Financial Post
October 31, 2013
By Barry Gros

Alberta and New Brunswick have launched sweeping reforms to ensure the continued sustainability of their public-sector pension plans. It’s time for Ontario, where plans face the same challenges, to follow suit.

The cost of Ontario’s public-sector pension plans, both to its members and to Ontario taxpayers, is at an all-time high. What’s more, current members are unfairly shouldering the burden of the increasing costs. The trend of increasing contribution rates that weigh on taxpayers and members can be corrected by adopting target benefit principles, which would involve either capping contributions going forward or simply setting the taxpayers’ cost at a specified rate. Having existing retirees share in some of the increasing costs would ease the burden being placed on current members. [EXPAND Read more]

With the total contribution rate moving into the 20% to 30% range, the Ontario provincial government intervened in 2012 and negotiated temporary caps on contribution rates. But the province needs better, longer-term solutions. Ontario’s public-sector pension plans were designed to be affordable in a very different economic environment than experienced for some time. Plus, many of the plans improved their benefits in the 1990s when it appeared that there were surplus funds in the plans, but time has shown that those surpluses would have been better used as reserves for the poor investment experience that followed in the last decade and to help pay for the fact that people are living longer.

Proposals to convert these defined-benefit (DB) plans to defined-contribution (DC) plans are moves in the right direction, but are likely overly simplistic. The same benefit to taxpayers could be achieved by capping their contributions to a set percentage, and allowing target benefits to be positively or negatively adjusted with the long-term performance of the fund. The jointly trusteed governing boards of these plans could then focus their attention on what benefits could be afforded. A target benefit approach would deliver the cost containment required, but would allow the plans to provide better sharing of investment and longevity risks than would be available to individual members under a traditional DC approach. Furthermore, converting these plans going forward to DC does nothing to manage the risk exposure from the large liabilities that have accrued to date.

Some of the public-sector plans have tried to deal with the problem of increasing contribution rates by reducing benefits going forward, primarily by reducing the amount of guaranteed inflation protection (i.e., indexing) provided on future benefits earned. However, this means that current plan members will likely not be able to achieve the benefits that current retirees are enjoying. This hardly seems fair, especially since new plan members now pay nearly double the contribution rates paid by retirees during their working life. But this approach simply reflects current pension standards that generally prohibit the reduction of benefits that have been earned.

Allowing for some scaling back of indexing to retirees when a plan is not fully funded – as in New Brunswick’s recently adopted schemes – would provide a fairer sharing of risk across generations. While retirees would surely vigorously protest such action, one wonders what their reaction would be to spinning off retirees into separate plans with a proportionate share of assets. With no active members to shoulder the burden of poor plan experience, it would be up to the retirees on their own to find workable solutions.

We have always known that good pension plans that provide for a secure retirement cost a lot of money, but past high investment returns have tended to obscure these costs. Unfortunately, stellar investment performance can no longer be relied upon to overcome the influences that have increased the cost of these programs. Solutions, such as target benefit plans, that meet the principles of containing costs and better sharing risk among members and among generations of members, should be considered in getting the cost of Ontario’s public-sector pension plans under control. [/EXPAND]