The Globe and Mail by Jana Steele 25 May 2015
Historically, governments have been reluctant to implement significant pension reforms, preferring instead to kick the pension can down the road. Because pensions have such a long life, it may have been perceived as more expedient to tackle other priorities and leave pension issues for future generations to deal with. More recently, however, we have seen Canadian jurisdictions begin to grapple with these changes.
You can generally put pension reform into three buckets: those aimed at strengthening government-sponsored pensions; those aimed at strengthening private-sector pensions; and those aimed at public-sector pensions.
The recent Ontario Retirement Pension Plan platform is an example of a reform aimed at strengthening universal government-sponsored pensions. The federal government has taken the approach that private-sector pension expansion is needed; it has encouraged pooled registered pension plans and is looking at introducing legislation for target benefit plans.
Public-sector pension reform is another story altogether. Some provinces have examined their fully indexed, final-average defined-benefit public-sector pensions and determined that they’re unaffordable or unsustainable. For example, New Brunswick has reformed many of its public-sector pensions in recent years. Some plans have been converted from defined benefit to a more sustainable design known as shared-risk or target benefit. Under this design, indexation is paid only when the plan can afford it. Also, the pension formula is generally based on career average, as opposed to the more expensive final average formula. Importantly, the design is such that the government’s costs are certain – it knows what its liability will be from one year to the next.
Contrast the target benefit design with the more traditional indexed final-average DB design for public-sector employees. These plans do not have cost certainty, as the government has to pay whatever is required to fund the generous benefits tied to automatic increases in pensionable earnings. Most of these DB plans were established in a different era; some may need to be re-examined in light of current economic and demographic realities. For example, longevity has increased significantly, yet retirement ages and indexation provisions under many pension plans remain unchanged.
In Alberta, the previous government had indicated that public-sector pension reform would be addressed. This may have included changes to governance structure as well as benefits to address sustainability. With the recent change in government, all eyes are on Alberta on many issues – will public-sector pension reform remain a priority?
Pension reform is needed for some public-sector pensions to be sustainable and affordable. The health of a pension plan is invariably measured at a point in time and can change significantly from one valuation to the next, depending on many factors, including interest rates, mortality and investment returns. Responsible design reforms would ensure that when the plans can afford more generous benefits, they will be paid, but when the plans cannot afford more costly benefits, such as indexation, it will be trimmed back. Pension costs would be shared and government costs would be certain.
Public-sector pensions should not be eliminated. To the contrary, many of their successes should be benchmarks for the private sector, provided that the design is affordable, sustainable and does not promise more than can be delivered. In some cases, this will require change to reflect new realities. Alberta’s new government should continue on the reform path. This would include dialogue with all parties to develop governance and design changes for public-sector pensions.
Embarking upon pension reform in the public sector is always a political exercise. It has been successfully implemented elsewhere, and we hope that Alberta’s new government won’t opt to kick the can down the road.
Jana Steele is a pension partner at Osler, Hoskin & Harcourt LLP. She has provided advice on the conversion and implementation of the innovative shared-risk pension model in New Brunswick.