8 steps to understanding the public pension debate
Unfunded liability, financial downturns and the Civil Service Superannuation Fund
The P.E.I. government has legislated changes to improve the sustainability of its public sector pension plans, and two of the largest civil service unions are not happy with the changes.
Teachers Superannuation Fund
The government has also been in negotiations with the P.E.I. Teachers' Federation over its pension fund.
These negotiations have not been so public or fractious as the ones over the CSSF.
Most of the issues with the CSSF also apply to the TSF. In one significant respect, the government proposal represents a potential improvement for the teachers. Currently, teacher pensions are indexed to 60 per cent of CPI. The government believes under its new plan it can provide 100 per cent indexing four years out of five.
In the wake of the financial crisis of 2008 everyone appears to be agreed some changes are needed to public sector pension plans.
The P.E.I. government, along with just about everyone else, lost a lot of the money invested in public sector pension plans when markets crashed. A significant amount of provincial government deficits in recent years has gone towards making up shortfalls in those plans.
But while the financial crisis focused attention on pension plans, their problems go beyond that. There have been significant demographic changes since the plans were designed.
Step One: There is no immediate crisis
People are not about to stop getting their pensions. There is currently $1.26 billion in the Civil Service Superannuation Fund (CSSF). Cash flow is positive, but this would turn negative in a few years without change. The concern is for the long-term sustainability of the plan.
Step Two: Understanding unfunded liability
Pension funds take in money from employers and employees, and pay out money to retirees. The money going out is a liability, and if you don't have enough money coming in to cover that liability, it is unfunded.
In a booklet on pension sustainability, the government explains unfunded liability is a growing problem because people are living longer. This means there are more retirees at any given time. The government workforce has also been growing smaller.
The overall effect is dramatic. The government says in the 1970's there were eight employees paying in for every retiree receiving benefits. There are now two employees per retiree.
The government says the CSSF is currently 78 per cent funded.
Government estimates the CSSF unfunded liability at $350 million. The Union of Public Sector Employees and the Canadian Union of Public Employees dispute that figure, saying it is $300 million at most.
Both the government and the unions have put forward plans or proposals to eliminate this unfunded liability.
Step Three: Indexing
CSSF retirees currently receive an annual increase in their pension every year based on the consumer price index. The increase is equal to 100 per cent of the CPI to a maximum of six per cent.
Both the government and the union have put forward plans or proposals to reduce this.
|Remove guaranteed indexing and replace it with contingent indexing. Indexing would only take place when the fund has the ability to pay it. In practice, this would be when the fund is 110 per cent or more funded. The government estimates this would allow for indexing four years out of five.||The unions accept that a 100 per cent CPI guarantee is not necessarily sustainable. They are proposing a minimum indexing guarantee of 60 per cent of CPI. A further 40 per cent of indexing would be delivered as the fund allows.|
Step Four: Level of funding
Current government policy is that pension funds should be funded at a 90 per cent level, meaning it has assets to cover all but 10 per cent of its liabilities. Everyone agrees the current 78 per cent funding level is not adequate.
The government plan is to increase the funding of the CSSF to 122 per cent. The proposal includes additional contributions from both government and employees if funding drops below 110 per cent in the future, and further contributions from government if it falls below 100 per cent. Funding at this level will increase the likelihood of indexing benefits even during downturns, the government argues.
|The unions believe it would be adequate to fund the pension fund at 100 per cent. The unions do not propose guidelines maintaining that level. A board of trustees would make these decisions as required on an ad hoc basis.|
Step Five: Retirement formula
The government and the unions agree people should have to work longer to become eligible for pensions, and on exactly how to change that.
Currently workers are eligible for full pension at age 60 or following 30 years of service. This would change to age 62 or 32 years of service.
Step Six: Calculating starting pensions
One way of reducing liability is lowering the amount of pension people are eligible for when they retire.
Currently, pension from the CSSF is based on an average of the employees three best salary years.
|Change to a career average, which would include the start of a person's career, when they were earning less, and pull down the average. Future indexing would also be based on that lower starting pension.||Change to best five years. This would add two years of presumably lower pay, and decrease starting pensions somewhat, though not as much as the government proposal.|
Step Seven: Reduction of liability
Both the unions at the government agree the overall liability of the CSSF, the total amount paid out to retirees, needs to be reduced, but they disagree on how much. Their proposals therefore are significantly different in how much they would lower liability.
Step Eight: Joint sponsorship
Perhaps the most significant disagreement between the unions and the government is on control of the CSSF.
|Currently the government is in full control of the pension fund, and with its current plan it would remain in control. The government has said joint sponsorship may be a possibility in the future, after the current round of reform is completed.||The unions have proposed joint sponsorship, with government and the unions forming a board with equal representation for governance of the fund. The two parties would also take an equal share of the liability of the fund. The union argues this would immediately remove 50 per cent of the fund's liability from the government's books.|