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Reform of Canada’s public sector pension plans is no longer limited to active employees—increasingly governments are willing to address expensive components of retiree pensions as a part of their reform initiatives.

Most recently, Prince Edward Island announced that, beginning in 2017, it would only grant cost of living adjustments (COLA) to its public sector retirees if the plan performs well, but otherwise they would be removing the indexing guarantees. While the P.E.I. government pointed to an estimated $400 million pension plan deficit in support of this change, it has also committed to making an annual $25 million special payment into the pension fund for the next 20 years to help ensure that “the plan does perform well”, and thus pay out indexing to pensioners.

Read: P.E.I. plans overhaul of public sector pensions

Other P.E.I. changes, such as increasing the age at which employees may retire with an unreduced pension from 60 to 62 and moving from a “best of three” or “best of five” to a career average earnings formula, would impact active employees. However, P.E.I. has made it clear that retirees will not be immune from its pension reform initiatives. Two of P.E.I.’s unions—the Union of Public Sector Employees (UPSE) and the Canadian Union of Public Employees (CUPE)—have expressed concern over the changes, with CUPE calling them “too drastic” and UPSE responding by organizing meetings with its members.

P.E.I.’s announcement, however, was welcomed by the New Brunswick government, with Finance Minister Blaine Higgs stating that:

Pension plan reform in Prince Edward Island is further proof that New Brunswick is following the right course.”

New Brunswick has also addressed retiree entitlements as a part of its strategy for tackling its underfunded public sector pension plans. New Brunswick’s changes to its Pension Benefits Act arose following the appointment of a Pension Task Force and a consultative process with unions in the province. Under New Brunswick’s shared risk plans, the base benefits are based on a targeted pension formula (usually career average earnings) and certain ancillary benefits, such as COLA, will only be provided where there are sufficient funds in the plan. Further, all benefits (i.e., both base and ancillary benefits for the past and the future) may be reduced under the shared risk model if there are insufficient funds. In the unlikely event that such a reduction was required, it would affect all plan members, including retirees.

New Brunswick’s willingness to include retirees in its reform was considered novel at the time and has not been without its detractors. Certain New Brunswick retirees recently launched a fundraising campaign to potentially fund a legal action.

Nova Scotia also passed amendments to its Public Service Superannuation Act implementing a five-year funding review cycle commencing in 2015. Under this approach, COLA will not be permitted unless the Nova Scotia Public Service Superannuation Plan is 100% funded and even when fully funded, the plan’s COLA will be subject to restrictions dependent upon the amount of surplus in the fund.

Alberta has also moved forward with changes to its public sector plans’ indexation formulas. Last month, Alberta announced public sector pension reforms to take effect as of January 1, 2016, which include changes to their plans’ COLA formula. COLA on benefits earned after 2015 will be “targeted” at 50% of the Alberta inflation rate. (Those already receiving pensions by the end of 2015 will continue to receive their pensions including COLA covering 60% of Alberta inflation.) Contributions will be set so that there is a high likelihood that the “target” COLA will be paid, but it will no longer be guaranteed. COLAs could be reduced or suspended if the pension plan’s financial status deteriorates, and “catch-up” COLAs could be made later if the plan’s finances improve. Alberta unions and employees have until December to comment on the changes.

Read: Alberta proposes public sector pension plan reforms

When considering changes to pension benefits as a part of a strategy to address an underfunded pension plan, plan sponsors have tended to focus on changes that would only impact active plan members—with retiree entitlements often considered “off limits.” However, with underfunded pension plans, inter-generational equity issues and taxpayers’ wrath becoming of increasing concern to Canadian governments, there appears to be a greater willingness to explore alternative solutions that broaden the impact of pension reform to include all plan beneficiaries.

Jana Steele is a partner in Osler, Hoskin & Harcourt LLP’s pensions and benefits group in Toronto. This article originally appeared on Osler’s Pension & Benefits Law Blog. The views expressed are those of the author and not necessarily those of Benefits Canada.

© Copyright 2014 Rogers Publishing Ltd. Originally published on benefitscanada.com

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See all comments Recent Comments

Mike Murphy:

Good article. A condensed view of what is happening throughout Canada with Public Pensions. Newfoundland and Labrador also have announced that they will look at changes to our public pensions within the next few months.

What’s encouraging is that none of these provinces are talking about doing away with defined benefit plans for public sector workers, just changing how to calculate benefits and suspending cost of living increases or other improvements if the plan is not sufficiently funded.

I do believe that we have to be very careful when we look at taking benefits away from those already retired. They should receive what was promised to them and I hope that the Courts see it that way. After all, they don’t have any say on future costs or benefits and little if any recourse it benefits are reduced.

Those working (along with those paying taxes) should pay the piper, not retired low income citizens.

Mike Murphy

Tuesday, October 22 at 3:22 pm | Reply

Robert in Vancouver:

A better and more fair reform would be to make public sector pensions equal to private sector pensions.

For example, a file clerk in a government office should get the same pension as a file clerk in the private sector.

That would be the fairest way to pay pensions, unless you believe government workers deserve more than everyone else.

Tuesday, October 22 at 3:24 pm | Reply

Robert Ottawa:

So if we follow the logic of Robert in Vancouver, senior public servants in similar positions as CEOs and senior executives in the private sector should get the same benefits as these individuals when they leave their respective jobs. For example, the CEO of Blackberry is getting anywhere between $16 and $56 millions as a severance package.

Thursday, November 07 at 12:07 pm | Reply

John in Vancouver:

Robert in Ottawa, you might want to gain an understanding of the difference between profit centers and expense centers. I have never met a file clerk with an MBA. If that is the case that person is over qualified or not motivated to seek a higher paying job commensurate with their acdemic and industry skills.Risk return models apply here, the bigger the big picture risk the larger the compensation, we don’t live in a meritocracy that is fair.

Friday, November 08 at 3:04 pm

Robert in Vancouver:

Reply to Robert Ottawa:
1. There aren’t any public service managers equal to CEOs in the private sector. Public service managers do not have any of the financial and legal burdens that the private sector has such a fiduciary duty to try to make a profit.

2. Private sector CEO compensation is set freely by the shareholders of the company. The company has competitors and has to watch it’s bottom line when negotiating CEO compensation.

3. Canadian taxpayers (ie. the shareholders of Canada) have no say in setting government worker pensions. Government unions can hold the public hostage till the government gives in to union demands. Neither party is concerned about bottom lines or competition because such constraints don’t exist for government workers.

Tuesday, November 12 at 7:04 pm

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