LOOKING FOR LEADERSHIP ON PENSIONS
Brian Steeves and Mike Wong
Commentary Telegraph Journal 18 Mar 2012 05:22AM
New Brunswick is struggling with questions of pension viability and sustainability – as are the federal government, most other provinces, municipalities and innumerable businesses. How the province acts (or doesn’t act) will have a profound impact on New Brunswick citizens for many decades to come.
Pensions are all-encompassing. They can impact business and government in terms of their current solvency. They have a powerful influence on our overall prosperity, in both the short and long term. Pensions impact us greatly as individuals and perhaps most importantly, the way they are structured strongly reflects our societal values.
We really need to think about what kind of world we want to live in. When talk comes to “fixing the pension problem” we are not just talking about a current issue but also for the next generation. Maybe our pension discussion should start by identifying our most important values, then see if we are on track to deliver them and finally take necessary action to assure that they are achieved. Premier David Alward touches on some of those values, in his introduction to Overcoming Poverty Together, when he calls for “safe, healthy, self-reliant and involved lives.” In an era of financial insecurity, galloping income disparity and dramatic change, the premier’s goals – not to mention questions of fairness and equality – become crucial for all of us. That is, if we are to pass on a society even as good as the one we have now.
Good pension policy is not only good social policy but good economics. Racing to the bottom is not the route to prosperity. So, how are we doing on self reliance, equality and fairness? A recent OECD report notes that income inequality is at “a record high” in Canada and other industrialized nations. The old canard “don’t waste a crisis” sees the corporate and to a lesser degree the public sector using the current economic malaise to bail out on pensions and freeze or reduce wages and benefits. A recent New York Times article notes that “Like private employers, which have in droves terminated traditional pension plans, many government officials like the idea of shifting much of a pension plan’s risk to the worker.” This is usually achieved by moving away from defined-benefit (DB) to defined-contribution (DC) plans. Barry McKenna, in a recent Globe and Mail column, observed that, “Experts report that workers in defined-contribution plans typically don’t adjust their risk profiles as retirement nears, leaving them dangerously exposed to market downturns.” Even more alarming, a recent Manchester Guardian article noted that a confidential report on pensions, done for the British government, observed that “...charges (fees) are spreading and are so steep that savers may find they get less back in retirement than they invested in saving accounts and pensions over their lifetimes.” Whatever happened to institutional responsibility? Do we really want our values to reflect a Social Darwinism worthy of a Dickens novel?
Moving to defined-contribution plans clearly violates the values test, puts future retirees at financial risk, is bad economics and pits new workers against current retirees. Plans in other provinces and countries have developed public sector approaches which call for flexibility on the part of plan sponsors and employees while maintaining most important features such as defined benefits.
James Pierlot, an attorney specializing in pension law, commenting in Benefits Canada, notes that the Drummond Report focuses on “managing costs, improv(ed) reporting and making plans sustainable over the long term”. The Report recently commissioned by Ontario calls for action on pension security by reducing indexation and eliminating retirement bonuses. It also accepts DB plans as appropriate. Unions also understand the situation. The Ontario Teachers Federation has agreed to increase plan contributions by members. The Healthcare of Ontario Pension Plan recently introduced conditional indexing, which may range from 0 to 100 per cent in any one year.
As of March 2011, there were 300 separate plans in New Brunswick. Thirty-six per cent were defined benefit (DB), 61 per cent were defined contribution (DC). Another three per cent were hybrids combining both features. The ratios are reversed when counting actual plan members. Fifty-seven per cent were in DB plans, 35 per cent were in DC plans and seven per cent in hybrids.
Roughly 74,000 people are in New Brunswick government plans, 81 per cent of which are defined benefit and indexed. These plans have a high ratio of retirees to contributors, meaning that they are very dependent on investments to be able to stay solvent and continue full payments to retirees. Current funding levels are in the 87 per cent range, perhaps acceptable in the very short term but not in the longer if investment returns do not materialize as planned. The province needs to take action on its own plans.
These plans need to maintain a DB approach but assure long-term viability through providing enough flexibility to deal with changing economic and financial cycles and long term trends. As mentioned in a previous discussion, the Dutch could help us avoid re-inventing the wheel. Flexibility to deal with their financial upheavals has come through moving toward more plans based on career-average earnings, rather than final salary. To balance this change, career average plans have a two per cent annual accrual rate, versus 1.75 per cent for final salary (The Canada Pension Plan is career-average based and is ranked as one of the best in the world). Another very important Dutch change has been to make indexing conditional upon a fund’s annual financial status (investment returns). Growing life spans and the resulting need to provide retirement income for much longer terms has also led to the Dutch scaling back or phasing out of early retirement plans.
The integrity of Dutch plans and their solvency is further enhanced by requiring actuaries to do an annual indexing valuation. If a fund’s assets are insufficient to meet the minimum solvency standard of 105 per cent, a mandatory three-year recovery plan is imposed. Contribution holidays no longer exist. Returning to values and income inequality for a moment, the Dutch changes put forward in 2008 were presented under the banner of social solidarity.
Private-sector plans in North America are another matter. Left to its own devices, the private sector generally does not seem to be willing or capable of providing real long-term retirement security for employees. This submission doesn’t have the space to make comprehensive recommendations on how best to address the problem here but the province, to its credit, has committed to trying to deal with it.
The Dutch experience could provide direction for New Brunswick. The main initiative for the Dutch changes came from the labour sector. Government and the private sector were wise enough to realize that effective change would come from all working together to solve their pension problems. New Brunswick could show leadership by pushing for expansion of the Canada Pension Plan in ways that offset the limitations of the private sector.
Changes like those suggested above should be sufficient to assure the long-term health and quality of public service plans and for the province to get its own house in order. The disparity between public and private-sector retirement futures cannot be sustained for long. The province has the opportunity to show national leadership by being among the first to take innovative and meaningful steps to get its own house in order. It also has the opportunity to show even greater leadership by showing the same concern and attention to private-sector workers.
Brian Steeves is an economist who has worked for the provincial Department of Finance. Michael Wong has worked as chief economist of NB Power.