Monday, June 29, 2009

The need for transparency in public sector pensions

A group of business leaders called British North-American Committee examined public sector pensions in the UK Canada and the US. The fruits of their labour is a report called The need for transparency in public sector pensions

Gold-plated pensions extinct in private sector

They began by recognizing that "private companies have considered the rising costs of existing defined benefit provision and decided that the benefits to their companies are often outweighed by the costs and forward liabilities involved." They then looked at public sector pensions to determine the cost to taxpayers.

Part of the analysis was to provide a baseline for the value of the liabilities that existed within these plans and the future liabilities that need to be funded. Their results discovered that in Canada public sector pensions at all levels of government has liabilities of $513 Billion and the public sector plans have accumulated $323 Billion of assets to offset the cost of these liabilities leaving a shortfall of $190 Billion.

I will have to investigate these numbers they appear short of what is actually in these plans. For example, Ontario Teachers had $110 Billion in it last year. As well in Ontario HOOP (Hospitals) and OMERS (Municipal) had another $60Billion and these are only a couple of the many public employee pension plans in Canada.

"In all three countries, the public sector employs a significant proportion of the workforce. Most of the public sector employers in all three countries offer defined benefit pensions (mostly based on final salary) to their employees, and in most cases these are still open to new employees, and also to new pensions accruals for existing employees. This contrasts with the position in occupational pension provision by the private sector in these countries, where many, if not most, defined benefit pension schemes are now closed to new entrants. Some private defined benefit pensions are also now closed to new accruals by existing employees.
The abandonment of defined benefit pensions by the private sector has occurred rapidly, and largely within the last 10 years."

Lack of disclosure to taxpayers on cost of these plans

One of the challenges the group faced in examining the pension was that "Pension finances are notoriously opaque, and indeed this has made the collection of data on the three countries’ public pensions difficult."

If the assumptions of the report are accurate and the methodology seems comprehensive. They have identified why public sector pensions plans have landed into the crisis that exists today. The government's pension assumptions show that the value of the liability of the plans as it exists today is 12% of GDP. A more accurate estimate based on the analysis of the report shows a true cost at 25% of GDP.

Remember these figures are just for plans covering those working in the public sector. This is for teachers, municipal and provincial workers, fire fighters and police. These pension plans are the ones considered gold-plated. These pension retire substantially earlier that the rest of the workforce and the pensions are a guaranteed income into retirement. Not like most pensions based on a pool of accumulated money which is then drawn down in retirement.

Huge expropriation of taxpayers dollars still fall far short
Although mention was made that Canada has "funded pensions" the funding into these plans has fallen far short of requirements. This was outlined in the report and the analysis shows that contribution into these plans are about half of what they need to be. For example, the federal pension contribution required is estimated by the group to be 45.5% of the income of plan members. However, members are contributing far less than 10% into these plans and the taxpayers is funding the other 35%.

Calculate what your RRSP fund would look like if you contributed 45.5% into every year that you were working. Hence the term gold-plated.

These assumptions have resulted in contributions rates into these plans that are far below what is actually required to fund the full liability that exists today. For example, most provinces estimate a contribution requirement into their pension plans of 14.1% when in reality the real contribution requirement is estimated to be 27.5%. The federal pension contribution required is estimated by the group to be 45.5%.

Public Policy Considerations

"Unfunded public pension liabilities represent a transfer of value (spending power) from a future generation of taxpayers to the current generation of public employees (and by implication, a transfer to the current generation of taxpayers). This decision is made by the current generation, but paid for by future generations.

There is constant electoral pressure to minimize the current tax burden for the electorate, but to make promises of future public expenditure. In the case of public employee pensions, these promises benefit only a small proportion of the electorate, and so it is very important that the promises are known and understood by those who will have to pay for them, and (ideally) paid for at the time of the promise, rather than, say, thirty years’ later, when the promise matures.

The public employee pension schemes in all three countries studies suffer from a strong element of wishful thinking in their choice of discount rate to calculate liabilities"

The report contains some very comprehensive information on public sector pensions in Canada. As well are included some definitions of the concepts that policy makers need to know about.

Thursday, June 25, 2009

Billions of Dollars Pouring Into Public Sector Pension Plans

I have been approached with a lot of questions and have had a few radio interviews
as a result of the article last week in the Globe and Mail. In feudal age of pensions, renaissance must come

Some of the questions have been centered on how much money is being poured into pension plans and how badly affected were the public sector pension plans.

It is estimated that last year public sector pension plans in Canada lost $100Billion.

It is hard to grasp how much money is being funneled into these plans. There are a few major plans and lots of little ones spread around the province. We do know that many of your tax dollars over the next few years will be pumped into these plans.

One item on the last Ontario Budget that received no public debate was the commitment of the government to make extra or supplementary payments into the public sector pension plans. In the Ontario Budget 2009/10 additional payments into pension plans amount to $10.6 over the next 4 years. This has already been budgeted and I am sure much more will have to be made available to stop the hemorrhaging. See Table 20 of the budget. These are just "bonus" contributions.

These contributions are in addition to the billions funneled into these plans by all of the government organizations in Ontario.

One example in my back yard is McMaster University. As of the last actuarial report the plan had assets valued at $1.059Billion and a shortfall of about $90Million. Last year the contributions into the plan were by employee $ 12,698,000 and by the university $41,562,000. This was before the market crash which potentially wiped another $200,000,000 from the plan. The details can be found in the Annual Report at Page 38.

In addition the annual report shows future employee liabilities at $222Million. These would be for such things as the sick leave policy the City of Toronto is debating in its strike.

This is typical of most public sector plans. Huge contributions are being pumped into the plan to try and make up previous shortfalls. Then the markets smacked these plans by around 20% last year. Now they are facing huge shortfalls. For example, the estimated pension shortfalls and the future employee benefits liability are close to Half a Billion dollars. This on a budget of revenue coming in at $730Million.

This is only one of many taxpayer funded institutions in my neighborhood. This is a typical picture. The only question is how long can the hemorrhaging last for?

Monday, June 15, 2009

The Inconvenient Truth

The National Union of Public and General Employees recently came out with a letter on policy statement regarding pensions. They were responding to an article by The Globe and Mail called Canada's Growing Pension Puzzle

The letter presented some interesting perspectives about public sector pensions. It also presented some serious misinterpretations about the current system of pensions for public sector employees.

The letter commented that the article played on "a convenient untruth: that public sector workers have a huge advantage over most others because they have cushy pensions provided by, or backed and guaranteed by, the taxpayer." Unfortunately for taxpayers this is a a truth that is substantiated by the public sector pension plans themselves.

The Ontario Teachers Plan states in regards to its almost $20Billion shortfall that "Responsibility for ensuring a defined benefit pension plan remains fully funded lies with the plan sponsor, usually the employer... " This sounds like it is backed by taxpayers.

The comment also points out the "huge advantage" that the public sector has with the pensions and benefits they are paid with taxpayer dollars. This sentiment is part of a report from the Canadian Chamber of Commerce that comments "With public sector jobs offering higher pension benefits, it can be argued that the current pension regime affects not only private sector competitiveness, but also its ability to attract and retain labour."

Another contentious point from the letter was an assertion that public sector employees pay their own pensions. In fact, the subtitle of the letter was "Public sector workers pay 8% to 9% of their income to finance public pension plans". As we saw last week the PSP - Federal Government Employee Pension Fund requires contributions of 4.9% of annual salary up to $46,300 and 8.4% of annual salary above this amount.

So the numbers just don't make sense.

The NUPGE in their PR campaign states that the public servant pays 8% to 9% of their own pension. To be fair in many pensions this is the contribution rate. However, this assumes that the employees are picking up half the cost. The CD Howe Institute in research for a pension paper discovered that the actuary for the Federal Government pension plan calculated that a contribution level of 30% of income is required to fund a gold-plated or defined benefit pension plan. Sorry but 8% comes up way short of the full amount required.

Part of the argument for the gold-plated pension is that "Their benefits were bargained for, and trade-offs were made along the way. For example, public sector workers traded off other benefits and greater wages to finance their pensions." This makes for a good argument if it were true but the CFIB Canadian Federation of Independent Business shattered this fantasy with their report called The Wage Watch. Public sector employees have a large gap between their pay and that of the private sector. Not only do they get gold-plated pensions they get better benefits and higher pay to boot.

As the letter moves onto the next section it asks "Have you ever heard of a Retirement Compensation Arrangement? RCAs are pension plans for business owners and senior executives, allowing companies to pay out exorbitant pensions to retiring executives. With an RCA, business owners and executives have an opportunity to increase their contributions to a retirement program beyond regular RRSPs and pension limits."

Have you ever heard of a Supplementary Pension Arrangement? SRAs are pension plans for government employees, allowing taxpayers to pay out exorbitant pensions to retiring public servants. These are the pensions that pay over an above the current pension limits. In the public sector this is about $135,000 per year but many pension plans have set these up for many city employees and provincial employees.

No most people don't know what a RCA is nor do they know what a Supplementary Pension is.

It appears that indeed pensions are a puzzle and the public sector unions obviously are missing several pieces.

Tuesday, June 9, 2009

Costs of Public Sector Employee Pensions

The Question?
Simply, are government pensions fair and sustainable? Legacy costs continue to be a major issue for the Canadian economy. Legacy costs are the expense that businesses have as an obligation to fund retirement plans and health benefits of retired workers. These costs have been a major barrier in the recent efforts to keep many Canadian businesses solvent. The problem of legacy costs has been highlighted for Stelco, Air Canada, General Motors and many other Canadian companies.

Most Canadians save money in a pension plan or an RRSP to accumulate savings for retirement. Whatever is available in the fund at retirement will produce the retirement income. In contrast, the federal sector pension plan, like other public pensions, is a defined benefit plan that provides an inflation protected salary, based on years of service and.the average of the salary of the worker over the last five years of service. Assuming that a public sector employee works the full 35 years of maximum of pensionable service, a public sector employee is guaranteed an income in retirement of upwards of 70% of their final working salary or wage. This income replacement is guaranteed for life and guaranteed to increase every year.

If legacy costs at businesses are a problem for the Canadian economy, what about public employee pensions?

There is a huge difference in the type of pension plans that the public sector has and those of the private sector. Defined benefit plans are considered to be the gold-plated plan.

In Canada there are a total of 4.5 million defined benefit pension plan members. In the public sector there are about 2.5 million defined benefit pension plan members. This leaves 2 million DB plan members in the private sector. In Canada, 85% of private sector workers do not enjoy defined benefit plans; they are almost exclusively public sector plans. The few remaining gold-plated plans that do exist are causing serious difficulty for Canadian companies.

Public Employee Pensions
Most Canadian have no guaranteed pension at all. In one Ontario public employee pension plan, the average annual pension is $42,000. In addition most pension members are also eligible for full CPP Canada Pension Plan of $10,980 per year. This amount is guaranteed for life, eligible for annual increases and will a major portion pay to a surviving spouse for life

In order to fund these retirement income requirements governments in Canada have created huge pension funds, funded by Canadian taxpayers. For example, one of the largest in Canada the Ontario Teachers Pension Plan has accumulated over $110 Billion in assets. Statscan estimated in Ontario the total value of infrastructure at $90Billion. This includes roads, bridges, power plants, water treatment systems, airports and many other public works. Since 1990 Ontario taxpayers have funded more into this single pension plan than its entire infrastructure. This is only one of several huge pension plans in Ontario.

The National Post recently asked… “Why do these giant public pension plans exist? … They are, essentially, wealth confiscated by governments… using money taxed from all their constituents. The rest of the public pension investment activity is on behalf of unionized monopoly government service providers — hydro workers, police, municipal employees, and teachers. All are set to receive relatively lavish pensions paid for by Canadian taxpayers who have no comparable pension plans.”

Statistics Canada estimates that a pensioner living on $40,000 of pension income has the equivalent income of a “working” Canadian earning $52,000. This is accounted for by the fact there is a dramatic cost of living drop in retirement. The biggets factor is that most Canadians have paid down their mortgages, for many working Canadian this is 30% of income. Also there is a lower tax burden on pension income when compared to working income. For example no CPP contributions are made and there are no contributions for Employment Insurance.

The most recent Statistics Canada figures show the average Canadian earning scarcely $40,000 per year. Since the average salary of government workers are higher than the the average of their private sector counterparts, assuming that these workers work for 30 – 35 years, they can expect to retire with relatively comfortable with pensions higher than the average working Canadian wage.

Contribution Rates

There exists a huge gap between what public sector employees receive for their retirement benefits and what other Canadians receive. Most Canadian businesses feel overtaxed and they along with all Canadians fund most of the public sector pension costs.

A self-employed businessperson pays CPP premiums at 9.9% of his income with the hope of receiving a $10,980 a year CPP pension (this reflects employer and employee contributions, based on a maximum income level of $46,300). Under the current CPP model, the public sector would be expected to match the employer contribution of 4.95 % of income, based on a maximum salary of $46,300. Currently a public sector employee funds into their pension at a rate of 4.9% of annual salary up to $46,300 and 8.4% of annual salary above this amount. The federal actuary has estimated these types of plans cost 33% to fund fully. This means the taxpayers is funding an additional 24% to 26% of public sector incomes into these plans to pay for public sector pensions.

Many small business owners are at extreme risk of under funding their personal retirement plans. Yet, these same business owners are paying taxes to fund government pensions, allowing workers to retire at a luxurious level of income.

“Pension Shortfalls”
Many of Canada’s public employee pension plans are in “pension shortfall”. This means that on top of the billions accumulated in these funds more money is needed to fully fund the income to retired public sector employees.

This is not fair for taxpayers and the system needs to be reformed.

Saturday, June 6, 2009

Pension Informercials

Anyone reading this blog will know the difference in value between a public sector and private sector pension plan. The public sector employee generally retires with a pension fund value in excess of $1,000,000. The average private sector employee has about $125,000 saved for retirement.

Pension Infomercials
As I study the public sector plans I am sometimes staggered by the audacity of the public sector pensions reporting on their plans.

Here is a pension plan site that had me chuckling with it's audacity. It is the pension site for the BC Municipal Pension Plan. They have a series of videos explaining the pension plan to members. The video called A Paycheque for Life is a real blast! A blast to taxpayers. Just click on the pictures under the video screen to watch the videos. They are only a few minutes long and well worth watching.

This is just like one of those late might cheesy informercials. Check out some of the phrases:
There are many reason why people work... You work every day knowing your future pension cheque gets bigger and bigger
Every mouse click, every email you answer, every shift you work ... that retirement cheque is growing
You are adding to a guaranteed paycheque for the rest of your life. You stop working but the cheques keep coming GUARANTEED

The video entitled There are Lots of Places Your Money Can Go would be like a comedy except it is such an insult to taxpayers.
It includes such greats as:
You can be like this guy and stuff a pile of cash into a hole in the ground
A plan that will always pay you more than you will ever contribute into it!
Best of all you investment is guaranteed for life. now that is something you can take to the bank!
Do you think the guy golfing at the end of this video was working???

Here is one that I ran across last week. This is the annual report for the Alberta LAPP pension. Check out picture of the rainbow on the cover of the report! the only thing missing is the pot of gold. LAPP Pdf Annual Report

Friday, June 5, 2009

Almost time for pension reform

An article from the UK states MPs must set example on pensions They have the same type of pension as our MP's.

Lets hope that once the current batch of MP's trigger their pensions they will consider the inevitable task of pension reform. Most of our current MP's are just a short time away from their gold-plated pensions. Election unlikely until Bloc gets its pensions

Pensions are sure to be a major issue in the next upcoming election. This from the The CEO of the Ontario Teachers' Pension Plan

Thursday, June 4, 2009

Puzzling Pensions

As I compile information for my blog I am seeing a very big trend towards pension reform. Many organizations are calling for a government run Supplemental Retirement Plan. This is an idea put forth by Canada's leading pension expert in a report from CD Howe Institute. Available in this PDF file.

There are some merits to the plan but I think out weighed by the inability of the government to run these types of plans efficiently.

I think the debate takes away from the real crisis that Canada's pension system is facing. That is the huge disparity between the public sector gold-plated pension and the average Canadian's pension. We have funneled billions into pension plans as Canadians but most has gone into the public employee plans.

Part of the problem is the huge contributions required to fund pensions to the level of the public sector plans. About 30% of payroll is needed. For example, employee contributions into the PSP pension plan, the federal employees plan, are set at a rate of 4.9% of annual salary up to $46,300 and 8.4% of annual salary above this amount. This guarantees the employee 70% of the final 5 years of salary in pension income.

The Ontario teachers average pension income is en excess of $40,000 per year.

In contrast, a self employed person pays 9.9% into CPP to get a $10,800 pension. A private citizen pays into CPP a higher rate but gets pension that is 75% lower than the typical public employee pension. For employees the contribution is 4.95% for employer and the same for employees.

How can private citizens and companies afford any more in contributions when combined they fund 9.9% to get a measly $10,000. There is no justification for additional contributions into these type of plans. This is what a supplementary plan would be. Just like the CPP but only voluntary.

It comes down to a cost benefit comparison. However, from the public employees point of view a 4.9% contribution guarantees 70% of final salary. Which would you prefer?

The need to fund these public sector plans is why we have seen a huge torrent of taxpayers money into them. The PSP plan in 2002 had $5.6Billion in assets but by 2009 taxpayers had upped the value of the plan to $38Billion . Thats about $4.5 B a year of your money. The total budget of the RCMP is only$4B per year.

Even these enormous contributions are inadequate. This year for example Canadian public sector plans are suffering shortfalls in excess of $100 Billion.

The plan trustees themselves estimated a total contribution requirement of 30% was required into the plan. The employee pays 4.9%. Where do you think the other 25% comes from.

Now if all Canadians were getting 25% pumped into their pension plans and they had to fund 4.95% I would say, bring on the supplementary plans!

It may be naive but if we did not have to fund tens of billions into these public servant pension plans every year, maybe our taxes would come down. This would leave us a little extra to save.

A solution need to be found. It might be in some form of supplementary pension plan but lets investigate all of the options first. See Superfunds

Let's fund both the private and public sector employee plans at the same rates. The public sector plans need to be converted into the type of plans most Canadians have that is; contributory. This way we will all be in the same boat together.

Why should the taxpayer have to pick up the tab for the gold-plated public employee pension plan?