English as a second language (ESL) has been a significant part of the Canadian education landscape for several decades, and its importance continues to grow with the increasing amount of immigration from countries where English is not the mother tongue. In addition, many individuals visit Canada for the primary purpose of learning English. This demand has spawned a thriving industry of dozens of private ESL schools, which range in size from those that operate with a handful of teachers to those with several dozen teachers. A few of the larger schools have multiple locations in different cities. These ESL schools exist separately from the conventional educational system of primary, secondary, and post-secondary schools. 

While practically all instructors in the conventional education system are covered by pension plans—be they defined benefit or defined contribution plans—the same cannot be said for teachers at ESL schools. While the number of ESL teachers is large and growing, there has been little coordination among teachers within and across schools. 

Five years ago, a group of ESL teachers formed the ESL Teachers Union (ETU) at a school in Vancouver. The idea quickly spread and the union now represents a significant proportion of ESL teachers across the country. One of the key reasons for the formation of the union is to increase the bargaining position of its member teachers to improve working conditions and compensation. After five years solidifying its position, the union executive decided the time had come to push for pension benefits for its members. 

So far, the ETU has had a good working relationship with the representatives of the ESL schools’ management, and the two sides have been able to resolve issues amicably. For the current pension negotiations, the ETU and the affected ESL schools have jointly hired you to prepare a preliminary report that provides fair and independent advice that will aid them in their negotiations. 

1. What amount should be contributed to the pension plan for each teacher? To be useful, this amount should be expressed as a percentage of a teacher’s salary. For this purpose, the two parties have agreed that reasonable parameters for estimating this amount are for a teacher at the beginning of his or her career who will spend 30 years as a teacher, 20 years in retirement, and annual pension payments that equal 2% of the final year’s salary for each year of service (i.e., a teacher who earns pension benefits for 30 years would expect to receive 60% of his or her final year’s salary). The average salary of an ESL teacher at the beginning of the 30-year working period is $35,000 and increasing by 2% in real terms. Inflation can be ignored. 

2. Should the pension be a defined benefit or defined contribution plan? How does this choice affect issue 1 above? 

3. The representative of the ESL schools proposes that the teachers be provided with an “opt-in” clause, whereby the teachers would by default receive their full salary as they have in the past, but if they choose to be part of the pension plan then their salary payments would be reduced in exchange for the future pension benefits. On the other hand, the ETU has proposed an “opt-out” clause, whereby the teachers would by default be enrolled in the pension plan; if they choose to opt out, they can receive the full salary as they do currently.

Required:

Prepare the report requested by the ETU and the ESL schools. Assume an interest rate of 6% for both investment returns and discounting.