Cracks appear in public-sector pension plans

Bumpy road ahead for some of the biggest DB plans in Canada

Public-sector workers may take comfort in knowing their defined-benefit pension plans are unlikely to be converted any time soon, but that doesn’t mean they’re spared the worries of unfunded liabilities that DB plans across the board are facing.

“The big concern (these plans) all should have is how expensive they’re going to get,” said Malcolm Hamilton, principal of Mercer Human Resources Consulting in Toronto. “They’re very expensive in terms of large benefits, (cost-of-living) indexing and early retirement. And we’re now in an environment of low real interest rates and high security prices which means we have reason to believe that returns aren’t going to be like they have been in the last 20 years.”

The result is increasing pressure for increases in contribution and reductions in benefits. Hamilton said that’s already happening.

The Hospitals of Ontario Pension Plan, facing unfunded liability of $227 million at the end of 2004, made changes last year to contain the liability. These included ending contribution subsidies early, ending the temporary transition benefit and changing how it administers cost-of-living adjustments.

At the Ontario Teachers’ Pension Plan, a preliminary valuation conducted last year reported a real investment return of 3.1 per cent, a drop of 1.25 percentage points from an earlier estimate that would result in a shortfall of $19.4 billion in 2005.

And more recently in British Columbia, the Public Sector Pension Plan covering 24,000 government employees reported an unfunded liability of $767 million, according to a 2005 actuarial valuation report.

As a result, members are facing premium increases of 1.88 per cent of salary, which would be matched by increased contribution of 1.88 per cent of payroll for employers.

“I think in the next five to 10 years, it will be a bumpy road for public-sector plans. It will be for the private-sector plans too, but their benefits aren’t as expensive, and a lot of the bad news there has been absorbed already,” said Hamilton.

One of Canada’s largest funds, the Ontario Municipal Employees Retirement System (OMERS) has also recently gone from taking a contribution holiday to posting an estimated funding deficit of $2.5 billion by the end of 2005. As a result, it increased contribution rates last month.

But other changes to the pension plan have stirred up considerable criticisms. A bill made its way through first and second reading last year that would enable the government to extract itself from its current role as sponsor of municipal employees’ pension plans. Under a unique governance model, the Ontario government sponsors OMERS but does not directly contribute into it. As one of Canada’s largest pension plans, OMERS has about $39 billion in investment assets and 355,000 members, who work for close to 900 employers. This move to devolve plan governance has raised questions as to whether the province is taking itself off the hook for fund liabilities. During a legislative committee debate on the bill last fall, Progressive Conservative MPP Ernie Hardeman asked whether this would be one of the consequences of the bill.

“The responsibility for any future requirements for more money or something to deal with the increased cost of the pension plan will no longer rest with the province. The liability will no longer rest with the province,” alleged Hardeman in the November debate.

To that question, OMERS spokesperson Debbie Oakley said the government isn’t liable now and won’t be liable with the passage of the bill.

“The government isn’t a backstop for the plan today, and it won’t be in the future. The plan is funded by members, which are employers and unions. There’s no obligation for it now to bail us out if we don’t manage it properly,” Oakley told Canadian HR Reporter.

“And if OMERS were to go down, the entire municipal sector would have to disappear, which is highly unlikely. But if that were to happen, everything would be collapsing around us. And all the pension plans would be knocking on the government’s door, I suppose, but that’s such an extreme scenario.”

That said, the bill has met with considerable opposition from municipal employers and some unions, particularly the Canadian Union of Public Employees. At the heart of the controversy are provisions for supplemental benefits for police officers, firefighters and ambulance workers, benefits that would allow them to retire early.

Although the bill ensures that cross-subsidization will not take place — meaning that the costs of providing the supplemental benefits would not be funded by the main plan — Hardeman said there remains inherent risks that the government has not addressed.
“If 20 years down the road, we find out that the actuary was wrong, and the plan didn’t accumulate enough funds, the sponsor of the plan is the same sponsor as the sponsor for the main plan. So they can’t transfer funds from one to the other, but all that would mean is (the sponsors) will have to pull money out of their own pockets to pay for that unfunded liability,” said Hardeman.

There’s another risk in the fact that the supplemental plans are negotiable, he added. It’s possible that in 20 years, when facing an underfunded supplemental benefits plan, the police, firefighters and employee groups may decide to withdraw altogether instead of making ever-increasing premiums. “They quit paying, and the plan is not funded. Who’s going to pay it?”

MPP Brad Duguid, parliamentary assistant for the Minister of Municipal Affairs and Housing, said opponents have grossly inflated the costs that would result from the supplemental benefits. The Association of Municipalities of Ontario’s estimate of $380 million a year in added costs to municipalities is premised on full and immediate participation, which is unlikely, said Duguid.

Asked why the province is set on mandating the supplemental benefits at the same time that it’s transferring governance to sponsors, Duguid referred to commitments that Premier Dalton McGuinty had made while still in opposition. “We are passing over the governance of the pension fund to those who benefit from it and those who contribute to it. In doing that we recognize the need and the public interest in ensuring that the emergency workers are recognized for their hard work and unique jobs that they do. So we make no apologies for recognizing the uniqueness of that.”

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