Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.
Kathryn May of the Ottawa Citizen reports, PS pension plan accounting changes spark pre-election concerns:
The federal government is changing the way it accounts for its employees’ pension plans — a change that would indicate the plans have a nearly $100-billion deficit.
The government says the move will have no impact on Canada’s finances or the viability of the plans.
But that doesn’t stop Canada’s 17 federal unions from worrying that this accounting change could spark a political blowback.
They fear that those who believe public sector pensions are too rich will exploit this deficit — even though it is only on paper — to lobby for further reductions or reforms to the pension plans of Canada’s public servants, military and RCMP.
Ron Cochrane, co-chair of the joint union/management National Joint Council, said the unions were briefed on the change and accept that it is an “accounting matter.”
But he said they can’t help but question why the government is making the change now — months before an election — after handling the accounting in the same way since the 1920s.
“The unions’ big concern is optics and whether this will become a feeding frenzy for the Conservative base and those institutes that favour changing public servants’ pension plans,” said Cochrane.
“It has no impact on anyone and everything stays the same, but that doesn’t mean it might not be used to give more fodder for Conservative supporters to make hay and push for changes.”
The change will have no impact on the government’s finances because the employee pension obligations have been accurately recorded in the federal budget and the Public Accounts, which is the government’s overall financial statement.
Treasury Board President Tony Clement wouldn’t comment until the reports have been tabled. The annual report and financial statement for the public service pension plan is expected to released Tuesday.
Stephanie Rea, a spokeswoman for Clement, confirmed the change will have no “financial implications” for the government. It will not affect the deficit or government plans to balance the budget in 2015.
She said the change is one of “presentation” only, and was done to bring the plan’s financial statements in line with public sector accounting standards as urged by Auditor General Michael Ferguson and the federal comptroller general.
The unions were also assured the change would have no impact on the plan, its viability, the contributions employees make or the benefits paid to more than 700,000 public servants and pensioners.
So, just what is the government doing?
The federal pension plan has two accounts, one for pension contributions that employees made before 2000, and another for ones made after 2000.
The pre-2000 account, known as the superannuation account, was created in the 1920s as an internal account to keep track of employees’ contributions, interest and benefit payments. It had no cash.
By the 1990s, this account began racking up a massive surplus that became the centre of a long court battle to decide if the surplus was real or not and who owned it, ending up in the Supreme Court of Canada.
Meanwhile, in 2000, the government passed legislation to create a new pension plan that was invested in the market and managed by the Public Service Investment Board.
The government began publishing financial statements for the combined plans in 2004. They included the superannuation accounts as “assets” along with the investments managed by the Public Service Investment Board. This was an interim step until the Supreme Court issued its decision.
By 2012, the Supreme Court decided federal employees were not entitled to the surplus and the accounts were nothing more than “ledger accounts” with no real cash or assets.
With the lawsuit resolved, Treasury Board decided that removing the superannuation account’s notional “assets” from the financial statements would more accurately reflect the fact the account was only a ledger account. It would also bring them in the line with accounting standards.
It consulted widely with pension experts, the administrators who run the military and RCMP plans.
Ferguson also raised the red flag that if the accounting wasn’t brought in line with standards, his office would issue a qualified opinion on the plan’s financial statements — a black eye on their credibility and the government’s management.
The size of the superannuation account will now be recorded as a note to the plan’s financial statement to be released Tuesday. If the change was applied to last year’s financial statements, removing the notional assets would increase the size of the plan’s deficit to more than $96 billion.
Robyn Benson, president of the Public Service Alliance of Canada, said the chief actuarial reports show the pension plan is adequately funded and viable but that the accounting change could confuse and mislead Canadians.
“The decision by the government to unilaterally remove the superannuation account from the Public Service Pension Plan’s financial statements is therefore unnecessary. Making billions disappear overnight is an attempt by the government to mislead the public on the viability of public sector pensions.”
The public service pension plan is the biggest in the country and critics, ranging from the groups like the Canadian Federation of Independent Business and the C.D. Howe Institute have assailed it as under-funded and unaffordable.
The Conservatives introduced reforms to the pension plan in 2012 that’s aimed at saving $2.6 billion by 2018 and an ongoing $900 million a year. Reforms included jacking up contribution rates so employees pay half and raising the retirement age to 65 for new hires from age 60.
I read this article last week and basically thought these public sector unions are making a mountain out of a molehill and they’re whining about nothing. They lost the Supreme court case and clearly can’t claim the surplus is theirs. Moreover, many pension experts said these surpluses need to be looked at from an accounting perspective or a solvency perspective – not on a going concern funding perspective. It just makes sense to remove these surpluses from the books.
Having said this, I’m not exactly a fan of the Harper Conservatives when it comes to pensions. I basically don’t trust them because they foolishly pander to the financial services industry and refuse to enhance the CPP for all Canadians.
Importantly, when it comes to pension policy, I give the Harper Conservatives a failing grade. They just don’t understand the benefits of defined-benefit plans for our economy and keep taking dumb measures like increasing the TFSA contribution limit which won’t really help anyone but high income Canadians with a lot of discretionary income at their disposal. These aren’t the people that need help when it comes to retiring in dignity and security.
But I got a bone to pick with these public sector unions too. I’ve had the fortunate (or unfortunate) opportunity of working at large pension funds, Crown corporations and federal government organizations and I’ve never seen more self-entitled people than when I worked at the government. It would drive me crazy when people were telling me, a contract worker with Multiple Sclerosis, how “they were counting the days to their retirement.” That type of attitude isn’t uncommon in these federal government organizations but I don’t really blame them as the Harper Conservatives totally demoralized our civil service with their asinine across the board cutbacks.
If it was up to me, the retirement age at all federal government organizations, with exception of the Armed Forces and RCMP, would be raised to 67 or even 70 years old to address longevity risk and I would introduce real risk-sharing in these plans just like Ontario Teachers’ Pension Plan and Healthcare of Ontario Pension Plan did at their plans.
I’m actually shocked that these unions are worried about irrelevant accounting changes and not focusing on how the Auditor General of Canada dropped the ball on the operational audit of PSP Investments. I didn’t see one person scream and shout about the shenanigans going on at PSP which included an embarrassing case of legal but unethical tax avoidance.
Welcome to wacky world of Ottawa where everyone is quiet as long as their sacred pensions remain intact. But if you dare reform pensions for the better, all hell breaks loose.
I think a lot of Canadians worrying about never being able to retire are sick and tired of hearing about public sector employees whining about their defined-benefit pensions. Get real, grow up and realize how good you have it even if you’re contributing to your pensions.
I’m no fan of the Harper Conservatives, the CFIB, the C.D. Howe Institute, the Fraser Institute and most other institutes that claim we can’t afford public pensions. But I’m increasingly annoyed by these grossly self-entitled civil servants who cry foul every time we dare reform their pensions for the better, like introducing more transparency and accountability to the way we measure unfunded liabilities.
Having said this, let there be no mistaking my stance on defined-benefit versus defined-contribution plans. I know the brutal truth on DC plans, they will only exacerbate pension poverty down the road, which is why I keep harping on Harper and the big boys in Ottawa to enhance the CPP for all Canadians once and for all.
I leave you with an excellent article from Adam Mayers of the Toronto Star on how good pensions help keep your community afloat:
The pension divide in Canada is a yawning public sector-private sector gap.
In the private sector, 76 per cent of employees don’t have a pension of any kind. In the public sector, 86 per cent do and they usually have the best kind.
By best kind, I mean a defined benefit plan where you receive a monthly amount for life when you retire. You don’t have to worry about how to invest the money or what it’s invested in. You can sleep easily at night.
Only 10 per cent of those in the private sector have this kind of plan and many are now grandfathered. In their place, companies are offering defined contribution plans – if they offer anything at all – which match money contributed by employees. Retiring employees have to figure out how to turn that cash into a reliable stream of income, a source of stress and anxiety
The gap is a growing source of friction, with some critics enviously eyeing public sector pensions and saying they are unaffordable and unfair. Far too generous. Wind them up, they say.
But would that really be a good idea?
If you own a business in Cobourg or Orillia, or St. Catharines or Collingwood, or for that matter in Toronto, the answer is no. You may wish you had as good a deal as your neighbour the teacher, the firefighter or nurse, but don’t wish their pension away.
The money they are paid is a huge economic energizer in the community where they live. The money they spend on groceries and restaurants, at the hardware store or taking yoga and fitness classes is greasing the local wheels.
A study by The Boston Consulting Group (BCG) commissioned by four of Ontario’s biggest pension plans, took a look at the relationship between pension income and the health of communities.
The 2012 study found that on average 14 cents of every dollar of income in Ontario communities come from pensions. The biggest chunk of that pension cash comes from defined benefit plans. The rest is from RRSPs, Canada Pension Plan and other supports like Old Age Security (OAS). That cash keeps smaller communities afloat because the money the defined benefit pensioners spend is someone else’s income.
In Toronto, pensions contribute 11 cents of every dollar of income in the city, the study found. In Elliot Lake, it is 37 cents, in Cobourg 27 cents, in Orillia, 24 cents and St. Catharines, 23 cents.
The four pension plans funding the research were Ontario’s biggest –Healthcare of Ontario Pension Plan (HOOPP), Ontario Municipal Employees Retirement System (OMERS), OPSEU Pension Trust (OPTrust) and Ontario Teachers’ Pension Plan (OTPP).
They were looking for support for the argument that defined benefit pension plans offer a lot more than cash in a pensioner’s pocket. Rather, they help with social cohesion and reduce pressure on government programs.
Here are some of the findings:
- In 2012, Canadian defined benefit plans paid out $72 billion to 3.5 million pensioners.
- Most of this money is spent where they live.
- In Ontario, 7 per cent of all income in our towns and cities, or $27 billion, is derived from defined benefit pensions.
- That $27 billion generated $3 billion in federal and provincial income tax, $2 billion in sales taxes and $1 billion in property tax on an annual basis.
- Seniors with defined benefit plans are confident consumers because the predictable income stream allows them to better plan their affairs.
- Defined benefit plans offer a broader social benefit, because people who get them rely less on benefits like the Guaranteed Income Supplement (GIS) to the tune of $2 to $3 billion a year.
“These pensions are an important part of income in their communities,” says Jim Keohane, HOOPP’s CEO. “You get different spending patterns because you don’t have to worry about running out of money.”
The study offers a six-point plan to encourage better pension coverage for all Canadians, something everyone wants but everyone is struggling with how to do it.
So we need more of them, not less.
The study concludes with some suggestions including:
- Make workplace pensions mandatory to force savings. The coming Ontario Retirement Pension Plan is an example of how that might happen, as is Britain’s Nest (National Employment Savings Trust.)
- Don’t wait. Governments should do something now, whether enhancing the CPP or going another way.
- Share the risk between employees and employers, so that pensioners aren’t left managing their money alone.
The study won’t reduce public sector pension envy, but it does explain why these plans are important. We need more like them, not less. The trick is finding a way for that to happen.
As I discussed recently in my comments on America’s attack on public pensions, America’s pensions in peril, and why the great 401(k) experiment has failed, we need to introduce retirement policies that bolster public pensions for all our citizens, not just those that work in the public sector. Good pension policy makes for good economic policy.
Photo by Roland O’Daniel via Flickr CC License
