Thursday, December 5, 2013

Revisiting New Brunswick's Pension Reforms?

CBC News reports, Controversial pension changes approved in legislature vote:
The Alward government's controversial pension reform has been passed into law.

The bill got final approval from the Legislature late Wednesday, passing 33-9 in a vote along party lines.

The new shared-risk system will see civil servants and retirees take on more risk for the pension fund's performance.

Current employees will see pension plan contributions increase at the start of the new year, with an average increase of $1,200 a year. Retirees could see cost-of-living increases curtailed if the markets perform poorly in the future, although Higgs says that risk is small.

Under the present system, only the government is at risk if there is a downturn in the markets. With the changes, the risk is shared between government, employees and retirees.

Higgs has been pushing the pension reforms through for two years, arguing that with retirees living longer, the pool of pension money may not be enough to cover their benefits under the current system.

"We have much more demands on this plan than it ever was designed to fund," said Higgs. "That is the reality.

"So in order to fix it, you have to structurally change it. We're confident in what we're putting forward and we're confident it will withstand any legal challenge."

Retirees argue the change amounts to breaking a contract and have hired pension rights lawyer Ari Kaplan of Ontario and threatened to sue the province over the changes.

The New Brunswick Pension Coalition has also vowed to defeat the Progressive Conservative government at the polls next September if the changes go through.

Liberal Leader Brian Gallant argued again yesterday for more time to debate the change.

"This will be seen as one of, if not the, most important pieces of legislation his government will put forth in its mandate," said Gallant.

But after two raucous years of debate inside and outside the legislature about the changes, the government pressed forward.

"Mr. Speaker there comes a time when you have to fish or cut bait," said Higgs.

The bill will be signed into law before Christmas and takes effect on New Year's Day.
I covered New Brunswick's pension reforms a couple of weeks ago and was largely sympathetic to these proposals, especially after I read Jim Leech and Jacquie McNish's book, The Third Rail.

But last week I saw Bernard Dussault, Canada's former Chief Actuary, at a pension conference in Ottawa where we discussed if Canada is on the right path. Bernard wasn't impressed with the reforms in New Brunswick and I don't think he was particularly impressed with Jim Leech's new book either.

So what's got Canada's former Chief Actuary up in arms? Bernard's main qualm is that he thinks the new reforms shift more costs to employees and restricts the growth of their retirement benefits:
According to government information about the plan, employees will have to increase their own contributions to the pension plan by 30 per cent or more starting next spring, even though benefits they can accumulate will be less generous.

"What the government calls risk sharing is more risk dumping," said Bernard Dussault, former chief actuary of the Canada Pension Plan, who has been assisting New Brunswick retirees with their fight.
I asked Bernard to expand on this and he was kind enough to provide his insights below. Please note these are his personal views (the email is bilingual but main points are outlined in English):
Tel que convenu je te fournis ci-bas ici le plus d’informations possible sur mes opinions personnelles et publiques (non confidentielles) concernant les enjeux du monde des pensions au Canada, et en particulier celui du système de pensions à risques partagés proposé du (et bientôt en vigueur au) Nouveau Brunswick.

Le 7 mai 2013 j’ai fait à Charlottetown la présentation ci-jointe à la Conférence du IFEBP. Porter une attention particulière aux pages (slides) 9 et 10 qui indiquent comment les régimes à prestations déterminées devraient (et auraient toujours dû) parer aux effets des fluctuations du marché sur la santé (soundness) financères des régimes de retraite.
Le lien donne accès à l’article paru dans le numéro de septembre 2013 du IFEBP Newsletter (cet article paraphrase ma présentation du 7 mai). Le lien donne accès à la conférence de presse que le Front Commun des membres du régime de pension de la fonction publique du NB a donnée à Fredericton le 20 novembre.
Le discours que j’ai donné à cette conférence se résume à ceci:

A- The Common Front of active and retired members of the NB Public Service Pension Plan (PSPP) understands that the PSPP current debt of about $1 billion identified in the April 1, 2012 actuarial report is a major issue for the NB government as well as for all NB taxpayers, and accordingly deserves to be addressed diligently in an appropriate manner.

B- The Common Front considers that the Shared Risk Pension Plan (SRPP) that is proposed by the NB government through Bill C-11 tabled November 19, 2013 in replacement of the NB PSPP is not an appropriate solution thereof because:
  • although not properly identified and designed in Bill C-11, the proposed increase in PSPP members’ contribution rates and the proposed increase from 60 to 65 in the age at which PSPP members become entitled to a normal (unreduced) retirement pension, respectively, are the only areas of remedies that are relevant to the unfavourable financial findings identified in the April 1, 2012 actuarial report on the PSPP;
  • it is unfair, as it does make pension indexation, both active and pensioned members, dependent upon the ongoing financial experience of the PSSA through the use of inappropriate actuarial and accounting mechanisms that properly account for indexation in the contributions and assets of the PSPP but not at all in its liabilities;
  • it fails to show the proportion of the PSPP cost that will be shared by active PSSA members; and
  • it is too complex, which was publicly acknowledged by the Minister of Finance, as he did himself publicly stated that he does not fully understand it, and as its implementation, management and day to day administration would be an overly expensive and intricate endeavour.
C- The Common Front accordingly recommends that the financing and benefit changes envisioned by Bill C‑11 be repealed and replaced exclusively by the following two ones, which should well address in a relevant and consistent manner the unfavourable financial findings, identified in the April 1, 2012 actuarial report on the PSPP, by:
  • reducing its cost;
  • optimizing the reduction in the volatility of the PSPP contribution rate from year to year;
  • eliminating any surplus ownership issue; and
  • optimizing intra and inter-generational equity.
1. In respect of future accruing pensionable service, the age at which PSPP members become entitled to a normal (unreduced) retirement pension remains 60 for any member born in or before 1950 but is increased by 2 months for each year by which the calendar of birth exceeds 1950. Therefore, the entitlement age would for example be increased to 61 for members born in 1956, 62 if born in 1962, 63 if born on 1968, 64 if born in 1974, 65 if born in 1980 and 70 if born in 2010, and so on.

2. The PSPP normal cost, i.e. the contribution rate expressed as a percentage of salary and determined on a realistic ongoing (as opposed to solvency) valuation basis, would be shared equally by its members and its sponsor, i.e. the total normal contribution rate would be split equally, i.e. on a 50%/50% basis, between the plan sponsor and the active members. Likewise, any emerging surplus or deficit identified in any of the actuarial reports on the PSPP, including the report as at April 1, 2012, would be amortized over 15 years through a decrease or an increase, respectively, in the normal contribution rate, still split equally between active members and the plan sponsor.

As I indicated to you at the Westin conference in Ottawa, the reason why plan sponsor “adore” the conditional indexation provision, modeled after the Dutch Pension System, is not that it reduces pension costs (essentially, it does not reduce them) but rather that it perversely causes the elimination from the pension liabilities the portion pertaining to the cost of indexation, which portion normally ranges from about 20% to 30%.
In this connection, the liabilities under the NB PSSA as per the actuarial report as at April 1, 2012 amount to about $6 billion while the assets are about $5 billion, for a debt of about $1. Coincidentally, conditional indexation would essentially remove that $1 debt from the NB balance sheet.
I thank Bernard Dussault for sharing these important insights with my readers. Bernard is a leading expert in pension policy and in my opinion, he's the best actuary in the country. He really understands the intricacies of pension policy and unions should have consulted with him first before accepting these reforms (his email is

It's quite disconcerting seeing public sector workers and pensioners getting squeezed while Wall Street profits off of excessive fees it charges public plans, effectively giving it a license to steal.  Chris Tobe, author of Kentucky Fried Pensions and founder of Stable Value Consultants, went over the 2 big myths about Illinois pension reform which I covered in my last comment and shared this with me:
Government retirees are definitely being forced to pay for pension fund problems caused by bad investments and Wall Street fees. The Detroit Bankruptcy judge locked in that possibility for Detroit employees yesterday and thousands of others around the country. It is well documented with FBI and SEC investigations that there were bad investments and excessive fees in the hundreds of millions in Detroit and now it looks like the retirees will bear the brunt of this corruption.
In a 106 page report on Rhode Island, former SEC attorney Ted Siedle documented that the excessive fees and bad investments directly hurt pensioners, because their Cost of Living Adjustments (COLA’s) are only allowed with a funding ratio of over 80%. Excessive fees and bad investments lower funding ratios so these COLA triggers are a definite way that pensioners will lose billions to Wall Street excessive fees and corruption. Ironically COLA triggers are being pushed by the Arnold Foundation/Pew Studies in over a dozen states (which were paid for by former hedge fund owner and Enron trader John Arnold).
Keep all this in mind as New Brunswick and Illinois pension reforms are being rammed through. The fat cats on Wall Street are loving it but public sector workers and retirees are right to be concerned.

Below, Susan Rowland, Chair of the Pension Task Force for the Province of New Brunswick, discusses the why reforms were needed. But as New Brunswick moves forward with sweeping pension reform, considerable opposition to pension reforms remains and I now think some unions fumbled badly on this file. They still have a chance to address the issues Bernard Dussault raises above but the courts will have to decide the fate of New Brunswick's public pension plan.