Posted August 15, 2012
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.
Related ArticlesPensions in Crisis
- The Teachers’ Plan Deficit Needs to be Addressed May 18, 2018
- CPP Changes: Don’t Pop The Champagne July 8, 2016
- A Weak Response to the Teachers’ Pensions Plan Deficit June 20, 2014
- Climate Change: Canada’s and The World’s Efforts Are Not Adequate April 12, 2019
- Ottawa’s Carbon Tax Does Not Do Much For The Planet October 26, 2018
- Conflict of Interest June 9, 2017
Voters trying to understand the various positions being advocated for the Canada Pension Plan have every reason to be confused.