bout de papier, Vol. 26, No. 3 (2012) — Spring 2012 // Printemps 2012, pp. 29–30
Bernard Dussault est l’un des plus réputés s du gouvernement du Canada de 1992 à 199 autres qu’actuarielles). Il est actuellement à l’heure juste sur la couverture et la solvabil (notamment une couverture élargie du RPC de l’APASE à l’édifice Pearson et il a accep membres du service extérieur du Canada qu bout: Canada’s public servants are getting nervous about the future of their pensions, how worried should They be?
Dussault: Let me first state that my views are personal and do not necessarily reflect those of agencies I currently serve as a consultant. My overall sense of the situation is fairly straightforward. First, even if our federal public service pension system is sound and sustainable, the government’s long term financial challenges are real, so some reform is inevitable and necessary; and second, the key issue — for all parties — is getting reform right so that commitments are honoured and savings are real. Incidentally, I applaud PAFSO’s initiative in organizing a seminar on the topic — public servants need to be better informed and much more engaged in any pension reform process.
bout: Should public servants worry that the government will act unilaterally and impose retroactive measures?
Dussault: On both counts I would argue “no”, the government will not act unilaterally — or at least it will try to avoid the appearance of acting unilaterally — and it will not attempt to make any measures retroactive. Legally speaking, unfavourable retroactive changes are fraught with problems and, politically speaking, usually invite a nasty backlash. bout: What, in fact, is the issue here?
Dussault: The question is whether the Public Service Pension Plan (PSPP) is solvent and in my view it is, unless and until the government itself goes bankrupt. In part, the debate is a matter of perceptions. Let me explain:
Contributions by public servants to the PSPP have always been deducted from their salaries, but it wasn’t until 2000 that the government created a real “segregate fund” for the excess of PSPP contributions over benefit payments. In practice, the government’s policy pre-2000 was to defer all accrued PSPP benefits until such pension benefit payments actually came due. Until 2000 the federal government used PSPP contributions to pay for other priorities.
Because no contributions were actually made to a “segregate fund” prior to year 2000, the pre-2000 PSPP financing approach corresponds to “pay-as-you-go” financing. Thus, all national deficits incurred after 2000 have been, and will continue to be, partly “caused” by the PSPP pre-2000 financing approach until the death of the last survivor among pre-2000 PSPP members.
That explains why the federal government is allegedly “targeting” the PSPP as a means to reduce recurring national deficits. However, going after the PSPP to reduce the national deficit overlooks two key factors. First, public servants contributed their fair share to the pension scheme prior to 2000, so it is not right to blame them for the deficit. Second, the post-2000 PSPP segregate fund is in good financial shape and should remain so whatever demographic trends arise in this country because the size of the fund is a function of the pension benefits accrued since 2000. In other words, the size of the fund is related to the number of its members, not to demographic trends in society in general. If one wants to reduce the deficit because our population is ageing, the PSPP is the wrong target.
bout: Where is the pressure to reduce pension expenditures coming from? Is the government right to claim that the PSPP is solvent, or is the C.D. Howe Institute right in claiming it is not — and major increases in employee contributions are necessary?
Dussault: There have been repeated attacks on the PSPP by some organizations such as the C. D. Howe Institute (CDHI) and the Canadian Federation of Independent Business (CFIB). However, these attacks suffer from some faulty logic. Let me explain:
First, you can’t always apply private sector solutions to the public sector. Three studies released in the past two years by the CDHI argue that the government’s estimates of PSPP liabilities and contribution rate (or “normal
Bernard Dussault est l’un des plus réputés spécialistes des pensions et du système canadien de retraite. Il a été actuaire en chef du gouvernement du Canada de 1992 à 1998 (relevant du Surintendant des institutions financières du Canada pour les questions autres qu’actuarielles). Il est actuellement actuaire-conseil en analyse des enjeux nationaux en matière de pensions, il donne l’heure juste sur la couverture et la solvabilité des régimes de pension et présente des options pour la meilleure voie à suivre (notamment une couverture élargie du RPC et du RRQ). En février, il a pris la parole devant une salle comble lors d’un colloque de l’APASE à l’édifice Pearson et il a accepté de partager les grandes lignes de sa pensée, par l’intermédiaire de bout, avec les membres du service extérieur du Canada qui n’ont pu être présents.
cost’) should be much higher and include a safety margin (or “risk premium”). The goal of such extremely high contribution rates would be to build up a contingency fund that would guarantee the payment of promised benefit payments whenever the PSPP fund fell short of PSPP liabilities (as a result of lower than expected investment returns or some other reason). If the government were to act on what the CDHI would like, PSPP contribution rates would go up to 34% of payroll versus today’s 19%.
These studies contradict the realistic and, in my view, accurate PSPP-related estimates made by the government Chief Actuary. Moreover, CDHI’s reasoning does not make sense for the public sector. With a pension plan sponsored by a private employer, a contingency fund is essential for the protection of all accrued promised benefits, especially if an employer goes bankrupt at a time when the pension plan faces an actuarial deficit. However, such employer bankruptcy-related pension insolvency risk is essentially absent for the PSPP. The Government of Canada may face budget constraints, but it is not expected to go bankrupt. If Canada actually declared bankruptcy, pensions might be the least of our worries!
My second point is that if critics claim that the PSPP has an “unfunded liability” (for pension benefits accrued before 2000), it is not because public servants didn’t contribute to the Plan. The problem, if there really is one, results from the government’s unilateral decision to spend, rather than set aside, both its pre-2000 PSPP contributions as well as the contributions already paid by public servants. The onus thus remains on the government, and ultimately on all Canadian taxpayers, to honour its responsibilities toward PSPP members. Reducing already accrued PSPP benefits on account of this “unfunded liability” would be unfair. Actually, it would penalize PSPP members by charging them twice for their PSPP pre-2000 contributions: when they paid into the scheme, and when their pension benefit payments come due.
In my opinion, whatever pressures the CDHI and others bring to bear, there is no real cause for PSPP members to panic about precipitate and unfavourable changes to the Plan. Any changes would require legislative amendment to the Public Service Superannuation Act (PSSA). Normally, amendments are implemented gradually, do not affect already accrued benefits and are not applied retroactively. Moreover, all accrued PSPP pension benefits are better protected than under any other Canadian pension plan because the promise to pay them is legally enshrined in the PSSA and because the plan sponsor, the Government of Canada, is not likely to go bankrupt.
bout: What is the best way to proceed — both for public servants (and their unions or professional associations like PAFSO), and the Government?
If the government were to unfavourably amend the PSSA, and thereby prejudice the interests of public servants, it should provide a clear rationale for such amendments and ensure they are consistent with the global compensation of public servants. In my view, the government: a) Should not reduce indexation of
pension benefits, as this provision is designed to protect the purchasing
power of pensions, not to increase them; b) Should not replace the Defined
Benefit (DB) PSPP by a Defined Contribution (DC) plan.
There are several reasons why I make that second recommendation. DC plans can defeat the purpose of a pension plan, which is to provide a decent and stable retirement income, i.e. financial security during retirement. Under a DC plan the average return on investments is lower because most members are not investment experts. Moreover, as we have seen, volatility in capital markets affects the return on investments of each member to an extent that can (and actually does) cause financial distress to many members af a NC nlan Finally, if the government is looking for an immediate reduction in the cost of providing pensions, and it is, adjusting the existing public service DB plan is much more effective than a gradual move to DC plan. If applied only to new hires, the latter would not produce significant government savings in the short term (meaning not for a decade or longer).
There are better options for both public servants and the government. Marshalling accepted facts, figures and solid economic logic, the government could consider a reduction in the scope of the PSPP. That could take one or more forms, including:
a) a gradual increase from 40% to 50%
in the members’ cost sharing; b) a gradual removal of the “age 55
and 30 years of service” rule; c) a gradual increase in the normal
pensionable age of 60; and d) a gradual change in the pension
formula from basing pensions on “final average” salaries to “indexed career average” salaries — a much fairer formula, in my view, that is already used for the Canada Pension Plan.
It happens that the first three of the above forms are enshrined in the federal budget tabled in the House of Commons on March 29. There needs to be good dialogue between the government and the public service representatives on the future of the public service pension system to ensure that the PSPP will not be subject to unfavourable changes further to those of the March 29 budget. Wherever there are legitimate needs and concerns between two parties there is usually common ground. We have options that may meet the key concerns of both.
bout: Thank you.
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Originally published in bout de papier, Vol. 26, No. 3 (2012) — Spring 2012 // Printemps 2012, pp. 29–30. Read the rest of this issue →
