Pension report from BC's Finance Minister

The Globe and Mail pension specialist, Janet McFarland, covered a report released from the BC government. The report shares their vision for the future of pensions in Canada.

Middle-income retirees face pinch

BC Pensions Report

This ia an excellent article on an interesting topic.

The CPP as it stands is designed to provide 25% of income up to the YMPE limit of $47,200. So any earners over the limit have topped out on CPP. This year the earnings will be $11,800.
2010 CPP contribution numbers

The BC report points out that CPP and OAS programs combined are designed to provide 40% of the YMPE income level. This is seen as a suitable income level for Canadian taxpayers to have for retirement. However, the BC Finance Minister and the rest of the MLA's in BC feel it is necessary to have a 70% replacement pension for themselves. They like to include the rest of the public sector employees at 70% as well. All with no limits or YMPE.

One rule for taxpayers and another for public servants sucking up taxpayer money.
Gold-plated Pensions for MLS'a in BC

This compares with public sector pensions that earn 70% of final salary. The income average at the federal level is $75,000. (the last salary survey was based on 2002/3 numbers, the average annual increase has been about 7% since then.) So the pensions here are at about $52,500 including CPP.
Treasury Board of Canada Treasury Board Compensation Report

Canada's average wage is at around $40,000 per year. So most Canadians are covered under the CPP plan. As the article points out there is a shortfall for the group between $30K and $100K. This group pays about 42% of disposable income into taxes. This does not leave very much to save into retirement plans.

The unions in Canada envision a program to boost CPP to 50% up to $100k. In the UK they have begun to implement this type of a program. They call it the NEST plan. All employees and employers will be required to contribute into the supplementary retirement plan.    
UK-wide pension fund to be called NEST
 
Lets move the public sector and private sector to the same plan, level the playing field so to speak and most Canadians will live comfortably in retirement

There are a few groups that are fighting for taxpayers to make sure that government stay accountable to the taxpayer.

One of the groups that I respect is the Canadian Taxpayers Federation. Occasionally they bring an interesting pension situation to my attention.

A pension they brought to my attention is the Saskatchewan Healthcare Employees Pension Plan or SHEPP. It is a a typical mid sized pension plan in Canada. Funded by taxpayers for the benefit of public sector employees.

It is the kind of plan all Canadians would like to have.
Pension Envy

A total of 65 healthcare employers in Saskatchewan participate in SHEPP on behalf of their employees.

The plan serves 43,729 members. Of these 32,287 are in active service and 10,018 are retired and the remainder have a deferred pension

Total assets in the plan at the end of 2008 were just under $2.5 Billion

Total contributions into the plan 2008 were $163 million.
Last year the employees contributed $75.514 M while the employers contributed $84.464 M or 112% of the employee contribution

There was $117 million in total benefits paid out in 2008

The plan lost 19.8% on its investment portfolio last year.

The total plan assets fell by $562 million in 2008

The employee contributions into the plan are 5.85% of earnings up to the YMPE ($46,300) and the contributions on income over YMPE are 7.53%

The employer (taxpayer) contributions are set at 112% of employee contributions or 6.55%

A total of 65 public healthcare employers mainly hospitals in Saskatchewan participate in SHEPP on behalf of their employees.

Like most of these pension plans there is no representation from the taxpayers who fund them. They have a list of trustees who are “employer” and “employee” representatives. However, even the employer representatives appear to be members of the pension plan.

When difficulties arise with these plans the funding problems are usually discussed with the government behind closed doors. The government does not like to create friction with its largest voter block. Pensions usually get what they want from the politicians negotiating with your money.

There needs to be taxpayer watchdogs on the boards of these pension plans. They are funded by taxpayers and taxpayers have to kick in any pension shortfalls.

The average wage in the health care sector in Saskatchewan is $46,742 per year. The average pension from SHEPP is based on a 2% per year with maximum pension at 35 years. This means a benefit of close to 70% of retiring income or $32,719 including CPP.

Of this pension of $32,719 the CPP would contribute $10,905 and the pension plan contributes about $ 21,814.

The big question is …
An private sector employee pays 4.95% of annual income into the CPP plan to get $10,905 per year in pension income.

The public sector employee in SHEPP pays 5.58% to get $21,814. How can the public sector employee pay in the same and receive twice as much in taxpayer funded pension?

Canada is addressing pension reform at all levels of government. Fairness between the public sector and public sector pensions is one the key issues that needs to be addressed.

Pension Problems in Nova Scotia

There was an interesting article about the pensions with city unions being renegotiated. Cities want to negotiate pensions

It will be a very tough challenge. Once given these things are hard to take back. They create a large financial burden on taxpayers and are very generous pensions indeed. This pension plan is in serious financial trouble. Lets hope that the cities will be able to negotiate some reasonable concessions for taxpayers.

At last report the pension fund was short $1.65 Billion to cover the cost of the commitments it had made. This is despite the fact that since its inception it had accumulated more than $2.9 Billion of taxpayers and members money. How long will it take to accumulate this extra $1.65Billion.

The government and pension managers have been aware of his problem for many years. In an attempt to cover the shortfall they have doubled annual contributions into the plan from $75Million in 2004 to $140Million last year and it has not made a dent in the plan's funding.

The plan is hemorrhaging cash very quickly now. There are almost as many on pensions (11,646) than paying into the plan (16,629). There are only 1.42 paying members for every pensioner.

Most members are paying only 8.48% of income into the plan. The taxpayer matches this for a total contribution of 16.96% of income. The CD Howe has estimated that the true cost of these types of pensions is 30% of income. This means contributions are short 13.04% every year. It is a ponzi scheme that has to end one day!

Retirees receive pensions based on the 80 rule. This makes an employee who started employment at age 20 eligible for pension at age 50. Many go on to other jobs while collecting pensions (double dipping). Many of these jobs will be with the same government employer.

As well the taxpayer is on the hook for the Teachers Pension Plan that had $1.5Billion of unfunded liabilities at the end of 2008. Even worse they only had 1.23 working teacher for each pensioner. The taxpayer funded $61Million into this plan last year.
These plans can be seen at: Nova Scotia Pension Agency

Last year taxpayers funded over $70Million into the plan. It is still almost $2Billion short.

The plundering of taxpayer dollars has got to stop

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.

St John NB Pension Problems

St John has been dealing with some issues in its city employee pension plan.

Taxpayers are concerned that despite increasing tax rates the quality of services provided from the city are falling. One of the areas of city spending that requires constant increases is the city pension. As a result of some investigations by a city councilperson some pension irregularities were identified. The pensions irregularities were a very small part of the problem with St John pensions.

Problem with pensions
The real problem with the pension is the very nature of public sector pensions. As cited in Global Economic Trend Analysis there are several reasons these pension are not sustainable. Basically in a nutshell, they are too generous in what they offer to public sector employees.

Many governments and businesses around the world are fighting to control the cost of pensions. We have seen the effect of huge legacy costs and their impact on business. Many large businesses that offer these types of pensions are staggering under the weight of their pension obligations.

The pensions in the private sector pale against public sector pensions. Recently the mayor of the city of New York called for pension reform. Michael Bloomberg in his comments on government pension reform stated that: "The Big Three automakers offer some of the best pension plans in the private sector, yet even they cannot match the generosity of New York state government (all public pensions are the same from Alberta to Zimbabwe). And Detroit's expensive pension plans are part of the reason why the automakers are teetering on bankruptcy and pleading for a bailout in Washington."

Two types of pensions
One of the issues that makes pensions difficult to understand is the ways in which income is received from pensions.

Most Canadians save over their working career into a plan and what ever is in the plan at retirement becomes their retirement income. They draw down on the savings over the course of their retirement years. A public sector pension works on a completely different concept. It guarantees a certain level of income in retirement. These are two quite different types of pensions.

Definition - Pension
The Oxford dictionary gives two definitions of pensions. It describes the differences in the two plans well.
1) a regular payment made by a government to people above a specified age... or to such a person's surviving dependents - Public Sector pensions
2) a regular payment from a fund to which the recipient has contributed - private sector pensions - Private Sector pensions

As a result of the different concepts pension apartheid is created. The public sector pension is designed to provide pensions based on 70% of income at retirement. A private sector pensions will payout based on what is in the fund at retirement, usually substantially less. But the taxpayer funds them both.

Most taxpayers fund more into public sector employee plans than they fund into their own. Fair Taxes Now estimates that the city contributes over 14.5% of salary into city worker's pension plans. In the St John plan employees add another 8% to the city contribution. This 23.5% is still short of the true 30% that is needed.

The limit in the private sector is 18% and most Canadians put less than 5% into their RRSP plans. These huge gaps between the public and private sector pensions create the pension apartheid.

The CD Howe report A Pension in Every Pot shows the impact of the two different ways of calculating "pensions".

Two Pension Families, Two Results

* A typical private sector worker family retires with a fund valued at $ 255,000

* A typical public sector worker family retires with a fund valued in excess of $ 1,200,000

Unfairness of the system
It is unfair to ask the taxpayer to fund into a public sector gold-plated pension plan when their's will be considerably less than gold-plated.

The CFIB produced a report called the Pension Predicament and the conclusion of the report is that "Canada’s pension predicament is one of fairness between the public sector and the private sector...There is no valid reason why Canadian taxpayers are on the hook for public sector pension plans when in fact half of the Canadians working in the private sector will not even benefit from any private pension plan upon retirement. The unfairness has gone on long enough."

Other problems in St John
Part of the allegations against the pension plan is St John is that the pension plan was used to deal with long term disability cases within the city. If this happened it would be highly irregular and should be investigated or audited.

Part of the problem with public pensions is that the people who are entrusted with making the decisions about them usually have a vested interest because they will be paid a pension themselves. It is my opinion that if the taxpayers is paying over 70% of the bill for the pension they should have equal representation on the board of trustees of any pension plan.

Without proper checks and balances in place governments are free to negotiate with public sector unions without any accountability to the people they represent. For example, the provincial government recently negotiated that taxpayers fund an additional $131 million into provincial public sector pension plans. This was done without any consultation with taxpayer groups or general public consultation. The government justified this because of poor market performance last year. Was this decision made by members of the provincial pension plan? How much did they fund into your retirement plan?

Recommendations for public pension plans

1) Regular forensic audits - these should be conducted in addition to the regular every three year actuarial report which shows the funding in the plan. The audit should check such things as compensation paid to plan advisors, conflict of interest issues of trustee advisors, use of pension funds against unapproved uses

2) Trustee committees should be representative of the groups funding them. If they are totally funded by employees, then very well have plan member trustees but if the taxpayer is funding them then the taxpayer should be entitled to representation

3) Many jurisdictions around the world disclose the value of pensions being received by plan members. These are set up similar to the public disclosure for salaries for public servants.

Bill Tufts