A key aspect to managing the increasing compensation costs of federal government employees is a transition away from defined benefit pension models, according to a new report by the C.D. Howe Institute.
Target-benefit plans would provide more stable contribution rates by allowing more benefit flexibility, says the report, while another option would be jointly-sponsored pension plans, in which employees take on some of the risks related to the cost of future benefits, and also get some say in sustainability and investment discussions.
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Compensation for federal employees has increased 4.8 per cent per year over the last decade, according to the report. In 2005/6, the government spent $85,000 on the average full-time employee, which covered salary, benefits, and pension and social security contributions. By 2015/16, that amount had risen to $136,000.
While salary and other payroll contributions rose three per cent ($81,700 to $109,500) in that time period, the cost of non-payroll items tied to unfunded deferred compensation shot up 23.3 per cent ($3,300 to $26,600). These benefits include veterans’ and police officers’ disability plans, future health and dental care, provisions for severance and sick-leave accumulation and the annual amounts reflecting the rising value of accrued pension and other future benefits.
Ten years ago, these non-payroll items made up around five per cent of an employee’s compensation package; today, they make up 20 per cent, according to the report, which notes declining rates of return have played a large part in the increasing costs of deferred compensation. Between 2005/6 and 2015/16, the expected federal long-term bond rate used to determine the value of these pension plans dropped from 5.1 to 2.4 per cent.
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The report also argues that federal financial statements understate the value of the federal government’s pension commitments: it values its accrued pension obligations at about 2.7 per cent, based on an “arbitrary” discount rate, while the yield of federal real-return bonds, which pension obligations closely resemble, are around 0.7 per cent.
“. . . This means that taxpayers are guaranteeing plan participants long-term real rates of return around three per cent — a guarantee of great value to participants and imposing great cost on taxpayers that does not appear in the federal government’s statement of operations or its debt,” the report adds. It goes on to note that if the government had valued its 2015/16 pension obligations using that year’s real-return bond rate of 0.49 per cent, the per-employee cost would have been about $30,500 higher and the total liability for accrued pension benefit obligations would be $107 million higher.
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The report also notes that federal employees’ wages are higher than they need to be to attract good workers. In 2105, the average employee earned $64/hour, compared to $46/hour in the financial services and insurance industries, and $40/hour in professional, scientific and technical jobs.
While it’s important the federal government attract able workers, the right level of compensation means some employees would leave for the private sector, as “some job turnover is a sign of a healthy labour market,” the report notes. If salary reductions are affecting certain areas too much, the government could increase compensation in those areas alone, it suggests.
“The federal government is paying more than necessary to attract and retain good workers,” the report concludes. “Containing federal borrowing and avoiding future upward pressure to raise taxes will require Ottawa to curb the cost of its own employees.”
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