Another Pension Bailout?

Posted June 7, 2010

Reporters and other keen observers know that a news release late on Friday usually means that the government hopes it will not get much attention.

Thus on April 30 there was a little reported story that the Teachers Pension Plan is to receive a modest extra payment of $1.5 million from the province because it is in deficit. This looks very small compared to the $536 million payment into the Public Service Superannuation Plan (PSSP) announced a few weeks earlier. The associated financial reports were only released in May and a much darker picture becomes evident.

Unlike the PSSP, the Teacher’s plan has received a number of prior extra payments, totaling over $400 million. So the accumulated total extra payments for the two plans is closing in on one billion dollars, or more than four years worth of the HST increase just imposed.

The financial statements for the Teacher’s Plan reveals a deficit at the end of 2009 of $1.274 billion. The April 30 letter from the trustee contained this optimistic statement:

“It will definitely take some time to recover from the effects of recent market conditions and restore the funded status of the plan, but it is moving in a positive direction.”

Most readers would conclude from this that it will only be a matter of time until investment returns solve the problem. In fact the most likely outcome is that it will get worse. The deficit calculation assumes that future investment returns will be consistent with historical averages. So it is equally likely that actual returns on invested assets will be better or worse. But because the plan is under funded, there will be no investment return on the $1.274 billion of assets that are not available to be invested.

So who owns this very large problem? As things stand taxpayers are responsible for half of it. Under an agreement between the teachers and the province, the pensions starting on or after Aug 1 2006 only receive indexing if the plan meets certain funding criteria. In a year (such as 2009) when funding is inadequate the taxpayer makes extra payments into the fund equal to half the value of the indexing that those pensions did not receive. Of course most of the pensions being paid started before Aug 1 2006 so the current year’s down payment was small—only $1.5 million. But it will grow very rapidly as more and more of the pensions are affected by the provision. If investment returns are consistent with historical averages taxpayers will end up with extra payments into the plan equal to half of the current deficit—$637 million—plus interest.

This is outrageously unfair to taxpayers, most of whom have no pension plan at all.

The current collective bargaining agreement between the teachers and the province expires on July 31, 2010. The next agreement must put the province in a position that restricts taxpayer liability to regular payments into the pension plan—which amount to almost 10% of salary, matched by the teachers. Provisions for early retirement and inflation indexing will need to be adjusted to bring the plan to a sound financial position. The resulting plan would still be among the most generous in the province.

Taxpayers have already made extra contributions to these two public sector pension plans of almost a billion dollars. It is time for taxpayers to get some relief.

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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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Most Recent Comments

  • Ernie my understanding is that over $400 million of extra funding has been put in by the taxpayer but none has ever been taken out.

    Bill Black

    Bill | January 17, 2011

  • This is a serious problem, has the NS
    government taken any monies out of
    the teachers pension fund over the
    years? Ernie

    ernie bolivar | January 17, 2011

  • I was just wondering what you think about the approach the Minister took with regard to the PSS Plan in his budget & the related changes put in place through the Financial Measures Act (FMA).

    More specifically, what is your feelings about the government of NS retroactively rewriting the employment (compensation arrangements) contracts of 30,000 retired and current public servants. These 30,000 Nova Scotians completed their part of the contract & because of the manner in which the plan benefit changes have been or will be implemented the NS government is reneging on its obligations.

    For example, a public servant who worked for the government for 30 years, did so under an emplyment contract that included the following
    – annual salary & benefits while employed
    – deferred compensation in the form of PSS pension benefits that included the following
    – basic pension of 2% per year X the average of the 5 highest years’ income
    – the above adjusted annually for CPI up to a max of 6%
    – a provincial guarantee that if the fund is not able to pay the earned benefits then the government will provide the funds necessary

    Now – one can argue that these are pretty good retirement arrangements compared to what other may or may not have, but the fact can not be ignored that these were legally contracted & earned benefits by the above individual with 30 years of service.

    I wonder how bond holders would feel if the government decided to unilaterally reduce the rate of interest they are prepared to pay on NS debt.

    Your thoughts please

    – on the NS government breaking a contract where the other party has already fulfilled its obligations under that contract?
    – and to add insult to injury, the FMA included provisions that eliminated the legal rights of the injured party to sue the government or anybody else for breach of contract.

    Claude thank you for the question.
    The Minister asserted his right as sole trustee of the plan to make the benefit changes. You may recall that Joan Jessome, who is never reluctant to assert rights contained in a bargaining agreement, was quoted as acknowledging that the Minister had the authority .

    Having said that I am sure there are many people like you who did not realize that these kinds of changes could be made. I am not in a position to know how well the possibility was communicated but I do know that most people do not tune into pension issues until sometime after age 50.

    Bill

    Hi Bill
    The following comments are provided “Without Prejudice”.

    First…I have been fully aware of the fact that such changes were possible to the PSS. What concerns me – & should concern anybody that does ‘business’ with the government of NS – is that obligations owed for goods & services provided may not be worth the paper they are written on.
    It appears many people do not fully understand the facts & background
    associated with the PSS plan and the fund itself or what the government has in fact just done.
    It is one thing to change benefits being earned prospectively, but quite another to change those already earned retroactively.
    I doubt you or any other Nova Scotians would like a past employer to unilaterally decided that they could not afford to compensate you the way they did, and retroactively claw back some part of the compensation or other benefits you earn long ago.
    What’s next…unilaterally cutting % rates on PNS debentures? Hey anything is possible.
    Next – NSGEU & the bargaining agreements are not relevant to my original question. All PSS retirees & many current active members are not & never have been represented by NSGEU or covered by the related
    agreements.
    Further, neither is/was relevant to the legal rights & interest of retired public servants to collect their earned retirement benefits.
    I would suggest that the Minister as sole trustee, did not have the unilateral right or authority to make benefit changes – otherwise there would have been no need for changes to be made to the PSS Act.
    It could be strongly suggested that the sole trustee’s responsibility would have included ensuring that the province (as sponsor of the PSS plan) completely & adequately met & fulfilled its obligations to the retirees & other plan beneficiaries as it relates to those benefits that had already been earned via the provision of pensionable time.
    The Financial Measures Act included provisions that were intended to
    eliminate/remove the rights of many now private taxpaying citizens of NS to hold the government legally accountable for fulfilling its contract obligations which provides evidence that the government was concerned that what it was doing amounts to breaking the employment contracts it had or has with approx 30,000 Nova Scotians.
    The fact is that retired public servants (at all levels) worked for years under an agreed upon employment contract which included the earning/accruing of retirement benefits (including guaranteed indexing and other benefits) that called for them to fulfill their part of the agreement & then the Province would fulfill/complete its obligations under those arrangements.
    Next – I agree with you that the communication around the ‘what & the
    why’ should have been much more thorough. The reality is, most people
    (including those affected directly & MLAs) likely did not fully & adequately appreciate the scope of the changes made (which go well beyond just indexing).
    Next – With regard to the $560m extra contribution, it should be noted that each year the government would have been charged interest on the PSS unfunded liability, so if they can borrow at a rate lower than that charged on its PSS obligation, there could actually be a saving realized as it relates to the calculation of the annual surplus of the Province.
    Last – Until the real facts behind this ‘transaction’ are known and understood, more fully & broadly I have no desire to have my comments
    included in any kind of public forum. I have seen first hand what happens to people who take a position contrary to a governing party or which may not suit the views of those members of the public who feel all current & past public servants are useless, overpaid, etc.
    So, now I am back to my original question….do you believe it is OK for the government of NS to renege on paying for goods & services already provided to used by it?
    Claude

    Thanks Claude.
    My view is that the government also has an obligation to taxpayers and that, without violating contractual obligations, it must balance those
    interests against those of pension plan beneficiaries.
    It is also my view that our democracy is enhanced when people publicly express views that are important but may not be popular with fellow
    citizens or the government of the day.
    Bill

    Thanks Bill….I agree fully…despite my initial concerns about participating in a public debate on the issueClaude

    Claude Carter | June 11, 2010

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