The situation for the City of Saint John’s pension plan didn’t look very good when it converted to a shared-risk arrangement at the beginning of 2013. According to its financial statements for Dec. 31, 2012, the plan had an unfunded liability of about $195 million on a going-concern basis and a solvency shortfall of $384 million as of Dec. 31, 2011.
With the city grappling to deal with the funding gap, it and its unions reached a deal to convert to a shared-risk model. The conversion meant significant changes to plan design: benefits would accrue at 1.8 per cent, excluding overtime pay, rather than at the prior rate of two per cent a year (including overtime and based on the best three consecutive years of earnings). In addition, the new plan no longer provided disability allowances or automatic indexing, which under the old arrangement provided for annual increases of one or two per cent, depending on the period of service.
For the employer, the change meant fixed contributions. Its contribution rate would be an average of 13 per cent of payroll, with a further temporary payment of 17 per cent for up to 15 years. Employees would contribute nine per cent, with those in public-safety roles paying more. And under the shared-risk model, the plan could invoke several measures, starting with changes to contribution rates and then early-retirement rules, should it find itself in a funding deficit.
Several years later, the plan has shown some signs of improvement. As of Jan. 1, 2016, the plan’s 15-year open-group funded ratio — a key measure for assessing plan status under the shared-risk model — was 115.9 per cent. The termination-value funded ratio was 85.1 per cent after a year in which the plan saw a net investment return of 3.3 per cent. Given the numbers, the plan announced in October it would provide a one-time increase of 1.12 per cent to base benefits as of Jan. 1, 2017. It was also able to boost accrued base benefits for active members only by 0.66 per cent as of Jan. 1, 2017. The increases, however, were less than the respective boosts of two per cent to base benefits and 2.57 per cent to accrued base benefits for active members the year before.
On the flip side, the plan’s most recent actuarial valuation report did show continuing funding challenges. While the province’s legislation doesn’t require shared-risk plans to conduct wind-up valuations, the report prepared earlier this year did conduct a hypothetical analysis. It found the plan had a hypothetical windup shortfall of $314 million as of Jan. 1, 2015, up from $212.5 million the year before.
So with the target benefit approach now in place in New Brunswick for several years, how have the plans actually performed? One of the key features of the shared-risk approach is to make cost-of-living increases conditional on the health of the plan, rather than automatic. Have the plans actually been providing the increases? And even if they have been providing them, what does the future look like, given the target benefit model’s potential impact on benefits?
Plans ‘doing pretty well’
“By and large, these plans are doing pretty well,” says Jana Steele, a pension lawyer at Osler Hoskin & Harcourt LLP who has advised many of the 10 New Brunswick plans that have converted to a target benefit approach.
Besides converting accrued benefits to the shared-risk framework — meaning plans can potentially reduce base benefits in certain circumstances and not provide annual cost-of-living adjustments — the change introduces several different compliance rules, including requiring plans to assess their funding according to the 15-year open-group basis (which accounts for plan assets, as well as the present value of the next 15 years of excess contributions), rather than the typical solvency framework.
At the public service shared-risk plan, changes included a contribution rate increase that went into effect on April 1, 2014, as well as amendments to benefits calculations and early-retirement reduction factors for service after Jan. 1, 2014.
Marilyn Quinn, president of the New Brunswick Nurses Union and chair of the public service plan — the largest in the province — says one of the biggest changes was to make the cost-of-living adjustment conditional on ability to pay.
According to Quinn, the plan has performed well, having paid full indexing since conversion, and has been meeting its risk-management goals. In September, the plan announced it would once again pay a full cost-of-living adjustment of 1.4 per cent in the coming year.
But Clifford Kennedy, spokesperson for the Pension Coalition NB group that represents the plan’s retirees, says that while there has been no monetary reduction so far, the real challenge is the uncertainty the shared-risk model brings because pensioners only find out annually if the plan will pay indexation or if there will be a reduction to the base benefits.
“Right now, there has not been a financial detriment to the retirees; it has been a psychological detriment to the retirees because they’re unsure. They can’t plan their budgets because they don’t know what it’s going to be, if anything, or if their pay is actually going to be reduced,” he says.
At the New Brunswick teachers’ pension plan, which moved to being a target benefit plan in 2014, changes at the time of conversion included increases to contributions as well as some amendments to pension calculations.
There was also a reduction of indexation going forward, from 100 per cent of the consumer price index up to a maximum of 4.75 per cent each year to 75 per cent of the inflationary measure up to that same cap.
“We were faced with either leaving the benefits the same and contribution rates the same and the plan eventually going bankrupt over a long period of time or adjusting the plan, reducing the benefit slightly, increasing contributions slightly to fund the benefits at an appropriate level to build a contingency fund and sustain the plan, sustain the benefits, stabilize the contribution rates over the long term,” says Larry Jamieson, executive director of the New Brunswick Teachers’ Association and chair of the board of trustees for the pension plan.
Jamieson notes that while the plan is in surplus, it hasn’t shared it with members or retirees to date because it’s working to build up a buffer.
In the case of the shared-risk plan for academic employees of the University of New Brunswick, it converted to a shared-risk arrangement effective July 1, 2013. The plan has performed well since conversion, but co-chair Larry Guitard cautions that past performance isn’t indicative of what will happen in the future.
At the time of conversion, according to Guitard, the plan was able to lower contribution rates due to a change in benefit calculations to use an enhanced career average instead of a final average approach and because it no longer had to make deficit amortization payments. There was also a slight increase to the benefit accrual rate.
Guitard says that at the time of conversion, the open-group funded ratio was about 111 per cent and he notes the plan has been meeting its risk-management goals ever since. “We’ve been able to maintain that open-group funded ratio and, in fact, it’s gone slightly higher than that since we converted in 2013,” he says. “And at the same time, we’ve been able to grant full [costof-living adjustments] both Jan. 1, 2014, Jan. 1, 2015, and Jan. 1, 2016.”
Guitard attributes the positive experience so far to the performance of the markets but he’s less optimistic about paying the full cost-of-living adjustment next year. “The market’s performance more recently has not been as strong,” he says.
Risk assumptions questioned
So what can plan members and retirees expect in the future?
Under the shared-risk model, plans must meet certain risk management goals based on ensuring there’s a high probability they won’t reduce base benefits in the coming years. To make the projections, they use stochastic projection modelling, an actuarial tool that looks at the probability of various future outcomes.
With the City of Saint John shared-risk plan, for example, it measures its financial position in light of 2,000 economic scenarios over 20 years to determine whether it would have to cut base benefits at any point. To meet its primary risk-management goal, it must not have to cut base benefits at least 97.5 per cent of the time.
The Canadian Union of Public Employees has been critical of the government’s assurances of a high probability that base benefits won’t decrease under the shared-risk approach. Given its concerns, the unions retained an independent firm, PBI Actuarial Consultants Ltd., to look into the issue further.
Clare Pitcher, a senior consulting actuary at PBI, says that because the stochastic projection modelling relies on inputs, there could be a large range of different outcomes, depending on the assumptions used.
In the case of the public service shared-risk plan, it has a goal of producing a 97.5 per cent probability of paying base benefits. Pitcher, however, used an independent set of assumptions to look at the plan and found the probability was 72.5 per cent when using different assumptions.
“If you’re going to use this kind of probabilistic approach to predicting benefit levels, then you better tell the full story,” says Pitcher. “And the full story includes that there’s a range of uncertainty.”
Mark Janson, national senior pensions officer at CUPE, echoes the concern. “The takeaway message to me is because these models are so sensitive to whatever inputs you put into them, the output, I think, has to always be taken with a huge grain of salt and communicated as such,” he says. “And I don’t think the government did that.”
The issue, of course, comes down to the level of certainty, and that’s what one City of Saint John retiree says is missing from the shared-risk plan. While the plan has approved cost-of-living adjustments for the past couple of years, the retiree, who asked to remain anonymous, says it didn’t do so in the first couple of years after conversion. “It’s less,” he says of the indexing amounts received in the past couple of years in comparison to what many members would have gotten under the old plan. He does acknowledge, however, that indexing is now more equitable than under the old plan.
“When it went to shared risk, nobody got anything for the first two or three years,” he adds, noting the concern among retirees that they have less certainty in the level of benefits if the city employs fewer people who pay into the plan.
“They’re constantly getting rid of people and when that happens, there’s going to be less money going in there and there’s going to be less money for us.”
Yaelle Gang is a former conference editor at Benefits Canada. Glenn Kauth is the editor of Benefits Canada.
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