Ottawa Understating Liabilities by $80 Billion?
The federal government is understating the liability for its employee pension plans by $80-billion because it does not use “real world” investment returns in its calculation, a new report says.
A C.D. Howe Institute study has concluded the federal liability for pension plans now totals $227-billion, which is $80-billion more than the government reports in its Public Accounts.
“Ottawa’s calculations do not reflect investment returns available in the real world,” says co-author William Robson, who is CEO of the C.D. Howe Institute.
One of the figures Ottawa uses to determine its pension liability is a moving average of past “nominal” yields on 20-year federal bonds, while the other is an assumed return on investments of 4.2 per cent based on averages earned since 2000. The C.D. Howe report says the “made-up” numbers are not realistic in today’s world of low interest rates and low investment returns, and could not be calculated the same way by private sector companies.
“Both these interest rates are well above anything currently available on any asset that matches the plans’ obligations,” Mr. Robson said in a release Tuesday.
“Any Canadian who does not work for the federal government and wanted a tax-backed, inflation-indexed pension would need to save far more money than these plans hold for his or her federal-employee counterpart.”
The report notes the pension liability is part of the federal government’s accumulated debt, so changing the calculation would raise national debt levels as well as increase funding obligations. In fiscal 2011, ended March 31, the federal deficit would have been $47-billion instead of $31-billion if the pension plan liabilities had been calculated differently, the report says.
The authors issued a similar report last year, which concluded the pension plan obligation was $65-billion higher than reported at that time, or $208-billion.
This year’s report notes the liability for the federal plans - which cover public service employees as well as members of the Canadian Forces and RCMP - is growing at 40 per cent of pay annually using “fair value” accounting required in the private sector.
Fair value rules require companies to value their pension assets and liabilities using current market prices and interest rates, which is a key reason why many private sector pension plans are now facing large deficits.
The 40 per cent rate of growth is far higher than increases in employee and employer contributions being made to fund the plans, the report adds. Many federal pension plans are only partly funded, while some hold no assets to back their promises.
The authors recommend three types of reforms to address the problem, including revamping and reducing the benefits provided by federal pension plans, increasing tax-deferred savings room available to other Canadians so they can save for retirement at the same level as federal employees, and ensuring the federal plans are being funded to match the pay-out promises.
If the folks over at the C.D. Howe Institute really want to see whacked out discount rates based on rosy investment assumptions, they should look at US public pension funds and their magic 8% discount rate (now closer to 7.75%).
And this whole business of "fair value accounting" is so stupid because Canadian public pension funds invest heavily in private markets - private equity, real estate, and infrastructure. It's ridiculous to use current market prices and interest rates to value private markets because it introduces way too much volatility and is not reflective of reality because pension funds do not need to sell during market downturns, especially not the federal government's pension fund, PSPIB, which has net inflows of roughly $ 4 billion for many more years.
Why does the media give C.D. Howe so much attention on this nonsense? Easy, the banksters and insurance hacks want to destroy Canadian public sector defined-benefit (DB) plans because they know they can't compete with them. That's why OMERS got push back from the private sector when it said it wants to compete for PRPPs.
So please, the next time you read some study from the C.D. Howe Institute claiming that Ottawa is grossly understating its pension liabilities, do what I do, just yawn and ignore their biased claims. You're better off watching the latest 'Farage barrage' at the European Parliament (see below). Much more exciting than anything coming out of boring Ottawa and their bank sponsored, right-wing institutes.