The implications include:
  • Under defined benefit pension plans, senior faculty could be induced to stay on in order to increase their pension entitlement. Those who have neither achieved 35 years of credited service nor met the new income cap by the age 65 will have every incentive to stay on in light of new federal pension regulations to be implemented by 2005. Universities with money purchase plans will also experience increased costs, as they will need to continue these contributions.
  • In universities where the full benefits packages were not available after retirement at 65, they will now have to be available to those who choose not to retire. The ratio of premiums to experience costs in supplementary health programs, is as much as 30% more for retired categories than those of younger groups. This will likely continue.
  • Life insurance premiums will increase since the average age will increase and the probability of experiencing a death while on active status will be higher, at amounts of coverage that are rather high, contributing to negative experience loss. Insurers can be expected to apply surcharges for insuring older faculty.
  • Long Term Disability (LTD) coverage costs will also increase. Currently, insured contracts provide for benefits to be paid until age 65 at the latest. If benefit payments do not end at that point, universities' LTD costs would increase substantially. Furthermore, unless legislation ends benefit coverage at age 65, if the insurers in order to contain costs were to refuse to provide benefits until death (or according to life expectancy tables), there will be grievances based on age discrimination.

• With tenure still in place, individuals are more likely to accept positions at other institutions while drawing pension benefits for one institution, thus contributing to increased "poaching" between universities. Therefore, the Pension Benefits Act needs to be amended so as to allow pension benefits to be paid as a second payor when an employee has access to a comparable pension plan with a new employer.

Transition Period

The need for faculty renewal, particularly through the period of the integration of the double cohort into the university setting, calls for special treatment in the form of a seven-year transition period to help ensure stability and security in the sector.

• It would allow universities time to make the adjustments necessary to ensure a quality education for the double cohort students. 
• It would allow universities time to adjust their compensation plans for academic staff to mitigate the impact of the elimination of mandatory retirement on pension plans. In this context, it is important to understand that federal tax law requires pension income to be paid starting at the end of the year in which age 69 is reached, regardless of whether the person is still employed. Non-retiring faculty members, and other broader public sector employees, will be eligible for both full salary and full pension at age 69 unless steps are taken to prevent this "double dipping" - the double payment of public funds. 
• Universities require more time than do most other employers to bring their policies into line with any potential changes to current policies because of the integration of mandatory retirement into the tenure system and into planning for academic renewal.
• When mandatory retirement for tenured faculty was eliminated in theUnited States, the unique position of universities was recognized and a seven-year transition period provided to allow for policy and planning adjustments. The American experience has shown that, overall, the average age of faculty is increasing as a significant portion of faculty retire beyond age 70, and that faculty at research-intensive universities are more likely to stay past the traditional retirement age. American universities offer early retirement incentive packages and adjust their pension plans to encourage early or phased-in retirement. All Ontariouniversities offer comprehensive pension plans for their academic staff.Ontario universities will draw on the American experience and use the transition period to make the required adjustments. A more detailed discussion of the effects of the elimination of mandatory retirement on American universities is presented below.

Other Provinces

• Other provinces that have eliminated mandatory retirement have introduced provisions that take account of the operation of pension plans and other special employment arrangements. In New Brunswickand Prince Edward Island, the legislation permits retirement at an agreed-upon age if there is a bona fide retirement or pension plan in place. 
• In Manitoba, the establishing acts of the universities have been amended to allow for retirement plans for academic faculty as provided for in collective agreements or board by-laws and to specify that these arrangements represent a bona fide and reasonable employment and occupational requirement for the purposes of the Human Rights legislation. 
• In Alberta, it has been held that in the university context it is "reasonable and justifiable" to have retirement at a specified age in light of the protections and benefits afforded to faculty under the tenure and pension systems. Based on the decision of the Supreme Court, theUniversity of Alberta has retained mandatory retirement, as has theUniversity of Lethbridge. At the University of Calgary, where mandatory retirement was eliminated in the 1980s when the Human Rights legislation was changed, early retirement packages have been used to encourage retirement at or before 65. Faced with rising costs, the University recently attempted to reinstate mandatory retirement in its collective agreement with faculty but was unsuccessful. The arbitration award, however, gave a lesser annual increase to faculty than they had requested to bring their salaries in line with the University of Alberta. The arbitrator's decision, leaving University of Calgary faculty salaries lower than University of Alberta's, was in recognition of the higher costs for the University of Calgary inherent in there being no fixed retirement age.

United States

• When mandatory retirement at age 70 for tenured faculty was eliminated in the United States in 1987, the unique position of universities was recognized and a seven-year transition period, to 1994, was provided before the change applied to allow for policy and planning adjustments. 
• As can be expected, studies of the impact show that more faculty are choosing to delay their retirement, and for longer periods. A major study published in 2000 based on a survey of retirement ages at universities over the period 1987 through 1996, shows that while the majority of faculty still retire prior to age 70, there has been a notable increase in the portion staying into their 70s. 
• This study further revealed that faculty at research-intensive universities are more likely to delay retirement past age 70. This confirmed an analysis of the findings of a survey conducted on behalf of the American Association of University Professors, which showed that doctoral institutions were more likely to report that a greater proportion of faculty were staying on beyond age 70 and that "it is the doctoral institutions that need to worry the most about the implication of the end of mandatory retirement." 
• This suggests that a similar pattern of delayed retirements can be expected at universities in Ontario. The Ontario Human Rights Commission noted in its 2001 report on mandatory retirement that "in workplaces and jurisdictions that do not have mandatory retirement, very few workers choose to stay past age 65 and those who do tend to retire within a year or two". The American experience indicates, however, that while this observation may be applicable generally across all employment sectors, it will have less validity in the university sector.
• American universities are increasingly using faculty retirement incentives to encourage retirements. A comprehensive survey of retirement policies at public and private American universities with 75 or more full-time faculty indicates that 46% have had one or more financial incentive programs since 1995 that encouraged tenured faculty to retire prior to age 70. These incentive programs often take the form of increments to annual retirement benefits or lump sum cash payments. Doctoral institutions were more likely to have such programs than other types of institutions, with 60% of private doctoral institutions having retirement incentive programs. 
• This demonstrates that American universities have generally tried to reduce the number of faculty staying past the traditional retirement age by offering early retirement incentive packages and adjusting their pension plans to encourage early or phased-in retirement. Such adjustments take time to implement and have an impact, and are, in themselves, costly.

Conclusion

Elimination of mandatory retirement would have a far more acute impact on universities than on any other sector in Ontario. It would disrupt employment arrangements at universities, create significant additional unanticipated salary costs, raise pension plan costs dramatically and increase the costs of benefits sharply.

These factors speak to the need for excepting universities from such a change. At a minimum, a seven-year transition period is essential to permit universities to plan for the impacts of such a fundamental change to their operations so that students are not affected adversely. Universities should also receive full compensation for the incremental costs which would result from the elimination of mandatory retirement within the sector.

APPENDIX

a) Planned retirements - based on a survey of universities - based on current age of faculty and actual retirement plans

b) Model used assumes that 30% reaching 65 each year will choose to remain - most for at least one year, a lesser portion for two years, then three years, etc.

c) Average compensation costs (salary and benefits) were estimated at $125,000 in 2005 and escalated by 3% annually thereafter. The total is an estimate of the compensation costs of the portion of senior professors reaching 65 who may choose to remain over all or a portion of the five-year period, estimated to be the equivalent of 368 professors.

d) To estimate the number of Assistant Professors that could be hired with these funds, average salary and benefits were estimated at $80,000 in 2005 and escalated by 3% annually thereafter, then averaged across all five years at $90,570.

These are estimates applied to the system as a whole. They may or may not be applicable to each individual university, and therefore have not been applied to each university. Factors that will affect each individual university's situation include:

1. Estimates of the portion of retiring faculty who may choose not to retire.

2. Average (and specific) salary and benefit levels for retiring senior professors.

3. Average (and specific) salary and benefit levels for new Assistant Professors.