Tuesday, September 17, 2013

Alberta's Sweeping Pension Reforms?

Kelly Cryderman and Bill Curry of the Globe and Mail report, Alberta tackles pension costs with sweeping reforms:
Alberta is setting a dramatic course to rein in the surging costs of public pensions, including actively discouraging early retirement and cutting cost-of-living increases.

The effort to contain the cost of Alberta’s four separate public pension plans, with unfunded liabilities of more than $7.4-billion, is being called the boldest move yet on an issue facing governments across the country – finding a way to pay for pensions even as work forces age, life spans grow, investment returns from markets fall, and the pressure on public finances rises. And Alberta’s approach is different in another significant way: the Progressive Conservative government of Alison Redford will pass a law to impose the changes rather than negotiate them with public-sector unions.

Alberta Finance Minister Doug Horner said he is taking a “balanced approach” to reducing costs. “There’s no crisis today, but it’s the long-term sustainability that we need to address,” Mr. Horner said on Monday.

In 1993, Alberta’s public-sector pension plans – the Local Authorities Pension Plan, the Public Service Pension Plan, the Management Employees Pension Plan, and the Special Forces Pension Plan – had four working, contributing members for every two pensioners. Two decades later, the government says there are six contributing members for every four inactive members.

“The reality is, the demographic of our work force has changed tremendously since these plans were designed and the benefits put in place,” the minister said.

The key features of the new scheme include a cap on total contribution rates for government and its employees, a moratorium on benefit improvements until 2021, and a limit on pension cost-of-living adjustments to 50 per cent of Alberta’s inflation, instead of the current 60 per cent.

Those annual cost-of-living increases will be paid only if the plans’ finances permit. And long-serving government workers who can now retire early with a full pension will see reduced benefits if they retire before age 65.

Economist Don Drummond, who authored a major report last year for the Ontario government on how to address that province’s fiscal situation, said Alberta’s moves are the most aggressive yet. “It seems like every time one province does something on deficit reduction, it seems to get exported pretty quickly,” he said. “So the tic-tac-toe in this case was first Ontario and then New Brunswick – and New Brunswick in some important respects went further – and now Alberta, and they have gone further as well.”

Mr. Drummond had urged Ontario to increase the age at which full retirement benefits kick in, and also called for an end to the existing system in which pension shortfalls were addressed through higher contributions, rather than through cuts to benefits.

He said Alberta’s decision to legislate rather than negotiate the changes could prove controversial, as could the proposal to limit cost-of-living increases. “I guess everybody in Alberta better pray that [Bank of Canada Governor Stephen] Poloz is an inflation hawk, because man, that could whack you big time,” he said.

In Ontario, Mr. Drummond recommended that growth be tied to the performance of the pension funds. New Brunswick adopted a similar approach.

The Progressive Conservative government is confronting a deficit as high as $2-billion this year, and is facing its strongest political competition from the more conservative Wildrose party. Mr. Horner said he has been searching for solutions to the ills of Alberta pension plans for more than a year but many options proposed by others didn’t go far enough. He said raising pension contribution rates would make the Alberta government uncompetitive in its attempts to recruit the best workers.

Mr. Horner said more changes may be required if these don’t suffice, and noted that he’s watching Ottawa’s move to raise Old Age Security (OAS) program eligibility to age 67 from the current age 65.

While provinces such as New Brunswick have introduced pension-plan changes that make allowances for market conditions, unions say Alberta’s moves go further than necessary and are being legislated into being instead of negotiated.

Mr. Horner said he will listen for feedback on his plan until December and will introduce new legislation in the spring of next year. If the proposed changes go forward, the new rules will take effect on Jan. 1, 2016, but benefits already earned will be protected.

Unions said the proposals are more about looking for a win on the political right than hard numbers. Gil McGowan, president of the Alberta Federation of Labour, said in the end public servants will have to work longer to retire, while also seeing reduced benefits.

“If the government wants to make deep cuts and sweeping changes to pension plans, changes that will have profound implications for the retirement security of literally hundreds of thousands of Albertans, then we feel strongly that they have an obligation to prove that there is a crisis, and demonstrate that there’s no alternative to these kinds of cuts.”
Alberta's sweeping pension reforms are controversial but Mr. Horner is right, the demographic of their workforce has changed tremendously since these plans were designed and benefits were put in place.

All over the world, pensions are a hot button issue. Unions will cry foul but the reality is that maintaining defined-benefit plans requires concessions from all stakeholders. I agree, there is no imminent crisis, but if the government does not introduce measures to curb pension costs, it will develop into a crisis.

Think about the measures being introduced: cutting early retirement and cost-of-living increases. Many other plans have introduced similar measures to curb their pension costs. These are hardly outrageous measures. I also think the government should have hiked the contribution rate too (don't buy their argument that raising pension contribution rates would make the Alberta government uncompetitive in its attempts to recruit the best workers).

There is something else unions should keep in mind. If interest rates rise over the next few years and the funded status of these plans dramatically improves, they can renegotiate the cost-of-living cuts down the road. Nothing is set in stone. In fact, I guarantee you if these plans achieve fully funded status in the future, unions will negotiate hard to increase cost-of-living adjustments.

But this isn't the case now. The government of Alberta has raised legitimate concerns and the 'sweeping' pension reforms they propose are very sensible given people are living longer. However, I don't agree with the approach. There should have been public hearings to discuss these proposals as it's important to hear all sides of the debate on pension reforms. Legislating instead of negotiating these reforms will only create animosity and more backlash from public sector unions.

Those of you who want to see news coverage can click on this Global Edmonton report on the proposed changes. Young public sector workers should listen to the retired man who states that he put away RRSPs on top of collecting a pension and still struggles to get by (never rely solely on your public pension!!!).

Below, the Alberta Union of Provincial Employees replies to politicians' attacks on public sector pension plans. I am very sympathetic to the arguments raised here, especially on governance, but demographic pressures require some sensible reforms or else there will be a crisis down the road.

One thing I can tell you is the Alberta Investment Management Corporation (AIMCo) is doing an outstanding job managing assets and its leader, Leo de Bever, is one of the sharpest and most experienced pension fund managers in the world. Listen to his comments below when he spoke at the Alberta Economic Forum earlier this year (fast forward to minute 34).