The Alberta Government has proposed a major overhaul of public sector pensions in light of “unprecedented challenges” to the pension plans.
Lower investment returns, early retirements and increased life expectancy are among the challenges that have cause the plans’ funds to lag behind their commitments, leaving a multi-billion dollar unfunded liability.
The current pension plans, which were designed decades ago, are no longer sustainable, the government said.
Workers retire an average of three years earlier and live about four years longer than workers who retired a generation ago. Some will spend more years in retirement than they spent working.
These factors coupled with volatile investment returns have led to the pension plans being grossly underfunded.
The government is proposing that some public sector plans become jointly-sponsored, managed defined benefit (DB) pension plans.
The plans that will face changes include the local authorities pension plan (LAPP), the public service pension plan (PSPP), the management employees pension plan (MEPP) and the special forces pension plan (SFPP).
More than 200,000 active plan members and more than 120,000 retirees will be affected by the changes.
The main features of the reforms are set to take effect on or after Jan. 1, 2016. They will include a number of key changes:
• The MEPP will be closed to new members at the end of 2015. New managers will participate in the PSPP instead.
• The PSPP, LAPP and SFPP will be open to become jointly sponsored by the major employee and employer stakeholders if the sponsors reach an agreement. They will continue to be jointly funded by employees and employers.
• Benefits and funding policies will be subject to government constraints including a cap on total plan costs. Funding of each plan will be split 50-50 between employees and employers.
• Sponsors will appoint boards of trustees to ensure plans are administered and assets are invest in the best interest of plan beneficiaries.
• There will be a moratorium on benefit improvements until Jan. 1, 2021.
• Stakeholders are asked to take over the SFPP plan with a new governance structure.
• Benefits already earned will be preserved, and all benefit changes will only apply to future service.
• For the LAPP, the MEPP and the PSPP, there will be no more subsidies on pension benefits earned for service after 2015 for those who retire before age 65. Additionally, cost-of-living adjustments will be targeted at 50 per cent of the Alberta inflation rate, not guaranteed.
• Those already receiving pensions by the end of 2015 will continue to receive pensions and cost-of-living adjustments for 60 per cent of Alberta inflation.
• As of Jan. 1, 2016, benefits will be vest from the first day of plan membership.
Additional changes are also proposed for each individual plan.
High contribution rates
Currently, contribution rates for the Alberta plans are among the highest in Canada with about 25 per cent of salaries as the total contribution rates for employees and employers. Employees generally pay about one-half of the cost through their own contributions.
The proposal will be prepared as legislation in spring 2014, the government said. The reforms will be implemented over the next few years.
Stakeholders are being asked to provide their input by Dec. 31, 2013, by emailing email@example.com.
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