Monday, February 17, 2014

Alberta's Push to Cut Pension Costs?

Kelly Cryderman of the Globe and Mail reports, Alberta pushes ahead with plan to cut pension costs:
The province of Alberta remains poised to make a series of reforms to its public sector pension plans this spring, despite the improving outlook for many pension plans across Canada.

“They’re looking healthier, but I bet you in 2007 they were looking good too,” Alberta Finance Minister Doug Horner said in an interview.

But while pushing ahead with his plan, which is designed to sharply reduce pension costs over the long term, the Alberta minister insists he has listened to union concerns and will consider small changes before introducing the controversial legislation in the months ahead.

Alberta’s pension problems are the same ones that many governments and large corporations face. Increased life expectancies, low interest rates and uncertain investment returns make it hard to keep up with the rising costs of defined benefit plans.

And those dark clouds are still on the horizon, no matter the current positive indicators after a strong stock market year, according to Mr. Horner.

The minister said unfunded liabilities – now sitting at about $7.4-billion for four separate provincial public pension plans – cannot be borne by taxpayers, and the problem won’t be solved with increased contributions or periods of higher investment returns alone.

On the table are changes such as an end to early retirement benefits paid at age 55 and the end of guaranteed cost-of-living increases. There will be contribution rate caps – that can be “changed from time-to-time” – and a moratorium on benefit improvements until 2021. Those already receiving pensions by the end of 2015 will not be affected by the proposed changes to cost-of-living adjustments (COLA).

“I’ve got to tell you, there’s very few defined benefit programs in the private sector that even have a COLA,” said Mr. Horner.

The minister said the government asked for union and member feedback in the fall and got some ideas. The province is talking about getting rid of subsidized early retirement, he said.

“Maybe instead of getting rid of it, you could moderate that somehow,” Mr. Horner said, adding that nothing has been decided yet.

Despite the signs of movement from Mr. Horner, the unions maintain the government’s plan is impossibly flawed. A consultant’s report commissioned by labour groups and released earlier this year shows Alberta’s largest public-sector pension plans are healthy and on the road to returning to fully funded status.

Alberta Union of Provincial Employees president Guy Smith said he’s hearing from members who plan to leave the public service before the changes are implemented – putting a drain on both pension plans and a government that needs to hold onto workers in the province’s labour market.

“Actually, what Horner is doing is creating a crisis,” Mr. Smith said, noting Alberta’s public sector pension plans are far from lavish.

Unions are also buoyed by a report from Alberta’s Auditor-General last week that stated it is “unclear whether the proposed reforms significantly increase the likelihood of the plans’ sustainability.”
I've already discussed Alberta's sweeping pension reforms and think the government and unions raise excellent points. While there isn't any imminent crisis ahead, ballooning pension costs must be brought under control and sensible reforms must be implemented.

Alberta and New Brunswick, which will introduce a teachers' pension bill this spring, are moving to adopt a shared risk model. But as Bernard Dussault, Canada's former Chief Actuary, so aptly brought to my attention when I revisited New Brunswick's pension reforms,  shared risk shouldn't be risk dumping. All reforms must be fair to all stakeholders, including taxpayers.

Alberta's public pension problems were also discussed in a recent report by that province's auditor general. Mariam Ibrahim of the Edmonton Journal reports, Alberta’s public pension plan suffers from lack of leadership, oversight:
A revolving door of finance ministers have compromised the financial health of Alberta’s public sector pension plans, the province’s Auditor General says in his latest report.

Ten ministers have held the finance portfolio since 2000, the same period during which the funding status of the pension plans deteriorated, Merwan Saher said in his 108-page report, released Thursday.

“The lack of continuity in this leadership role poses a significant risk in the ability of the system to respond to adverse experience in a timely manner,” the report said.

While the boards of the four plans have implemented patchwork risk-management systems, Saher’s report said there “is no one organization within the public sector pension system with clear responsibility for co-ordinating and monitoring the performance of the public sector pension plans.”

He recommended the government establish a risk-management system, saying pension plans with no formal system “are less likely to identify risks ... effectively”

The audit studied the Local Authorities Pension Plan, the Management Employees Pension Plan, the Public Service Pension Plan and the Special Forces Pension Plan, which have a total of about 200,000 active members and 120,000 retirees.

Together, the plans have an unfunded liability of $7.4 billion, essentially the amount needed for the plans to follow through on promises made to current and retired members.

Without an overarching system to assess risk, the right decisions can’t be made at the right times, Saher said.

“Risk management is not a panacea to make $7.4 billion in unfunded liability just magically disappear,” he said. “What we’re saying is without good risk management, the chances of that unfunded liability increasing are greater than they need to be.”

Finance Minister Doug Horner has proposed several changes to address the gap, including plans to implement caps on contributions from both employees and employers — the largest of which is the provincial government — and a limit on cost-of-living adjustments to 50 per cent of Alberta’s inflation rate. Proposed changes would come into effect Jan. 1 2016, and would not be retroactive. Horner is expected to introduce legislation proposing changes during the upcoming spring session, which begins with a throne speech March 3.

However, public sector unions have said the best option for addressing the unfunded liability is to stay the course with higher contribution rates. They say the government’s proposed changes would shrink benefits and hurt employee retention.

In a written statement, the Alberta Union of Provincial Employees noted Saher’s report found that it’s not certain whether the government’s proposed changes would increase the likelihood of the plans’ sustainability. “The one clear goal of the reforms is sustainability. With the Auditor General saying it’s not clear if you’re going to accomplish that, it’s time to go back to the drawing board,” AUPE president Guy Smith said.

Saher urged the Finance Department to consult with stakeholders and also recommended the department assess the future impact of proposed changes, analyze how they would affect employee retention and create a detailed implementation plan. But he stressed his audit of the sustainability review only considered work done up to July 2013.

In an interview, Horner said Saher’s report confirms that the plans won’t be sustainable if changes aren’t made.

“That’s the thing that we’ve been talking about all along. It’s not the crisis of today; it’s the crisis that we’re building for tomorrow if we don’t change something,” Horner said.

As part of the changes, Horner said the pension plans will move from government-sponsored to being jointly-sponsored by the employers and employees of a particular plan. Each of the plans’ boards would be responsible for establishing its own risk management system, he said.

He noted his department has consulted with the boards for the plans since Saher’s audit concluded in July 2013.

Alberta NDP Leader Brian Mason questioned the value of the report, saying the question of whether Alberta’s pension plans need to be overhauled isn’t addressed.

“People care about whether or not their pensions are going to be cut unnecessarily and this report unfortunately sheds very little light on those basic questions,” Mason said.

He said it might be time to do a value-for-money audit of the Auditor General.

“I think it’s very difficult to get the current Auditor General to give you a really clear answer when it comes to some issue that might offend the government.””
I commend the Auditor General of Alberta for producing a very thorough and comprehensive report on the state of Alberta's public pension plans. It highlights weak governance and even though it's far from perfect, it's an excellent report. The entire report can be downloaded here.

I can only hope the Office of the Auditor General of Canada (OAG) finally follows up with the Treasury Board to implement changes I recommended to them back in 2007 on the governance of the federal Public Sector Pension Plan. To put it mildly, the governance of this federal pension plan is abysmal (the folks over at Treasury Board still don't have a clue on what constitutes proper pension governance).

I also think it's high time Clyde MacLellan, the Assistant Auditor General of Canada, and the folks at the OAG stop producing puffy and misleading special examination reports exalting PSP Investments and get on to conducting a comprehensive performance, fraud and risk audit of this organization highlighting serious governance gaps. The OAG doesn't have to hire me for this work (I'm not interested) but it should hire someone qualified, like Edward Siedle,  the pension proctologist, or Diane Urqhart. Diane analyzed PSP's disastrous FY 2009 results for my blog and showed how they foolishly bought ABCP and even worse, sold CDS at the time which led to billions in losses (don't worry, PSP's executives still received millions in bonuses despite those giant losses).

And despite being one of the best places in terms of compensation, the turnover rate at PSP remains unacceptably high. How do I know? I know a lot of things about PSP, the Caisse, Ontario Teachers and many of Canada's top ten public pension funds, and they aren't all pretty. The provincial and federal auditor generals are asleep at the wheel, which is hardly surprising given most of them are completely and utterly clueless on proper pension governance and controlling operational risks, including risk of fraud. They also need to do a comprehensive audit of these organizations making sure they respect diversity in the workplace, and are hiring minorities at all levels, including aboriginals and people with disabilities, the two minority groups with a catastrophically high unemployment rate.

Below, the Government of Alberta explains challenges facing the Public Service Pension Plan (PSPP), Local Authorities Pension Plan (LAPP), Management Employees Pension Plan (MEPP) and the Special Forces Pension Plan (SFPP). And the Alberta Union of Provincial Employees replies to politicians' attacks on public sector pension plans, urging them to stop the scare tactics.