Federal public servants have pension guarantees in their DB plans that are mispriced, causing Ottawa to seriously underestimate the cost of the pension plans and the total compensation of its employees, according to a report.
In the C.D. Howe Institute report Evaluating Public-Sector Pensions: Are Federal Public Servants Overpaid?, pension expert Malcolm Hamilton says this advantageous situation for members of the main Public Service Pension Plan (PSPP) exacerbates the growing compensation gap between federal public sector employees and their private sector counterparts.
“Back in 2006, a government report acknowledged that federal public sector salaries generally outstripped those for comparable jobs in the private sector,” notes Hamilton.
“Steady pay increases since then and rising pension costs mean that federal employees are probably significantly overpaid by now,” he adds. “And while salaries for senior-level mandarins may still lag those in the private sector, they have some extraordinary pension benefits.”
The federal government appears to believe that pay in the federal public sector should be comparable to pay in the private sector on a total compensation basis, he says, noting that recent government reports are generally consistent with this view.
The payroll for members of the federal PSPP was about $20 billion in 2012, with pension contributions totalling about $4 billion, says Hamilton. The fair value of these pensions was about $8 billion.
As a consequence, the report states that the federal government underestimated the 2012 compensation of these members by $4 billion and reached a long list of erroneous conclusions about the cost of its pension plans and the compensation of its employees.
Actuarial and accounting standards do not explicitly advocate or endorse the use of funding or accounting numbers in compensation studies but the standards-setting bodies and the professionals involved know, or ought to know, that numbers prepared for one purpose are being used for other purposes to which they are ill-suited, the report says.
“In this sense, actuarial and accounting standards have become the enablers of bad financial practice even though the standard-setting bodies do not advocate or condone bad practice,” he says.
Hamilton doesn’t advocate slashing salaries, setting high employee contribution rates or converting to DC plans.
“The easiest fix is to eliminate the guarantee and transfer the investment risk to employees, as has become common in provincial public sector plans and in Europe,” says Hamilton, who suggests shifting to target-benefit plans. “If Ottawa is to meet the goal of general parity with the private sector, it needs to stop tinkering with its pension plans and to start making some meaningful changes.”
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