Saturday, December 8, 2012

Canada's Public Servants at a Tipping Point?

Kathryn May of the Ottawa Citizen reports, Public servants forced to scrimp for retirement, says pension expert:
Canada’s public servants may have reached the “tipping point” where they are forced to save so much of their salaries for pension benefits that they are scrimping while working to pay for a better standard of living when they retire, says a leading pension expert.

A study by the Institute for Research on Public Policy on federal pensions being released Friday calls for a major overhaul of the public service pension plan to resolve a growing list of long-term financial, demographic and human resource challenges facing the government.

And chief among those concerns is a pension plan whose costs have created an “irrational” imbalance between the pre-retirement and post-retirement lives of public servants, says the study’s author Bob Baldwin, who worked in pensions for the Canadian Labour Congress.

“We are at a tipping point because the increase in contributions to cover the cost of new benefits … becomes irrational for plan members,” he said. “They are giving up too much in the way of consumption opportunities before retirement in relation to their value after retirement. There are a chunk of members put in a situation where the plan is depressing their pre-retirement living below what they expect in retirement and we should avoid that.”

Baldwin said people should save or “give up enough consumption” while working to ensure they have a secure retirement income that maintains their lifestyle. The public service plan is getting out of whack when contribution rates are so high that public servants’ standard of living is lower than the lifestyle they can enjoy when retired.

Public servants can earn pensions worth up to 70 per cent of their salaries.

Baldwin said the public service plan is approaching this tipping point because benefits are so generous that the costs of providing them have skyrocketed. The contribution rates needed to pay for existing liabilities have increased 50 per cent since the 1990s and they are expected to continue to climb.

The cost of pension benefits now account for 20 per cent of the government’s wage bill.

But Baldwin argues this “imbalance” is one of three major problems facing the plan that the government will have to wrestle with, especially in the face of a looming labour shortage.

Under existing financial rules, the contribution rates will become volatile and unpredictable. The existing plan also encourages public servants to retire too young. They can leave as early as age 55 if they have 30 years of service without facing penalties.

This poses a problem for the government, which will want to retain workers as long as it can as the labour market tightens. Federal employees are typically university-educated and older when they join the public service today, which means fewer will qualify for early retirement at age 55.

Baldwin said the government took a critical first step with the pension reforms it introduced in the March 2012 budget, but more must be done. He is recommending a top-to-bottom rethink about pension financing, benefits, the plan’s structure and even how it is governed.

A wobbly economy, labour shortages and an aging population have put the cost of public sector pensions on the political agenda at all levels of government.

The government faces intense pressure from groups like Fair Pensions for All, Canadian Federation of Independent Business and the C.D. Howe Institute to revamp public servants’ pensions, which they call gold-plated and unaffordable.

In the budget, the government increased the age of retirement from 60 to 65 for all new hires. The move will not only force future public servants to work longer for the same pension as current workers, it also effectively killed for future employees the early retirement provisions that allow public servants to retire at age 55.

Under the changes, public servants will have to foot the bill for half of the contributions to their pension plans by 2017. Public servants slowly increased their share and now pay about 37 per cent of contributions, with the government paying the remaining 63 per cent.

Baldwin argues the plan should be redesigned to limit the financial risk of future plan members and the government, address the “consumption imbalance” public servants face and better align it with the government’s long-term human resource planning and recruitment.

This will mean shifting some of the financial risk from contribution rates to benefits. Among the factors increasing contribution rates are public service retirees living longer, employees joining the public service later in their careers, and changes in the assessment of future returns on investment.

He acknowledged such a major rethink will meet fierce resistance from the 18 federal unions that have fought hard to keep public service pensions as they are.

“Where the unions will come down in this depends on what the real alternatives are and I imagine their opening view will be the status quo,” he said. “But in my personal view, the status quo can’t be sustained forever and they shouldn’t be because of the growing irrationality of the plan for lifetime consumption.”

He said reforms should be part of an overall or ‘total compensation’ strategy to pay “neither more nor less” to fill the public service with the talent and skills it needs. Compensation includes salaries, overtime, pensions, health and dental plans, performance pay, classification and reclassification, vacation, leave, cash-outs and contributions to CPP and EI.

For years, critics have argued the problem is Treasury Board ministers typically don’t get a “big picture view” of how the wage bill is spent. They approve salaries and benefits as they are ratified but don’t see them as an overall compensation package.

Baldwin argues the system would work better if all the pieces of compensation were managed together. This would mean expanding collective bargaining beyond negotiating wages. With everything on the table, unions are more likely to make trade-offs.

Baldwin said the government should also consider offering employees joint management of the plan now that they will equally share contribution costs. He argues it would be “untenable” for the government to call all the shots when public servants are paying half the costs and could be asked to change benefits.

He said the government would also have to do a better job of tracking compensation and comparing it to other sectors where it competes for talent. The government should also do regular reports on the total compensation packages of all employees compared to the private sector.

“The total compensation of government employees is a matter of legitimate public interest and silence on the government’s part feeds cynicism on the subject,” he wrote.
Bob Baldwin's report, The Federal Public Service Superannuation Plan: A Reform Agenda, provides a thorough analysis of the problems with the new reforms and how they impact Canada's public service.

Below is the summary of the report:
In the current economic and fiscal environment, Canada’s public sector pension plans have come under significant scrutiny. Critics have argued that these generous defined-benefit pension plans are inequitable, because the benefits they offer are vastly superior to those in the private sector at a public cost that is understated and unsustainable. This has led some to suggest that plans for public servants be brought more in line with private sector defined-contribution plans, where workers bear the risks of underfunding. Proposals to increase the retirement age and the share of costs borne by employees have also gained traction.
As governments across the country move toward public sector pension reform (Canada, Ontario and New Brunswick announced important changes in 2012; Quebec is still examining the options), it is important to put these issues in perspective. In this study, pension expert Bob Baldwin analyzes the federal Public Service Superannuation Plan (PSSP) as a case study of the broader policy issues in the context of these reforms.
Moving beyond the simplistic comparison of the public and private sector pension landscapes, Baldwin critically assesses the long-term fiscal, demographic and human resource management context facing the PSSP and the public service more generally. He finds that the PSSP is  indeed more generous than other plans, and he suggests that reforms should focus on making the plan more consistent with other public sector plans in Canada and with  workforce renewal objectives. This means that more significant reform is required than was  announced in the 2012 federal budget.
An important aspect of Baldwin’s analysis relates to the plan’s affordability and cost-effectiveness relative to the basic objective of retirement saving, which is to balance pre- and post retirement living standards. He argues that the cost of consumption forgone today to pay for PSSP benefits upon retirement is approaching a tipping point. The cost of benefits may be too high relative to their future value in retirement. Given this imbalance, he argues, reform should be of interest to both the employer and the employees. This suggests that policy-makers need to target the overall cost of the plan — forecast to be 20 percent of pensionable payroll in 2013 and rising — not just how costs are shared between employers and employees.
As for establishing what the value of retirement benefits should be in the future, Baldwin recommends that this calculation be part of a more systematic approach to total compensation (wages plus all benefits). In the context of an aging workforce, where attracting and retaining workers is likely to become a more significant concern, the federal government should resist completely moving away from the PSSP’s defined-benefit structure. Instead, Baldwin recommends it adopt a framework similar to the jointly sponsored/jointly governed model (with joint cost- sharing) that is prominent in Ontario’s broader public sector, as in the Ontario Teachers’ Pension Plan. This approach would enable the government to share the risk of future shortfalls equally with employees while maintaining leverage over the retirement age of its workforce.
Bob Baldwin's report and recommendations need to be reviewed and assessed by all stakeholders. A former director of PSP Investments, he knows what he's talking about. I agree, we are at a tipping point because the increase in contributions to cover the cost of  their defined-benefit plans becomes "irrational" for plan members.

Some of the comments from the Ottawa Citizen article underscore people's need for flexibility in their retirement plans. One reader writes:
It is when you have a young family and costs across the board are skyrocketing... I need to pay the bills now, save for university educations, then think about retirement. I'd gladly trade for a plan that afforded more flexibility when employees need the money most.
Flexibility is good but I caution public servants who would "gladly trade in" their defined-benefit plan for a "cheaper" defined-contribution plan to think about what this entails. It basically shifts the onus of retirement entirely on the individual and while a few may be lucky, most will suffer a serious hit in retirement.

Having said this, increasing the contribution rate for a "gold-plated" DB pension in the future means the take home pay of public servants will drop dramatically to the point where it will make it harder to attract and retain qualified staff. This is at a time when the morale of public servants is at an all-time low following waves of job cuts in the public service.

As for Bob's recommendation to look at total compensation (wages plus benefits) to establish the value of retirement benefits, think this is a must in the context of an aging workforce. His governance proposal to adopt a framework similar to the jointly sponsored/jointly governed model (with joint cost- sharing) that is prominent in Ontario’s broader public sector, as in the Ontario Teachers’ Pension Plan, is also the way to go.

I've worked with Bob when he was a director at PSP. He's sensible and understands the complexities of pension policy. A couple of years ago, he wrote an excellent editorial on being creative with CPP, stating "the huge advantage of using the CPP’s legal and organizational structure is that it can provide pension benefits to whatever portion of the employed and self-employed one wants to reach." Like many others, he questions the benefits of PRPPs.

Below, CBC's The National reports on the last wave of job cuts in Canada's civil service. Not surprisingly, the combination of heavy job losses in the public service sector and a less-than-robust economy, is expected to put a damper on Christmas retail sales in Ottawa this year.

Meanwhile, Canada's F-35 fighter jet debacle might cost up to $40 billion (watch below). Andrew Coyne's editorial, F-35s debacle is a broad failure of democratic accountability, is spot on:
In sum, virtually every safeguard that was supposed to protect the public purse and the public interest was subverted, evaded, or rolled over. Ministers failed to exercise oversight over their departments; Parliament was prevented from exercising oversight over ministers; the public was kept in the dark throughout. You could have backed a truck up to the Defence Department and loaded it up with $40-billion, for all our traditional checks and balances were concerned.
Let's hope we get the more democratic accountability on all fronts, including how public pensions are managed and supervised in the best interests of all stakeholders.