Modern public sector pension plans share risk, most are fully funded, well-governed and superbly efficient at securing adequate retirement income at an affordable cost.
Some commentators and lobby groups are stuck in the past, mistakenly concluding that public sector pension plans are on the whole unsustainable. And a research series by the Canadian Federation of Independent Business says they present a crushing burden to taxpayers.
Nothing could be further from the truth.
The facts about well-run modern defined benefit pension plans may surprise you. They share risk and most are fully funded, and they operate efficiently with the goal of securing adequate retirement income at an affordable cost to members and employers. For instance, the CAAT pension plan is 110.4 per cent funded, which means that for every dollar we’ve promised in pension payments, we have set aside a $1.10.
Read: CAAT reports 8.1% return in 2015
Why do we need a funding reserve? Because we’re jointly governed, meaning members and employers share equally in the responsibilities for the plan. Cost increases are painful for everyone, so a reserve is used to keep contributions stable in a volatile world.
As a multi-employer pension plan primarily serving the Ontario college system, the CAAT plan pools risks among its 38 employers, the most recent of which is the Royal Ontario Museum. The ROM’s 640-member, single-employer pension plan merged with the CAAT plan in January. The aim of the merger is to create greater efficiencies and eliminate the ROM’s pension management risk.
Read: ROM pension members join CAAT pension plan
Many plans now share risks with retired members by providing conditional inflation protection that is dependent on the plan’s funded status. Guided by its funding policy, the CAAT plan pays retired members conditional inflation protection increases in those years when it can afford to. Under the policy, if the plan is less than fully funded, this conditional benefit is suspended until the plan is fully funded again. In this way, risk is shared among employers and generations of members. The CAAT plan is managed to remain fully funded and has always been able to pay conditional benefits, including during the global financial crisis in 2008 and 2009.
A recent study published for the Broadbent Institute sounded the alarm that about half of Canadians aged 55 to 64 have no accrued employer pension benefits, and about half that number have inadequate savings amounting to less than one year’s worth needed to supplement the Canada Pension Plan, Old Age Security and the Guaranteed Income Supplement. This same study also points to rising levels of senior poverty, from a low of about one in 25 in 1995 to about one in nine in 2013. The poverty rate for single seniors, especially women, is at a stunning one in three, according to the report.
Read: Canadians’ retirement savings ‘wholly inadequate’
Adequate retirement income from defined benefit pensions provides a deferred tax base, which will be vital as the number of Canadians over the age of 65 doubles during next 25 years. As well, senior poverty is expensive to manage if governments rely on social programs, such as OAS and GIS, funded through general revenue. Through effective and efficient pooling of longevity risk, workplace defined benefit pension plans help reduce reliance on social programs now and in the future.
Defined benefit plans are the most efficient way to provide pensions, according to a report by the Canadian Institute of Actuaries. Many mistakenly believe that taxpayers are paying 100 per cent of benefits as they come due. The facts are different.
A report published in 2014 by Robert Brown and Craig McInnes, and funded by the Canadian Public Pension Leadership Council, seventy-five cents of every pension dollar paid by the CAAT plan actually comes from investment income. Member and employer contributions amount to 12.5 cents each.
In Ontario, where less than half the costs of operating a college comes from the provincial government and the remainder from tuition and other revenue sources, taxpayers contribute about six cents of every pension dollar.
Read: Sounding Board: ROM, CAAT pension merger lowers costs and risks
We all benefit from having pension systems that provide adequate retirement income. In Ontario, nearly 1.3 million defined benefit pensioners account for an estimated $27 billion in consumer spending each year, according to a booklet published by the Healthcare of Ontario Pension Plan. This generates about $6 billion in tax revenue.
Spending by defined benefit pensioners is crucial for many cities and towns. These pensioners feel confident about having a steady income in retirement, so they spend their pension benefits at local restaurants, businesses and stores. For instance, about one-fifth of the economic activity in the Ontario cities of Kingston, St. Catharines and Thunder Bay is generated by defined benefit pensioners, according to a study by the Boston Consulting Group. With the shifting of demographics in Canada’s defined benefit pensioners will likely be the largest and most stable “employer” in many communities.
The modern public sector defined benefit pension plan model is a stable and an efficient way to provide adequate retirement income for members and their families, while helping to support local economies and reduce reliance on social programs.
Derek Dobson is chief executive officer and plan manager of the CAAT pension plan.