Power Pensions

Nova Scotia Power’s 2013 rate increase request includes a substantial element arising from serious funding deficiencies in its pension plan. The UARB has been hearing evidence on the request this week. Why is this a problem that customers should pay for?

The utility may be able to successfully argue that its management of the plan assets has been reasonably sound. But of course that is true of most of the pension plans that are in deep difficulty. All have been impacted by poor equity market returns, increased longevity of retirees, and a very low interest rate environment which increases the present value of future benefit promises.

In response almost all private sector employers have been making major changes to their plans to reduce the size and cost volatility of their plans and to involve employees more in risk sharing. Likewise the provincial government has made major changes to the Public Sector Superannuation Plan (PSSP) to reduce and control its cost. In New Brunswick a new era has been created for both public and private plans with employers and unions cooperating to control and manage benefit costs.

NSPI has a very rich defined benefit plan, more generous than the PSSP. The problems leading to this year’s cost increase were clearly identified in UARB hearings responding to rate increase applications in prior years. Yet it has made no progress in bringing its plan into line with emerging trends, and limply argues that if it did so the union would not like it. Apparently it does not feel responsible for controlling benefit costs.

But there is an even more important adjacent issue. NSPI carries over $2 billion of debt, money used to build power generation and transmission capacity. The vast majority of it is at interest rates much higher than will likely be available when that debt renews. For example a $300 million note at 6.09% renewing in 2013 and a $75 million note renewing at 8.43% in 2015 would, if renewed today, require much lower interest rates. Those same low interest rates that hurt its pension plan costs will be an immense help to its cost of debt servicing.

Beyond that the return on equity that NSPI has been allowed is based on an estimate of a “risk free” rate of return plus a margin for the risks that it takes. Given the major reduction in interest rates (Canada ten year bonds currently yield well under 2%, down over 2.5% over the last 60 months) surely a review of the return on equity should be part of the same evaluation.

Unlike most private sector and many public sector employers NSPI has failed to deal with its spiralling pension costs. It’s cost of borrowing benefits greatly from the low interest rates that contribute to those pension cost increases. It is not reasonable to ask customers (most of whom have no pension plan at all) to foot the bill.

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Reference Material

Pensions in Crisis

Voters trying to understand the various positions being advocated for the Canada Pension Plan have every reason to be confused.

The initial incarnation of CPP required only 3.6% of pensionable earnings as contributions, and provided benefits to people well before they had been earned. This was eventually repaired in the nineties; otherwise, the plan would have gone broke.

Today’s CPP provides a pension at 65 of up to $12,780, for which employees and employers annually contribute a combined 9.9% of pensionable earnings. It is simple and cost-effective, but even when combined with Old Age Security (OAS) it does not provide an adequate pension.

After fruitless discussions with the federal government, Ontario proposes to go it alone. Details are not yet finalized and the scheduled start is not until 2017, no doubt reflecting a hope that federal policy will change and save them the trouble. Ontario’s plan, mandatory only for those not already in a pension plan, would require a worker to contribute for 40 years in order to receive an unreduced benefit. The only examples provided on the Ontario website are for employees who work the full 40 eligible years.

The Canadian Labour Congress (CLC) has one of the many proposals to increase the existing CPP. The CLC loves to quote a 2014 Nanos survey in which 88% of Canadians support “increasing the benefits Canadians receive through the Canadian Pension Plan.” Of course the survey does not mention the corresponding need for a substantial increase in contributions, nor the 40 year wait for unreduced benefits. (The same survey makes the shocking discovery that most Canadians would like lower taxes.)

The strongest support for improving benefits was from the oldest respondents, who would get only small benefit from the CLC proposal. There is one group who should actively oppose it. Low income workers are typically able to receive the Guaranteed Income Supplement when they retire, in addition to OAS and a small pension from the present CPP program. An increase in CPP will be largely offset by reductions in GIS. This needy group will be paying something for nothing.

As a result, some proposals for reform, otherwise similar to that of the CLC, do not require contributions or provide benefits on earnings below $25,200. These proposals have considerable merit as a cost-effective and comprehensive improvement to retirement savings for Canadians. 

But that virtue will be much clearer to actuaries and economists than to voters. Most Canadians, given a clear and detailed understanding of proposed changes, would be much more tepid in their enthusiasm for a program that takes so long to mature.

Hence, the rather vague communications from the three political parties. One can search their websites in vain for any indication of what they have in mind.

The Conservatives have argued, incorrectly, that CPP contributions are just another tax. Unlike unemployment insurance, the CPP funds have for five decades been operated entirely outside of government accounts and are only used to pay CPP beneficiaries. Having been opposed to any change, the Conservatives now say that they are willing to consult Canadians about a possible optional program.

How that might work is anyone’s guess. It appears to be just creating a different RRSP opportunity. Are there limits on how much can be contributed? Is it optional for employers too? Are contributions locked in until retirement as is the case for the base plan? This “plan” does not offer much.

The Liberals favour a mandatory program. Liberal Critic for Seniors John McCallum points out that changes would require the agreement of two thirds of provinces with two thirds of the population, so an agreement would have to be negotiated. Their position would tilt toward a large amount of excluded earnings to protect low income earners. Good.

More troubling is that they are not committed to adequate funding, which suggests that they might , as happened with the original CPP, cheat young contributors by paying older ones more benefits than their contributions have earned.

The NDP, which might be expected to follow the CLC recommendation, is so far silent about what exactly they have in mind—although it will clearly be a mandatory program. Caucus Press Secretary Greta Levy promises that “The exact figures on CPP will be announced before the election as part of an NDP government’s approach to retirement security.”

So voters actually trying to understand this complex issue don’t have much to work with.

The Conservatives are trying to fog the issue by musing about a no-hoper voluntary plan.

The Liberals appear to prefer a mandatory plan, but have not drawn any lines in the sand about how it must look. They may be willing to consider an irresponsible funding choice, or to be pushed that way by the provinces.

The NDP say they have advocated a CPP expansion for years—as well as strengthening GIS and reverting the age of OAS to 65. This adds to a growing list of expensive promises with no indication of how they are to be paid for.

Today’s CPP plan is appropriately funded and provides a cost-effective but modest portion of retirement funding. A long term reform is possible that would allow that portion to become more substantial.

The Conservatives have no real intention of making any changes. The Liberals and NDP say they do, but if they choose a wrong model they could do more harm than good.

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