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August 06, 2014
Federal pension plans may need re-design, auditor general says

Canada’s public service pension plans may have to be re-designed to make them sustainable in the long term, Auditor General Michael Ferguson says.

In his spring 2014 report to parliament, Mr. Ferguson warned that the pension plans for federal public servants, the military and the Royal Canadian Mounted Police have total liabilities amounting to $152 billion, posing a threat to the viability of those plans.

According to his report, prolonged low interest rates, lower than expected  investment returns and increased longevity of pensioners “could have a significant impact on pension liabilities and the financial position of the government.”

Noting that the federal government “has a statutory obligation to pay pensions and is fully responsible for any funding deficit,” the auditor general warns that the plans may have to be “appropriately designed to ensure that policy options are in place to protect future employees, beneficiaries and taxpayers as well as the employer.”

The report noted that retired public servants are now living approximately 27 years longer than when the three pension plans were originally designed in the 1970s.  Further increases in life expectancy will increase the plans’ liabilities by between $4.2 billion and $11.7 billion for every one to three year rise in average life spans.

The pensions’ $152 billion obligation is the federal government’s second largest liability.

The auditor general’s warning has prompted some pension reform advocates, such as former Ontario Teachers’ Pension Plan President Jim Leech, to urge the government to consider adopting target pension plans.  Target pension plans blend elements of both defined benefit and defined contribution pension plans. Target plans pay a defined benefit, provided they have the financial solvency to do so.  With a target plan, pension benefits and contributions can be increased or decreased, based on the plan’s overall solvency.  

The government of New Brunswick is already considering adopting the target pension concept for its public service pension plan.  In addition, the federal Minister of State for Finance, Keven Sorenson, has called the plan an innovative third pension option that is neither defined benefit nor defined contribution in structure.

Many unions, including the Teamsters, the Canadian Union of Public Employees (CUPE) and Unifor oppose the concept, arguing that it would leave pensioners’ incomes vulnerable to the whims and financial well-being of plan sponsors.  They cite Nortel, the city of Detroit and General Motors as examples of plan sponsors that sharply cut their pensioners’ benefits when they encountered financial difficulty.

Pension primer

Defined benefit pension plans: 

  •  Pay a defined pension income based on a member’s earnings and years of service.
  • The plan sponsor manages the plan and is responsible for plan shortfalls and surpluses.
  • Used primarily in the public sector.

Defined contribution plans:

  • Pay a pension income based on member contributions and investment returns of the plan.
  • Both plan sponsors and plan members usually contribute to the plan.  Plan members often can choose to invest their funds in a variety of investment vehicles.
  • Used primarily in the private sector.

Target benefit pension plans:

  • Plans guarantee a specific payout based on the investment returns of the pension plan.
  • Contributions and payouts can be adjusted to reflect the solvency of the pension plan.  Poor investment returns could result in higher contribution requirements and/or lower pension payouts and vice-versa.
  • Adopted widely in Europe.  Some jurisdictions, such as the province of New Brunswick, are studying the concept.
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