# C.D. Howe report on public sector pensions



## MoneyGal (Apr 24, 2009)

Here is a new report on how public sector pensions are funded and valued:

Toronto, Dec. 13 - The federal government's unfunded liabilities for its employee pension plans total $227 billion, far more than reported, according to a report released today by the C.D. Howe Institute. In "Ottawa's Pension Gap: The Growing and Under-reported Cost of Federal Employee Pensions," authors Alexandre Laurin and William Robson find that, using fair-value accounting like private-sector plans which value assets and liabilities using current market prices and interest rates, Ottawa's unfunded employee pension obligations are $80 billion more than reported in the Public Accounts.

"Ottawa's calculations do not reflect investment returns available in the real world," notes Bill Robson. Ottawa arrives at the reported figure for its obligations, he explains, by discounting the future payments using notional interest rates. One of these - a legacy from the days when federal pensions were completely unfunded - is a moving average of past nominal yields on 20-year federal bonds. The other is an assumed return, currently about 4.2 percent in real terms, on fund assets for benefits earned since 2000. "Both these interest rates are well above anything currently available on any asset that matches the plans' obligations," says Robson. "Any Canadian who does not work for the federal government and wanted a tax-backed, inflation-indexed pension would need to save far more money than these plans hold for his or her federal-employee counterpart."

These obligations are part of the federal government's debt, so the fair-value calculation raises the debt by the same amount. Moreover, this restatement of the debt affects Ottawa's annual budget balances in the past: the surpluses reported from 2001/02 to 2007/08 were smaller, or were deficits, and the deficits since then were much larger. In 2010/11 alone, the deficit would not have been the $31 billion reported, but half again larger: almost $47 billion.

These colossal numbers reflect a gross unfairness in Canada's pension system, say the authors. The fair value of the typical federal employee's pension entitlement is growing at more than 40 percent of pay annually- much faster than the contributions to fund it, and faster than tax rules permit other Canadians to contribute to RRSPs or defined-contribution pension plans. "Unhappily, those Canadians who must prepare for retirement in a much less congenial environment are also on the hook for the growing unfunded liability in the federal plans," say the authors.

The authors recommend three types of reforms to address the problem: a revamping of the benefit-structure of public-sector, defined-benefit plans; increasing the tax-deferred saving room available to the rest of the population; and ensuring that actual money is flowing into the public-sector plans to match their pay-out promises.

For the report click here


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## Sampson (Apr 3, 2009)

Will have to read the entire report first, but on first glance of the excerpt, the issue of fairness comes up. And it seems CD Howes' argument is that as long as private sector workers have access to equally unsustainable DB options, or more RRSP room, then things will be better?

My first read on fairness is how will those under-funded pensions become properly funded? That won't be fair.

Maybe Canada needs to implement some austerity measures, cutting benefits to public workers seems to be the mode around the World these days.


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## CanadianCapitalist (Mar 31, 2009)

It should be noted that PSPP employee contributions are already increasing and employee's share of PSPP contributions are expected to hit 40% by 2013.


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## MoneyGal (Apr 24, 2009)

Sampson said:


> And it seems CD Howes' argument is that as long as private sector workers have access to equally unsustainable DB options, or more RRSP room, then things will be better?


The report is making no argument that DB plans are unsustainable. It is making the argument that the public sector DB pension plan results are unavailable to pretty much every other working Canadian - even if you could save the 40%+ of your salary required to fund the pension, you couldn't shelter that amount from taxation.


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## the-royal-mail (Dec 11, 2009)

More CPP room for all. No PRP, RRSP or other schemes required. Simple.


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## MoneyGal (Apr 24, 2009)

You ready to put 46% of your salary into that expanded CPP, TRM? (see page 3 of the linked report)


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## CanadianCapitalist (Mar 31, 2009)

Since when did *current* RRB yields become the guideline for the discount rate on retirement savings lump sums? How many pension plans out there are entirely invested in RRBs?


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## kcowan (Jul 1, 2010)

There is no question that making good on DB pensions is going to take a supreme sacrifice. The only question is who will be making that sacrifice?

(I fear that it will not be the government or their employees!)


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## MoneyGal (Apr 24, 2009)

CanadianCapitalist said:


> Since when did *current* RRB yields become the guideline for the discount rate on retirement savings lump sums? How many pension plans out there are entirely invested in RRBs?


Since always. If you want to compare apples to apples, you must compare RRBs to the Treasury-backed, inflation-protected pensions offered in the federal public service. Otherwise, you are introducing an element of risk for non-PS DB pensions which is not present for public sector workers. 

See also: http://www.advisorone.com/2011/09/01/what-does-retirement-really-cost


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## MoneyGal (Apr 24, 2009)

Let me rephrase: since mark to market accounting for pension plans became the internationally-recognized standard for pension valuation, per the Financial Accounting Standards Board and the International Accounting Standards Board, in a move toward convergence of global accounting standards.


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## andrewf (Mar 1, 2010)

Final salary plans are unsustainable, unfair, and unreasonable, IMO.

In the pension reform debate, the number thrown around was a six percentage point increase in contributions to fund an incremental 25 percentage point of replacement salary (a doubling of benefits). By that logic, it would require 24% of salary (between employer and employee) to cover 100% replacement of inflation indexed average career earnings--excluding the 4% of stranded CPP liability that needs to be covered going forward. I don't have time to read the report right now, so could you quote the passage you're referring to MG?


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## Daniel A. (Mar 20, 2011)

Something not mentioned that should worry the average taxpayer even more is all the benefits that are on top of this amount ie medical extended benefits.

We are on the same road as the EU countries with their pension issues, they waited till the bank was empty.
None of the promises made in these contracts can be covered the sooner big government unions understand this the sooner things will change.

In the USA pension under funding amounts to 3.3 trillion dollars.

In the real world where do these folks think the money is going to come from.


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## Sampson (Apr 3, 2009)

MoneyGal said:


> The report is making no argument that DB plans are unsustainable. It is making the argument that the public sector DB pension plan results are unavailable to pretty much every other working Canadian - even if you could save the 40%+ of your salary required to fund the pension, you couldn't shelter that amount from taxation.


Finally had a chance to read the full report.

Agreed, one of their main points is the fairness among Canadians, and I think we have discussed this in the past on this forum, even if all Canadians had equivalent tax-deferred savings potential, what would be the outcome. Would most Canadians use it?

I think the underfunding is what I took away. It is one of their 3 main points, that their estimates are resulting in an underfunded plan - I didn't look at the 2009 paper to see their methodology - are you familiar with it MG? If the amount of underfunding continues to accelerate, then ALL Canadians will be in a world of hurt.

40% of salary towards pensions hey?


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## slacker (Mar 8, 2010)

I work in the private sector. I save 49% of my after tax income. I realize that's highly unusual, but at current rate of market return, that's about what it takes for a reasonable retirement.


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## the-royal-mail (Dec 11, 2009)

They can solve so many issues simply by allowing people to top up their CPP. It could be voluntary or mandatory, doesn't really matter, but after a certain point in the year I reach some upper limit cap and they stop taking CPP contributions. I for one would be more than happy to keep contributing to this plan to help solve this problem for a lot of people. More people would retire with better pensions, based on their higher contributions.


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## Karen (Jul 24, 2010)

slacker said:


> I work in the private sector. I save 49% of my after tax income. I realize that's highly unusual, but at current rate of market return, that's about what it takes for a reasonable retirement.


Slacker, if most of the average income workers in this country saved 49% of their after-tax income, they wouldn't have to worry about retirement - because they would be in danger of starving to death long before they reached retirement age!


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## slacker (Mar 8, 2010)

Karen said:


> Slacker, if most of the average income workers in this country saved 49% of their after-tax income, they wouldn't have to worry about retirement - because they would be in danger of starving to death long before they reached retirement age!


That's about the amount I'll need to save to match the gold plated pensions that my friends who work in government.

Scratch that, I am bearing market risk, while my friends in government enjoy equity like returns with GIC like risks. So for someone in the private sector to match the gold plated pension that government worker gets, they'll probably need to save 2/3 to 3/4 of their wage.

Meanwhile, government workers' wages have already caught up with public sector. The myth that one takes a paycut working government is just that, a myth.

Am I being unreasonable?


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## slacker (Mar 8, 2010)

I'm not sure what the problem here is ... underfunding is ok. Just increase the contribution rate. Problem solved.

Oh the unions don't like that? ... ok... Let the taxpayer take care of that then, we don't mind.


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## sags (May 15, 2010)

The pension plans referred to by the report, are Federal pension plans that include those of MPs, judges, RCMP, and the Canadian Forces.........all non union employees.

The Ontario Teachers Pension Plan is referred to in the report.....although it isn't a Federal pension plan, but is a privately administered plan.

Although the thrust of this report has some merit, it doesn't reflect the reality of the vast majority of pension plans, whose members receive much smaller pensions than calculated in the report.

MP pension plans are particularly generous. Judges earn high salaries which bear high wage replacement costs and benefits attributable to the hierarchy of the RCMP and CF would have a significant impact on the cost of providing the pensions.

For the rank and file of these organizations, the pension plan is much less lucrative or expensive.


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## sags (May 15, 2010)

A contrarian view on the necessity and appropriateness of defined benefit pensions, coming from CEO of the HOOPP pension plan, which is fully funded and serves both employers and employees well.

http://opinion.financialpost.com/20...boosting-defined-benefit-pensions/#more-20555


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## HaroldCrump (Jun 10, 2009)

HOOPP is the Ontario health care workers plan, right?
So sure he can talk.
It's nice to run a pension plan "fully funded" by tax payers.


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## Eclectic12 (Oct 20, 2010)

Sampson said:


> Finally had a chance to read the full report.
> 
> Agreed, one of their main points is the fairness among Canadians, and I think we have discussed this in the past on this forum, even if all Canadians had equivalent tax-deferred savings potential, what would be the outcome. Would most Canadians use it?
> 
> [ ... ]


I'm always leery of the often suggested "raise the limits" and "would most Canadians use it".

IMO, part of the picture should be to clearly identify who has the option versus those who don't.

Case in point, my buddy has lots of RRSP and most of his TFSA room left - which will be lumped into the standard Canadians have "$## billion" in unused RRSP room type statements.

Trouble is - he staying at home to take care of his mom. Until she passes on, he's not likely to use much of it as a "good" year is around $12K.



Cheers


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## CanadianCapitalist (Mar 31, 2009)

MoneyGal said:


> Since always. If you want to compare apples to apples, you must compare RRBs to the Treasury-backed, inflation-protected pensions offered in the federal public service.


Really??? It makes no sense to me that a portfolio composed mostly of equities should use a discount rate equal to current RRB yields. I'd probably quibble that a 4.2% real rate of return is a tad optimistic but 1.15% is far too conservative.


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## sags (May 15, 2010)

HOOPP members make substantial contributions to their pension plan.

It also helps when the plan gets these kinds of return on investment.

_On the investment side, "equities and long-term bonds were our strongest performers in 2010," he says. HOOPP reported returns of 17.38% in Canadian equities and 16.78% in U.S. equities. Canadian long bonds were up by 17.35%, real return bonds were up 11.41%, universe bonds were up 9.54% and corporate credit was up 1.71%. HOOPP’s real estate portfolio had a solid year as well, returning 12.29%. Private equity posted a 9.7% return rate (approximately 16% before foreign exchange impacts)._

The HOOPP plan has 35 Billion in cash, and pays out 1 Billion per year in benefits. They receive more than that in contributions and return on capital, so the fund will continue to prosper.

It is a good example of proper pension plan management, perhaps because the board consists of 50/50 employee and employer representatives.


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## OhGreatGuru (May 24, 2009)

Here we go again.

The Chretien Liberals took $30B “surplus” out of the plan under Bill C-78, in Sep. 1999. to pay down the national debt. The public service unions are still fighting this theft in court.

We won't go into the fact that the Chief Actuary's reports disagree with CD Howe, as I suppose their purpose is to disgree with the Actuary.

If the CD Howe analysis is correct, the taxpayers should return the $30B plus interest to correct the underfunding. (That would be about $48B now at 4% interest)

If the CD Howe analysis is wrong, it is just one more in a long string of ideology-driven attacks by this institute on pensions of all kinds, including public pensions. The existence of public pension plans makes private employers without pension plans look bad. CD Howe would prefer that employers not suffer the burden of contributing to any pension plans, and that the masses go on welfare when they retire. (They don't seem to understand that retirees with decent pension plans pay taxes and purchase goods & services that keep private businesses going.)

Bah humbug.


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