$30 Billion Pension Surplus Fight Continues?

Amy Minsky of Postmedia News reports in the Ottawa Citizen, Top court OKs appeal in PS unions' $30B pension fight:

Federal unions and retiree groups will continue their decade-long legal fight to get $30 billion of their pension plan fund back from the government.

The Supreme Court of Canada decided Thursday that the plaintiffs had legal grounds to appeal a 2007 decision that said 700,000 public servants, military and RCMP personnel were not entitled to any of the $30-billion surplus in their pension plans.

The surplus has been at the centre of a historic legal battle for more than a decade, which began shortly after the Chrétien government used the surplus in 1999 to help offset the deficit.

"It was a money grab," said Patty Ducharme, national executive vice-president with the Public Service Alliance of Canada, one of 18 unions involved in the battle. "The federal government has a responsibility to its employees, to the plan members; but they just took that money out of the plan and stole it."

The Ontario Superior Court of Justice in 2007 ruled against unions, which had filed a claim in 1999 to force the government to return the $30-billion surplus to the plan.

The plaintiffs also lost their appeal.

Pensions continue to be at the tops of many baby boomers' minds, as thousands prepare to retire from the public service over the next several years.

This battle began months after Parliament passed Bill C-78, amending the law governing public service retirement benefits.

The revision gave government permission to use surpluses from its employees' pension funds and either spend the money or transfer it to the general government coffers.

Before the legislation was amended, the Treasury Board had no legal authority to relocate or redistribute the surplus, according to the Public Service Alliance of Canada.

So even though government abided by its laws when it used the surplus to offset the deficit, Ducharme said the government's actions were "immoral and unethical," and that the money was "stolen" from public servants.

The Ontario court rejected the claims, and instead accepted the government's argument that the $30 billion at the centre of the dispute was not a surplus, but rather an accounting device used to monitor government liabilities.

A spokesman with the Treasury Board said the government could not comment on the case since it is before the courts, but assured public servants they would continue receiving their benefits.

Shortly after the government appropriated the pension surplus, it increased the amount its employees were required to pay into the fund - something Ducharme said is backwards and unfair.

"If they had done one or the other, it probably wouldn't have been quite as offensive.

"But they did," she said. "If there's money enough to take $30 billion out of the fund, but then you crank up the amount the employees have to pay, somehow it just doesn't seem right.

"You're getting it from both directions."

The National Union of Public and General Employees released this statement:

The Supreme Court of Canada has granted the Public Service Alliance of Canada (PSAC) application for leave to appeal a longstanding pension case.

In October 2010 the Ontario Court of Appeal dismissed PSAC's case against the federal government for expropriating $28 billion from the federal superannuation fund.

At issue is the fact that the federal government raided a $28 billion surplus from the public service, RCMP and Canadian Forces pension plans after passing legislation that restructured the way the plans are managed.

PSAC claims that the government breached the trust of plan members, violating its fiduciary duty and not meeting its obligations.

In addition, PSAC maintains that the removal of $28 billion in pension contributions, impacting 700,000 employees, is a matter of national importance.

The union believes that the trial judge incorrectly concluded that the Superannuation Accounts had not accrued assets. The evidence clearly demonstrated that the government was required to and did put aside real funds to deal with its pension obligations, along with funds collected from plan members' contributions.

PSAC also disagreed with the trial judge's conclusion that the government had no fiduciary obligation toward plan members and toward their interest in the surplus. The evidence presented in the case established that this was true.

The Court of Appeal found that the federal government did have the discretion to remove the surplus funds, even if it resulted in higher pension contributions for plan members. PSAC believes that the government must be held to account for its actions and that the funds should be restored to the pension fund.

This is an interesting case. The big issue is who does the pension surplus belong to, the plan sponsor (Government of Canada) or the employees represented by the unions? Some argue that investment gains should belong to the plan sponsor because it allows them to lower the cost of funding the pension and in the case of a shortfall, they're on the hook for topping up the pension plan. Others argue that pension surpluses belong to employees because without their contributions, these surpluses wouldn't exist.

I think there is a case to be made on both sides but using pension surpluses to pay down deficits and then increasing the contribution rate is a low blow. I can understand why the unions are fighting this case hard. Hopefully, it won't take another decade to resolve it.

***Feedback***

Bernard Dussault, the former Chief Actuary of Canada, sent me his

1. Members’ contributions

The emergence of any pension surplus indicates that contributions made so far to the plan were too high. Contributions were made each previous year by both the plan sponsor and the then active plan members (some of whom are now retired). Therefore, both concerned active and retired members and the plan sponsor did generate the surplus. In this sense, any surplus withdrawal should be allocated to the concerned active and retired plan members and to the plan sponsor in proportion to all past contributions made by each party to the plan (about 1/3 by members and 2/3 by the plan sponsor for the federal superannuation plans under consideration). Therefore, the plan sponsor should not be allowed to withdraw more than its share of the surplus.

2. Contribution holidays

Some of the surplus withdrawals from the accounts and the funds of the three concerned pension plans (Public Service, Canadian Forces & RCMP) were, and continue to be, made through contribution holidays. Whether surplus withdrawals are made through contribution holidays or otherwise, and whether the holidays apply only to the plan sponsor’s contributions or not, any surplus withdrawals should be amortized over at least five years. The obvious reason for such amortization is that a pension deficit will sooner than later emerge following the emergence of a surplus. Withdrawing in full any emerging surplus is a sure recipe for a pension solvency issue as soon as a deficit emerge afterwards. Actually, contribution holidays are the major cause of the solvency problems affecting defined benefit pension plans each time investment earnings from the plan funds are less than those assumed for determining the contribution rates. In that sense, the pension solvency crises is a chronic problem because these crises occur on a regular basis.

By virtue of the provisions of the Income Tax Act (ITA) applying to Registered Pension Plans (RPP), the fund of a defined benefit pension plan may include a cumulative surplus not exceeding 25% of the plan’s liabilities (this percentage used to be 10% until last last year). However, as plan sponsors are not compelled to amortize the withdrawal of pension surplus, most of them generally take a contribution holiday to the extent of any emerging or cumulative pension surplus. Without mandatory amortization of surplus withdrawals, the ITA 25% rule is useless. I attach for your convenience the e-mail that the Common Front for Retirement Security (CFRS) sent to the Minister of Finance (James Flaherty) last year regarding contribution holidays.

3. Notional funds (no real money vs. real assets)

Until 2000, excess contributions tot he three concerned federal superannuation plans were invested in notional government bonds. These bonds are notional in that they were issued to the three concerned pension accounts rather than to persons. Some claim that these bonds, which correspond to money lent by the government to itself, are not real assets. They are real assets at least to the extent that about 1/3 of the concerned excess contributions came from plan members’ salaries, which is real money. Moreover, all of theses bonds are real assets in that:

• they support the actual related pension liabilities;
• both assets and liabilities are reported in detail in the federal public accounts;
• liabilities are part of the national debt.

4. Financial risk exclusively on sponsor’s shoulders

Sponsors of defined benefit pension plan generally claim that that they are the exclusive owners of any pension surplus because they are exclusively responsible for any deficit emerging from the plan. This is a weak argument because plan sponsors are not really financially responsible for their plan’s deficit, which proves quite obvious when the sponsor’s business goes bankrupt or when the plan sponsor either increases the share of members’ contributions or decrease pension benefits following the emergence of a material plan’s deficit. Consistent with the respective share of contributions made by members and the sponsor to the pension plan, both surpluses and deficits should be shared consistently by each party.

5. Increase in members’ contribution rates

Despite appearances, there is no relationship between the withdrawal of the surplus by the plan sponsor and the subsequent increase in the members’ share of contributions to the plan. Surplus relates to pension credits having accrued until the withdrawal date while normal contributions due after the withdrawal date relate to future accruals. Members’ contribution rates were increased to bring their share of total pension costs to 40% (it was about 33%).

And Jim Murta of Murta's actuarial blog shared these comments:

Surplus for these plans needs to be looked at from an accounting perspective or a solvency perspective - not on a going concern funding perspective. The question then becomes: is there really any surplus?

If there is an excess of surplus that exceeds reasonable margins, this excess may be classed as redundant and reduced or shared through contribution holidays. Who gets the holiday should be influenced by who pays if there is a deficit. If the plan sponsor pays the deficit, there is little justification for the employees to get a contribution reduction. However, if employees pay of if retiree benefits are cut when there is a deficit, then employees or retirees should get the benefit of any excess surplus.

The value of these plans is grossly understated. I doubt that there is a surplus (in other words, the recorded liabilities should be much higher, thus squeezing out the surplus).