Involvement by plan members and joint trusteeship are also significant factors contributing to improved financial situation, says NUPGE's Larry Brown
Ottawa (August 18, 2006) – The financial health of provincial public sector pension plans has greatly improved as Canada's provincial governments have taken advantage of an improved budgetary position to bolster their contributions, according to a new report from CIBC World Markets.
The Canadian Financing Quarterly report released on July 28 says that special payments being made against pension liabilities, in many cases with borrowed money, is a strategy that's putting public sector plans on a firmer long-term footing and helping to trim future debt-servicing costs.
"Today's focus on pension shortfalls coincides with a generalized improvement in provincial finances," says Warren Lovely, CIBC World Markets senior economist.
"In the past, budget deficits constrained government efforts to shore up pensions, but today's reduced financing needs for government programs provide a more accommodative backdrop for special pension payments." The report notes that solid investor demand for high quality provincial bonds has allowed governments to make debt-financed pension payments without unduly pressuring provincial interest rate spreads.
The report cites the governments of Newfoundland and Labrador, New Brunswick, Prince Edward Island, Quebec and Manitoba for making special payments against pension liabilities in the last year.
The CIBC World Markets report is positive news”, says NUPGE National Secretary-Treasurer, Larry Brown.
“It reconfirms our view that the sky isn't falling on defined benefit plans here in Canada. The report, however, gives the impression that provincial governments themselves are responsible for closing the pension liability gap of our members' pension plans. That's certainly not the case. For one thing, almost all public sector pension plans are plans that the employees contribute to at the same level as the employer,” Brown says.
“More importantly, little credit is given to such important factors as joint trustee arrangements for certain public sector plans as well as the sacrifices our members have made to ensure the financial health of their plans.”
Brown noted that NUPGE's component unions have negotiated joint trustee arrangements for pension plans in British Columbia, Manitoba and Ontario. Joint trusteeship involves the members of the pension plan in helping to make the decisions about the plan, including its financial health.
Dealing with liabilities
“These jointly trusteed plans not only limit governments’ responsibilities for liabilities in plans, but also obligate trustees to deal with liabilities in the near future and not decades from now," Brown says.
"So we would argue that the move in several provinces to joint trusteeship over the last decade was a significant factor in reducing liabilities of public sector pension plans," he adds.
“With a commitment from the governments of PEI, Newfoundland and Labrador and Manitoba (regarding the Public Service Plan) to move to joint trusteeship of our members’ plans and active campaigns by our Components to achieve joint trusteeship in Nova Scotia, New Brunswick, Alberta and Manitoba, we think liabilities of many of those public pension plans will lesson as underfunding becomes much less of an issue under joint trusteeship."
Brown provides two examples of the success of joint trusteeship of public sector plans:
- The OPSEU Pension Trust, which has $10 billion in assets, is in its 11th year as a jointly trusteed plan and is the only public sector plan in Ontario that has not had to increase contributions.
- The jointly trusteed Manitoba Health Employees Pension Plan has a requirement that in the event the Plan is not adequately funded, there must be either a decrease in benefits or an increase in contributions. In order to deal with an underfunding problem in 2005, a deal was reached through collective bargaining to increase contributions by 1.8% for both employer and employees.
Contribution rates raised
The CIBC report also notes that the four large public sector plans in British Columbia are jointly trusteed and remain in a net asset position for 2005/06.
“It’s also important to give credit to our members for improving the health of public sector pension plans," Brown says.
"In the last two years, our members (and their employers) in Nova Scotia, New Brunswick, Ontario, Manitoba, Alberta and British Columbia have had their contribution rates raised in order to stabilize the health of their pension plan. This undoubtedly has been perhaps the most significant factor in reducing public sector pension plan liabilities.”
“It is our experience that our members are prepared to do what it takes today to protect their financial security in retirement.”
“Yes, we agree that several provincial governments have taken important steps to reduce liabilities of pension plans. But it’s important to give credit to equally important factors – like plan members and their sacrifices and solid plan governance emanating for joint trustee arrangements.” NUPGE
CIBC World Markets Monthly Indicators report