I am a pensioner. I am a member of a 'public-sector' British Columbia pension plan. I am also watching and listening to the news stories, the most recent of which involved the Canada Post and Air Canada dispute.
I am troubled by the apparently broadly-based employer/neo-conservative 'rush to the bottom' in implementing defined contribution pension plans. In some cases converting existing defined-benefit to defined-contribution plans. In the face of such developments, it is not hard to figure out why employees would feel concerned about these efforts.
In the following, I am going to say some things that I believe I 'know' about pensions. So, my understandings:
In broad strokes, to me, there seem to be primarily two different pension contexts. Those that operate in the so-called private sector, and those that operate in the so-called public sector. The plan of which I am a retiree, of course, is one of the latter. There is perhaps a third category, and those are the plans of which politicians are members -- often seen as 'gold plated'. My comments will focus mostly on the first two, although I think that the general public often confuses the broader, so-called public-sector plans with the plans politicians have created for themselves. And increasingly, the conventional wisdom seems to suggest that defined-benefit plans (particularly those in the public sector) are 'gold-plated' and unsustainable. It seems to me that public-sector pension plans are often represented as 'taxpayer-funded'.
In the face of this notion of taxpayer funding, I will describe what I understand about the public-sector plan from which I draw a pension. And then make some comments about private sector pensions.
Public Sector Pensions:
As I recall, a dozen years or so ago, the BC provincial government at the time and the trustees administering the plan to which I belong -- and perhaps for all BC public-sector plans -- engaged in a process of separating the plans financially from the finances of the government. My understanding at the time was that this was to remove the government from any future unfunded liabilities that might arise. This deal was done and has been in place for a decade or so. The trustees of the various public-sector pension plans use the services of the British Columbia Pension Corporation, which administers the various pensions and investments, my plan included.
The BC Pension Corporation web site states the following: "The Pension Corporation is one of Canada's largest pension benefit administrators, serving the boards of trustees for the largest public sector pension plans in British Columbia, and representing over 440,000 active and retired plan members, and about 800 plan employers."
So, two things about British Columbia public-sector pension plans:
- The so-called public-sector pension fund administration is arms-length from government, and
- The administrative costs are paid out of the employer-employee contributions on behalf of the members, and from income on investments.
Of course, as I have said above, compensation for public-sector employees is initially paid by taxes. In that sense the original funding comes from a different source than private-sector plans -- which are intended to be based on earnings of the firms having their own plans. But in both cases, regardless of the initial source for employee compensation, in either case, the amounts involved are part of the agreed-upon package for which any employee agrees to provide his/her service to the employer.
As I understood the situation at the time of my own retirement three and and a half years ago, the elements of the fund from which my pension is drawn was based on two primary factors:
- about 20 percent of the funds in the plan is from on-going direct contributions (part directly by the employer and part as a checkoff from each employee's gross pay) , and
- about 80 percent was from return on investments of the built-up savings.
And, as mentioned above, a decade or so ago, by mutual agreement, the government and its employees decided that would be the limit of the funding relationship.
As I understand it, this has offered an advantage to the taxpayers of British Columbia in the sense that the BC taxpayers do not have an open-ended pension obligation; and from the point of view of the future pensioners, their pension prospects have benefited from what appears to be excellent asset management on the part of the BC Pension Corporation.
Just as importantly, there are benefits of scale to each plan through collective asset management. Indeed, this matter of 'scale' seems sufficiently beneficial, that pension funds have been joined with other publicly-administered trust funds -- through the British Columbia Investment Management Corporation. (Furthermore, these funds are available for investment in BC firms, for example, the funds were recently used for a shared investment in Timber West. So, what sector is 'public' and what is 'private'?)
I am sure that there are parallels to the above strategy at the federal level and in other provincial settings. But I am anything but an expert on these matters. I am told, however, that in the case of some Federal public-sector employee pension plans, and perhaps some other provincial plans, that unlike the British Columbia situation described above, the governments involved never actually accrued the employer-employee savings, and did not create a separate investment fund. Instead, a book entry was created, and all funds just stayed as part of general government funds, with no pension fund. The political policy expectation being, I guess, that future pension obligations coming due, would be paid out of future taxation revenue.
Not having accrued any actual contributions, and more importantly, not having accrued any investment income, the emerging claim is that the taxpayer can no longer afford to pay for such 'gold-plated', union-bargained pension obligations. While one can see the point of the taxpayer, it is hard to argue that blame for the expense rests on the greed of public-sector workers who assumed the governments for whom they were working were appropriately taking care of business.
Private Sector Pensions:
The latter scenario above is not unlike what I understand to have happened in the case of many so-called private-sector, defined benefit pension plans which are now also being touted as too expensive for employers.
Not unlike the BC public plans, each employer who has agreed compensate employees partially through having access to a defined benefit plan is expected to set up a fund -- conventionally often administered by the firm itself. Again, generally the employer or employer (or both) make contributions. I am not aware of how smaller corporations handled such funds, but I believe that most large corporation funds were or are self administered. I suspect that there are likely some legislative requirements in place around the administration of private-sector pension funds, but I am mostly ignorant in this regard.
I know little about whether or not the private-sector employers have ever moved to pool their respective pension funds or pension obligations in the fashion of the BC Pension Corporation for public-sector funds. If so, I expect this practice would be very uncommon.
A decade or two ago (perhaps more), private-sector employers began to realize that the book value of the pension funds they had established exceeded the actuarial projections of the future retirement needs for such funds. There were all kinds of news reports of conflict between corporations and their employee groups (organized or unorganized) as the corporations sought to 'claw back' the actuarial excess in such funds.
My own sense is that jurisprudence at the time allowed for such claw backs. I don't 'know' the rationale for such permission, but I presume that it might relate to the notion that the employer in some fashion was only required to ensure that "defined benefits" would be fully funded. Otherwise, the 'excess' belonged to the shareholders. Easy to understand, perhaps, because the corporations were generally self-administering their respective employees' pension funds. Presumably these funds had been invested in some income-earning assets, not unlike I have described is done in the public sector by the BC Pension Corporation.
But the fact is, that many corporations withdrew the 'excess' funds for the firm's ongoing operations. A process somewhat parallel to the way some governments set up defined plans, but instead of setting aside the funds, simply made a book entry and used the funds to provide ongoing public services. However, enter the turbulent investment periods of the last decades or so.
Now the finances of the private-sector pension plans are reversed. Instead of surpluses for future pension payouts, there are short falls. Corporations either ignore the actuarial deficits, or they begin to change the rules of the game -- not unlike is currently happening with Air Canada and Canada Post. Many employers either de-fund existing plans and discontinue them, or move to defined-contribution plans. The 'gold-plated' defined benefit pension plan is no longer seen as economically viable.
And over some period of time the ascendant public narrative about pensions begins to seem to be in accord. The new narrative says nothing about poor asset management or clawbacks on the part of the corporations, but is mostly about the costly nature of providing employee pensions and the ongoing 'richness' of 'gold-plated public-sector, taxpayer-supported pension plans.
The narrative promotes the effective alternative as one of two things:
- employees ought to be responsible for ensuring their own future through retirement, through their own financial discipline; or
- employers will assist with retirement planning of their employees by ensuring that employee compensation includes contributions (perhaps shared) to what amounts to a self administered RRSP, including more recently, a delimited tax-free savings account.
Faced with the new economics of pension (in)-security, the previous Harper government had the opportunity, in such a climate, to try to create some sort of broadly-based pension vehicle that would presumably allow employees with their own personal retirement funds to enter into some sort of collective arrangement for spreading the risk. A nation-wide portable pension arrangement. The current federal finance minister stepped away from such an initiative.
So, we are left with a pension mess, and a broadly-based rush to the bottom in terms of policy around assisting Canadians (particularly paid employees) to provide for their own retirement. Everyone eventually will pay a price for a retirement bulge that does not have the financial resources to see themselves through the retirement years. And, as described above, the lack of resources is often not a problem of employees' own making.
By the way, while it is a little difficult to calculate at this point, after working in the public sector since the mid 70s, my 'gold-plated, public sector pension when I turn 65 next year, will amount to about $1500/mo, before taxes. I am grateful for it, but not a huge income; no years of world travels ahead of us. It would have been better, if over my years of employment across the country, there had been portability arrangements among pension plans. Another topic.
