Thursday, November 21, 2013

Battling New Brunswick's Pension Reforms?

The Canadian Press reports, New Brunswick to introduce changes to public sector pension plans:
New Brunswick’s finance minister says the provincial government has gained the support of the majority of unions that represent the civil service in its proposed public pension changes.

Blaine Higgs says he has signed a memorandum of understanding with unions that represent two-thirds of the bargaining positions within the public sector for pension legislation the government will introduce later today.

He says the unions include those that represent nurses, hospital workers and court stenographers.

The government wants to implement changes including moving to a shared-risk model for pensions in order to address a $1-billion deficit for the public service plan.

The provincial wing of the Canadian Union of Public Employees has expressed concerns over the changes, saying while they may work for some unionized workers, they don’t for others who have defined benefit plans.
And CTV Atlantic reports, N.B. government pushes ahead with pension reform:
Despite loud and growing objections, the New Brunswick government is pushing ahead with pension reform.

On Tuesday, New Brunswick Finance Minister Blaine Higgs tabled pension reform legislation that will bring about 30,000 current and former public service employees under a new shared-risk model for their pensions.

Higgs says the bill would see contributions from both the employer and employees rise in an effort to address a $1-billion deficit.

“We not only have a right to do this, we have an obligation to do it because if we don’t, the plan is in trouble,” says Higgs.

He says, of the almost 30,000 public servants - which doesn’t include teachers - more than 20,000 are now behind the shift.

“(New Brunswick Union) are part of that, the electrical workers are part of that so, all told, we have 70 per cent of the total (PublicService Superannuation Act) group, roughly two-thirds that are endorsing this change,” says Higgs.

However, some public sector unions remain at odds with the reforms. CUPE New Brunswick says it is still considering challenging the changes in court.

“The other thing we’re going to look at is the possibility of getting this reversed,” says Danny Legere of CUPE New Brunswick. “I’m not sure how we would have that done, whether other parties would entertain that, but that’s certainly an avenue we’ll be exploring for our members in the PSSA.”

“It’s not a good day for the future of the civil service because it’s going to be extremely hard to attract high, well-calibered talent into this province and to keep them here because they are not going to be willing to come with what this is,” says Bonny Hoyt-Hallett of the New Brunswick Pension Coalition.

The Oppositional Liberals wonder how far the reforms will reach, saying they have heard the target could soon shift to the teachers’ plan.

As for MLAs, the legislation that would move their pensions to the new shared-risk model wasn’t tabled on Tuesday, and may not be until next spring.
I've already referred to New Brunswick's shared risk model when I reviewed Jim Leech and Jacquie McNish's book, The Third Rail:
We then talked about solutions to the looming crisis. The key for Jim is to implement New Brunswick's shared risk pension model which was enshrined in legislation in July 2012 and draws from the Netherland's pension system. "This way, employees, employers and pensioners all have a say on pensions and they share the risk of their pension plan." Indeed, New Brunswick has become a pension trailblazer and risk sharing must be part of the solution going forward.
Now we read that members of CUPE New Brunswick are considering challenging the new reforms in court. Kevin Skerrett of CUPE recently tweeted me this message (click on image): 

And he retweeted my reply:

But there is some confusion over shared risk plans and I must admit, I too was confused. When I state that I am against hybrid plans, it doesn't mean that I'm against shared risk plans.

Importantly, as I've repeatedly stated in this blog, the sustainability of defined-benefit pension plans requires concessions from all the key stakeholders: unions, plan sponsors and taxpayers. There is simply no way the status quo can go on indefinitely without jeopardizing the sustainability of DB pensions.

As far as shared risk, I think the Task Force on Protecting Pensions did an outstanding job presenting what is wrong with New Brunswick's pension system and why shared risk is the way forward. Take the time to look at the Task Force's presentation by clicking here.

When explaining why moving to shared risk makes sense, the Task Force highlights these key points:
  • Changes are incremental over 40 years and go-forward
  • Past pension amounts do not change
  • Introduce legislation to allow pension plans to offer much higher benefit security
    • base benefits
    • are very strongly funded (97.5%)
  • extra benefits like cost of living increases are strongly funded (75%)
  • Shared risk pension plans must do annual in-depth stress-testing
And the Task Force stipulates the change is to “secure risk / reward sharing” from “guaranteed wishful thinking”:
  • If investment markets are bad, delay benefit increases
  • If investment markets are excellent,make up for missed benefit increases
  • Contributions are designed to be stable over the long term
I do not see shared risk as a hybrid model between defined-benefit and defined-contribution plans. I see it primarily as a defined-benefit plan which is realistic and designed to ensure the long-term sustainability of the plan. There may be cuts to ancillary benefits like cost-of-living adjustments and hikes in contributions but for the most part, it's still a DB plan where everyone shares the pain and gain.

This is why I believe CUPE New Brunswick would be making a grave mistake to challenge the new reforms in court. Unions must acknowledge that people are living longer and the old rules on DB plans must change to reflect the new environment. Shared risk models are already in place at the Ontario Teachers' Pension Plan, the Healthcare of Ontario Pension Plan and CAAT pension plan. And it's working great for them.

But I'm also going to warn governments that shared risk isn't enough. You've got to get the governance right, implement independent investment boards and compensate your pension fund managers properly or else you'll end up with the same problems down the road.

Below, as cities and states across the U.S. grapple with their pension programs, PBS travels to one country -- The Netherlands -- that seems to have its pension problem solved. Ninety percent of Dutch workers get pensions, and retirees can expect roughly 70% of their working income paid to them for the rest of their lives.

Olaf Sleijpen of the Central Bank of the Netherlands says "I think what makes it successful is that you basically force people to save for their old age." I agree, and even though Dutch pensions are on the decline, the Netherlands is years ahead of most countries when it comes to ensuring retirement security for most of its citizens.

Postscript: Make sure you read my follow-up comment, revisiting New Brunswick's pension reforms. You will find out why some unions fumbled up badly on this file.