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Pension Tension

Alberta moves first on pension reform

Jan 14, 2014

014_pension_storyimage
Illustration Steven Hughes

In September, Finance Minister Doug Horner grabbed the political hand grenade that is public pension reform and, boy, did he ever pull the pin. Horner promised legislation that would freeze benefit increases until 2021, reduce the rate of cost-of-living increases and move to what pension experts refer to as “defined ambition” plans, in which targets replace guarantees. The proposal will eliminate early retirement incentives, reduce the amount received by those who do retire early and give the province some flexibility for payouts in times of market crisis. And it will cap contributions that Alberta – and by extension, taxpayers – make to the plans, meaning the risks associated with underfunded public pensions will be shared more evenly from now on.

Horner was blunt about the proposed shift. “You have more people retired than are contributing to some of the plans – that, just on the surface – will tell you it’s not sustainable …”

And that’s the nut of it: It’s about the demographics, stupid. On that point, Alberta is similar to many other Canadian jurisdictions, if perhaps stronger economically and with a slightly younger population. And so with the rapidly growing number of retirees and a public pension system that was unprepared (and perhaps unable) to meet its responsibility to keep them out of the cat food aisle, something needed to be done.

Predictably, Alberta’s labour groups cast Horner as a heartless Grinch. But the broader public was far more open-minded to his changes, with many declaring them a bold and necessary step towards long-term solvency. Several provinces are, tellingly, already working on similar reforms to public pensions while others are studying Alberta’s plan and likely strategizing when – and how – they will follow in its footsteps.

Public pensions, meet demographics
Ratio of members contributing to Alberta’s four public-sector plans to pensioners:
1993: 2-1
2003: 3-2

The divide
Percentage of workers with defined benefit pensions:

Public
sector
Private
sector
Alberta 79.2 9.4
B.C 85.9 9.6
Ontario 74.5 13.9
Share the risk

While Alberta has limited its changes to employees retiring in the future, New Brunswick has similar unfunded liability concerns, and is changing its pension plan for current retirees, too. Employing ideas from the Netherlands, New Brunswick will no longer top up its pension fund if its investments don’t keep pace with entitlements. Instead the risk will be shared 50/50 between the government and pensioners. New Brunswick isn’t the only province trying to deal with the problem this way, either. In its most recent throne speech, the government of Prince Edward Island announced similar shared-risk measures intended to shore up the balance sheets of the province’s public pension plans.

You down with the CPP?

The government of Ontario is taking a different tack on the pension issue, promising to move ahead with a de-facto expansion to the Canada Pension Plan if the federal government won’t do it. But the Harper Conservatives seem to want no part of such a plan, instead preferring the so-called PRPPs (portable retirement pension plans) that Jim Flaherty announced in 2010, and which Alberta has indicated it will introduce in 2014. Business seems to prefer this option, too, judging by a recent survey conducted by the Canadian Federation of Independent Business. It asked members what they would do if the government of Ontario increased mandatory pension contributions, such as the provincial equivalent of an expanded CPP. Their answers were telling.

Freeze/cut salaries 65%
Reduce investments in their business 48%
Fire people/cut staff 40%

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