A new report by the C.D. Howe Institute says taxpayers are on the hook for the unfunded liability of pension plans for federal employees.
In the report, authors William Robson and Alexandre Laurin argue that official figures for federal pension obligations understate future costs and leave many plans seriously underfunded. “The federal government in particular presents a misleadingly rosy picture of the situation of its plans,” wrote Robson, president and chief executive officer at C.D. Howe. “Ottawa’s unfunded pension liability is nearly $100 billion worse than stated. This is unsettling news for the federal employees who belong to these plans, as well as for taxpayers.”
Ottawa’s defined benefit plans create taxpayer risk because the economic value of the benefits they’ll provide can fluctuate by tens of billions of dollars every year, the report noted. It also suggested the federal government’s accounting practices understate those risks for both taxpayers and plan members.
“Since pension promises are guaranteed by taxpayers and indexed to inflation, the appropriate rate for discounting the value of future payments should be the yield on federal government real return bonds, which for years has been much lower than the assumed rate in official figures,” the report stated.
“Correcting this distortion would produce a fair value estimate of $245.9 billion for Ottawa’s unfunded pension liability at the end of 2016/17 — around $27,000 per family of four and $96 billion higher than the reported figure. Because the unfunded pension liability is part of Ottawa’s debt, applying this fair value adjustment raises the net public debt from the $631.9 billion reported at the end 2016/17 to an adjusted $727.9 billion.”
The report suggests Ottawa should switch to a different type of arrangement with benefits based not only on salary and years of service but also on the plans’ funded status. It notes that such arrangements are already common in much of the provincial public sector and have a variety of labels, including shared-risk and target-benefit plans.
“Their common feature is that when things do not go as expected, the plan sponsor and the employees share the costs and benefits of the new reality,” the report stated. “Ottawa could also protect taxpayers from liability risk by capping employer contributions at a fixed share of pensionable pay.”
“Most importantly, economically meaningful reporting of the plans’ benefit values and their cost to taxpayers would foster improvements in Canada’s retirement saving and income system generally. And it would foster reforms that would provide federal employees with better-funded pensions and taxpayers with protection against risks too few know they face.