PETER DOLEZAL: Public sector pensions coming under pressure

Alberta has just announced its intention, through legislation in 2014, to implement major changes to its various Public Sector pension plans

The third province in recent years to do so, Alberta has just announced its intention, through legislation in 2014, to implement major changes to its various Public Sector pension plans. The province’s current unfunded liability in these plans stands at $7.3 billion.

This massive funding shortfall is the key reason for proposed drastic changes to the level of future benefits, the degree of inflation protection and pension penalties assessed for those retiring before age 65. Alberta expects to implement these changes in 2016. Pension values earned by employees before the changes are implemented  would be protected.

Alberta’s planned pension reform follows those of Ontario and New Brunswick. Ontario’s pension funding shortfall stands at $9.6 billion; New Brunswick’s at $1 billion. To date, both provinces, seeking to avoid an imposed solution through legislation, have instead engaged their unions in negotiated changes.

Should the Ontario Conservative party win the next election, its leader, Tom Hudac, proposes that Ontario’s public sector pensions should move toward the more sustainable model of defined contribution plans, rather than the current, very costly defined benefit plans. Unlike the current guaranteed level of benefits, a defined contribution plan would base the level of pension payments solely on the plan’s investment returns.

The federal government’s last budget also incorporated substantial changes in Federal Public Sector pension plans. Slated to commence in 2014, these changes will impact primarily future employees. The changes will ease the Plan’s future funding deficiencies without further taxpayer-funded remedies.

In the next five to 10 years we can expect this reform in public sector pension plans to continue to accelerate, with strong taxpayer support. Even with substantial modification, public sector plans will remain far richer than the few in the private sector, where in fact, some 75 per cent of employees have no employer-sponsored plan.

In B.C., where do the various public sector pension plans stand with respect to their funding sustainability? To the great credit of the B.C. Government, its unions and the Plan’s Trustees, the B.C. Pension Plan, despite its defined-benefit characteristic, is possibly the best-funded in Canada. Across its four major public sector plans, the average funding deficiency stands near zero.

Why is B.C. so different? Aside from delivering an unusually consistent and solid track record of investment returns, the plan is set up on a pre-funded basis. Contribution rates for each group and generation are set to fully pre-pay their future benefits. For example, the B.C. Teachers Pension Plan requires higher contribution rates because members tend to have more years of pensionable service and hence receive higher average pensions than do employees in other sectors of the public service.

Currently, there are currently 56,000 contributing members in B.C.’s public sector pension plans; another 39,000 receive pensions. These Plan members are fortunate to not be in the cross-hairs of a nationwide pension reform movement. The economy of B.C., and hence all its taxpayers, are also beneficiaries of the province’s long-term pension funding and benefits sustainability.

It is regrettable that, having so long ignored their ballooning pension funding deficiencies, other jurisdictions have left  themselves no option but to implement drastic changes to both contribution and benefit levels. Another reason why we are fortunate to live in B.C.!

 

A retired corporate executive, enjoying post-retirement as an independent financial consultant, Peter Dolezal is the author of three books. His books, including the most recent, The SMART CANADIAN WEALTH-BUILDER, are available online, and in bookstores.

 

 

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