Union says changes in new plan are not ideal, but current alternatives are disastrous
New Brunswick introduced a shared-risk pension model in July for public-sector workers that is designed to keep unfunded liabilities down.
The model, developed by a special task force, is heralded as being a creative solution to the province’s pension woes. Between 2008 and 2009, New Brunswick had an increase in pension expenses of $169 million.
Its credit rating was downgraded by Moody’s in 2009 and in 2010 it was placed on a negative outlook by Standard and Poor’s, according to the government of New Brunswick.
The new model is based on a successful Dutch pension model.
“Both jurisdictions face similar economic and demographic challenges, including an aging population, growing life expectancy and market returns that are not keeping pace with payouts and indexing,” according to the government.
Premier David Alward called the new model an innovative way to address issues before it’s too late. The new model “ensures that public sector pensions are affordable for taxpayers in the long run,” according to the province.
The model is “fabulous” for sponsors and plan members, said Jana Steele, a partner with Goodmans law firm in Toronto and the head of the firm’s pension, benefits and compensation law group.
The new model will see pension funds put into a less volatile mix of investments and “firm rules to guide management of surpluses and deficits,” according to New Brunswick’s government.
It also seeks to address issues that the province’s defined-benefit plans have faced over the years that threaten their long-term sustainability. These include low interest rates, an aging population and unstable capital markets.
The funding processes and risk management requirements mandated as part of the new model are there to help ensure the benefits are there, said Steele.
But not everyone is as thrilled with the plan as she is. Union leader Gordon Black saw the changes as necessary, but not ideal.
“We looked at it as an alternative to benefit cuts or uncontrollable contribution increases. So we supported it,” said Black, the Canadian Union of Public Employees (CUPE) regional director for the Maritimes, based in Fredericton.
CUPE is one of the four union pension plans in the province that had signed on to participate in the new model when it was announced on May 31. The other three union public plans signed up to adopt the model were the Pension Plan for Certain Bargaining Employees (CBE) of New Brunswick Hospitals, the Members’ Pension Act (MPA) and the Members’ Superannuation Act (MSA). The lone public plan that had signed on was the New Brunswick Pipe Trades Pension Plan.
Under the new model there has to be money in the plan to provide indexing, or cost of living allowance increases to pensioners. If there is no money in the plan, no increases will occur. But in the next year, if there is money in the plan, cost of living can be given to pensioners retroactively.
For plan members, the changes mean contributions are likely to increase marginally. The model also moves the province into plans based on enhanced career-average earnings instead of final salary, according to the province’s government.
The model also intends to move the target year of retirement from 60 to 65, although the government says this will be implemented over a 40-year period. Benefit levels for current retirees are to remain unchanged.
Despite all of these changes, Black said there has been very little negativity from members of his union.
“I don’t think people are jumping up and down like it’s a major victory,” he said. “But in some ways it is for me, because the alternatives would have been disastrous for workers and retirees. It doesn’t come without sacrifice, but I think you have to accept where we are, why we got there and how we get out of it.”
Some wish the province had gone further in their pension reforms for public unions. The number of public pension plans that have an underfunded liability is staggering, said Scott Hennig, vice-president of communications for the Canadian Taxpayers Federation, based in Fort Saskatchewan, Alta.
The changes are a “step in the right direction” but the federation would like to see more drastic changes to public pension plans.
“We would prefer defined-contribution plans where the risk has been completely negated for the employer. That’s our goal, that’s our ideal, that’s where we want to see things go.”
The plans are designed with 97.5 per cent probability — in 97.5 per cent of all economic scenarios there will not be a reduction in base benefits, Steele said.
“So 97.5 years out of 100 — at least that — there should not have to be any reduction in base benefits.”
No pension plan is foolproof or guaranteed, but this is a plan unlike others, said Steele.
“This is really innovative, this is really looking at what some of the problems are and how they can be addressed,” she said. “This is really trying to address benefit security and plan sustainability, which are issues.”
The Canadian Federation of Independent Business has a meeting planned soon to meet with one of the architects of the new model to get more details, said Richard Dunn, policy analyst for the federation, based in Moncton.
“We have guarded optimism that this is a step in the right direction, but like everything the devil is in the details,” he said. “We know a fair bit about what they’re doing but we still have questions.”