Auditor general calls for better management of public-sector pensions

Funding policy needed to assess sustainability
By Sabrina Nanji
|Canadian Labour Reporter|Last Updated: 05/20/2014

A pension storm is brewing in the federal public sector — and if policies and practices don’t change, the consequences could be dire.

This, the message from the auditor general’s latest report, could signal a turning point for public sector pensions as we know them.

In his report, auditor general Michael Ferguson looked at how the Treasury Board, the RCMP, National Defence and Finance Canada had carried out the key responsibilities to manage Ottawa’s pension plans for its public servants.

According to the federal government, its current net liability relating to these pensions exceeds $150 billion.

While Ferguson said all parties have carried out their responsibilities under the law, no one is responsible for carrying out a regular and systematic assessment of whether the government of Canada pension plans are sustainable over the long term.

"Pension plans are operating now in an environment where interest rates are low, and plan members are living longer," Ferguson explained. "It is therefore important that public sector pension plans be designed and managed in a way that considers not just present circumstances, but also protects the interests of current and future employees — and taxpayers."

The report indicated that, in the current climate, the risks to the financial position of the government could be significant.

Over the past three years, pension funds experienced funding deficits totalling $6.5 billion. Special payments were required to cover the gap and, for 2013, those payments totalled $741 million, according to the report. That equates to $1 billion over the last two years. While such a disbursement does not affect the government’s financial results, factors such as prolonged low interest rates, lower than expected returns on assets and increasing longevity could have a significant impact on pension liabilities and on the financial position of the government.

"We concluded that the current governance framework for the public sector pension plans, and the way it is distributed, needs to be strengthened to properly protect current and future employees, beneficiaries, employer and taxpayers," Ferguson said. "First, the plan sponsor does not address the sustainability of the plans. Second, the governance framework does not include a funding policy for the pension plans."

As well, the report indicated the parties involved did not do a sufficient job of informing stakeholders in a clear and consolidated fashion. Though there have been recent improvements to its practices, information on pension plans needs to be clarified and further improved.

No funding policy

What’s more is that the framework for running these pension plans does not include a funding policy.

A funding policy defines the funding objectives and guidelines of a pension plan. The Public Sector Pension Investment Board (one of Canada’s largest pension investment managers that funds the retirement schemes for the public service, Canadian Forces and RCMP) assumes the funding risks required to ensure the rate of return on assets set by the actuary are acceptable to the pension plans’ sponsor. Therefore, funding decisions could have an impact on the government’s budgetary framework and on employees and employers.

Ferguson recommended all parties finalize a funding policy for all three plans to better manage financial risks and to strengthen governance framework.

Real deficit $270 billion: C.D. Howe

According to Alex Laurin, pension expert at the C.D. Howe Institute (a non-profit third-party public policy think tank), the risks are much more dire than government forecasts. While Ottawa’s initial projections put its unfunded pension liability at $150 billion, Laurin argued that number is, in reality, closer to $270 billion.

The C.D. Howe Institute released a report in April, co-authored by Laurin, which noted assumptions behind calculations for the unfunded liabilities actually puts the number much higher.

"It’s all about where the risk falls. The risks are clearly on taxpayers," said Laurin. "Now that this is established, the funding policy should try to fully fund the pension promise."

He cited New Brunswick’s pension model — a shared-risk program — as an attractive rubric to address funding concerns, but called the federal government’s newly proposed target benefit model a baby step in the right direction.

"The funding risk is different, it’s allocated differently," Laurin went on to say. "With target benefit plans, the risk falls entirely on the members. Since the risk is allocated differently, there will be no funding problems because taxpayers will be protected…You take risks — and at best, you don’t profit."

Despite calls for, and recent moves towards, restructuring, labour leaders in the public sector maintain the plans are sustainable as-is, but that better oversight — particularly by a third-party advisory board — would improve their functionality.

According to Robyn Benson, national president of the Public Service Alliance of Canada (PSAC), the defined benefit pension plan is far from extinct. She cited the Air Canada model as one example. The airline reported a massive solvency deficit of $3.7 billion but, earlier this year, wiped that liability out. As well, federal government employees have made changes to address these concerns over the past few years, including pushing retirement ages later.

Benson said that as they currently stand, the pensions are 98 per cent funded.

"There’s an improvement in the investment returns and an increase in the long term interest rates," she explained. "People need to realize the average pension is about $27,000 a year and we’ve continually increased our contribution rates — we’re headed to the 50-50 mark soon. It’s about dignity and respect, it’s about knowing what you’re going to have."

As for the federal government’s recent proposal for voluntary target benefit models for its employees at Crown corporation and federally regulated businesses, Benson is wary.

"The target benefit pension looks, at first blush, very much like a defined contribution plan. You won’t know what you’ll be retiring on," she said. "Certainly I think the government has launched an unprecedented attack on retirement security. If they want to push target benefit plans, I think that’s going to be very, very difficult."