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.
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.