Supreme Court Rules on $28 Billion Surplus
The Supreme Court of Canada has ruled federal employees aren’t entitled to any of the $28-billion surplus the government took from their pension funds a decade ago to help pay down the deficit because the accounts were nothing more than “ledger” records with no real assets.The Supreme Court's decision was expected but I understand why unions are disappointed. Prior to the creation of the Public Sector Pension Investment Board (PSP Investments) back in 1999, the federal Crown corporation that invests funds for the pension plans (Plans) of the Public Service, the Canadian Forces, the Royal Canadian Mounted Police and the Reserve Force, pension assets were held in non-marketable Canadian government bonds.
Wednesday’s unanimous decision, written by Justice Marshall Rothstein, rejected union and pensioners’ claims that the government breached its fiduciary duty when it scooped the surplus from the pension plans of Canada’s public servants, military and RCMP. They wanted the court to return the money to the plans.
The high court upheld previous lower court rulings and found the pension accounts were not separate funds with assets but “rather accounting ledgers used to track pension payments” and to estimate the government’s future pension obligations in its financial statements or the Public Accounts.
With no assets in the plan, the court rejected claims that employees and retirees had an “equitable or legal” interest in the plan and that the government had a fiduciary duty as the plan’s administrator to put members’ interests first.
If the accounts were just records, the court determined, employees and pensioners couldn’t suffer “any detriment” by the government’s accounting treatment and decision to amortize the surplus against the deficit.
“The … accounts are legislated records and do not contain assets in which the appellants have a legal or equitable interest,” the court concluded.
“The government was not under a fiduciary obligation to plan members nor was it unjustly enriched by the amortization or removal of the pension surplus.”
The ruling came as a disappointment to unions, but several privately admit they weren’t surprised by it because of their earlier court losses. It ends one of the longest and costliest legal battles undertaken by the unions and retiree associations.
The Supreme Court granted the groups leave to appeal because of the national importance of the case, which affects more than 700,000 retired and working public servants — many of whom live in the National Capital Region — who belong to one of the country’s largest pension plans.
The 79-page decision concluded employees’ only “entitlements” are the pension benefits promised under the mandatory defined-benefit pension plan. Public servants can collect pensions worth up to 70 per cent of the average salary of their best five years.
It also held that the government had the legal authority to take the surplus when it passed Bill C-78, the legislation that created a new pension plan in 2000.
If the unions had been successful, the government could have found itself with an additional $28-billion liability added to the national debt.
Unions knew such a win could risk another backlash against well-paid public servants. The Parliamentary Budget Officer recently estimated taxpayers are paying $114,100 a year for every public servant when pensions and other benefits are rolled in.
“It’s been a long fight and cost lots of money but the Supreme Court has ruled and we’ll respect the law. It’s final and we can now move forward,” said Gary Corbett, president of the Professional Institute of the Public Service.
The ruling comes at a time when the government is cutting public service jobs and trying to rein in spending, including pension costs.
Treasury Board President Tony Clement said the lawsuit, triggered by a decision of the Jean Chrétien government, would have saddled taxpayers with “an enormous expense” had unions won.
He said the Conservatives had to take steps in the March budget to reduce public service pension costs to ensure their sustainability and bring them more in line with pensions in the private sector. The government recently passed legislation that increased the retirement age from 60 to 65 for new employees and forced all public servants to pick up half the cost of premium contributions to the plan.
The historic case stands out because of its complexity, uniqueness and the billions of dollars that were involved.
The federal pension plan was an internal account. Employees’ contributions were taken off their paycheques and credited to the account. The act governing the plan required that the government match employees’ contributions, pay interest and cover any shortfall so it could meet its obligations. It was silent, however, on how to handle a surplus.
The contributions, along with interest and other charges, were dumped into the government’s Consolidated Revenue Fund. When it came to time to pay pensioners, the payments were taken from that revenue fund.
Unions and retirees maintained they were entitled to at least a portion of the $28-billion surplus. It was part of their “total compensation” and the surplus was partly built by their contributions and interest paid on those contributions. They argued the pension accounts were “trust funds” and the government had a “fiduciary duty” to manage the funds and only use them for pensions.
The court accepted the government’s argument that the pension accounts were “legislated ledgers” to track what went in and out of the accounts. There was no money, stocks, bonds, real estate or other tangible assets in them. The money credited to the accounts was deposited in the Consolidated Revenue Fund and became public funds for the government’s use.
The court said employees have no “property interests” in their contributions which were “costs” they paid for their future guaranteed benefits.
By the 1990s, the accounts started to post a surplus which exploded as the decade wore on, hitting $30 billion by 1999. It mushroomed for a number of reasons — low inflation rates, high interest rates on government bonds, a six-year freeze on public service salaries, caps on indexation benefits and changing assumptions on how to calculate the plan’s liabilities.
The unions argued the Liberals — led by then-finance minister Paul Martin — were obsessed with reducing the federal deficit and eyed the surplus as an easy way to cut expenditures.
As early as 1990-91, the government began to amortize the surplus to better reflect the pension liabilities it would be on the hook for in the future.
“The effect of this ‘amortization’ was twofold: it reduced the government’s annual budget deficit (or increased the annual budget surplus) by reducing annual pension expenditures, and it brought the government’s net debt down by reducing the net pension liabilities to an amount closer to the actuarial estimates of the government’s future pension obligations.”
In April 2000, the Liberal government passed Bill C-78 and changed how the pension funds were collected, managed and distributed. That law allowed the government to take the surplus and put limits on the size of surpluses.
Claude Poirier, president of the Canadian Association of Public Employees, said he was disappointed by the ruling. He said the surplus could have been used to offset higher contributions that public servants are now facing rather than being “siphoned off” by the government.
“These changes are due in part to the shortfall caused by the government’s appropriation of the pension plan surplus even though the pension plan remains solvent and fully funded,” he said. “In this sense, the public service pension plan is in much the same situation as other defined-benefit pension plans that are in trouble today because of the contribution holidays taken by many employers between 1994 and 2003.”
CAPE’s predecessor union initiated the lawsuit after one of its retirees discovered the government had been amortizing the surplus for several years without employees and retirees knowing. The surplus was used to offset the debt in the Public Accounts while the books for the pension accounts showed the surplus was still there.
Poirier said the ruling should reopen the debate over giving unions joint management in the running of the public service pension plan — especially now that employees have to pay half the costs in contributions.
Robyn Benson, president of the Public Service Alliance of Canada, said the ruling acknowledged that public servants contributed about 42 per cent — or $12 billion — of the surplus and that shows they have already done their bit to reduce the deficit.
She said the unions wanted the surplus returned to the plan to ensure it remained “healthy and viable” and protected taxpayers and public servants alike from rising contribution costs they now face.
Benson said public servants were “misled” for years by government documents and statements by ministers and senior bureaucrats that the pension fund had “assets” or was “fully-funded.” The court acknowledged the “words” government officials used to describe the plan didn’t “accurately” reflect how the plan operated.
“So while the court says there are no assets in the account, the government has been misleading its employees for decades and that was at the core of the problem,” said Benson.
In the 1990s, these accounts posted a surplus which exploded as the decade wore on. Canadian bonds rallied due to low inflation and cuts to government expenditures. The value of those non-marketable government bonds rose significantly during that period, far surpassing the pension liabilities owed to public sector employees, creating a $28 billion surplus, which the Government used to pay down the debt.
This, in a nutshell, is what unions and the Government of Canada have been fighting over for many years. The unions claim that $28 billion surplus was theirs but the Government successfully argued that these accounts were legislated records, not assets administered by a separate pension investment board as they are now.
While I understand the Supreme Court's decision, these "legislative records" would not have existed if the Government didn't have to enter them in the books as non-marketable government bonds to pay for future pension benefits. In other words, the surplus would never have existed if the Government didn't enter those funds in non-marketable government bonds. In that sense, the unions have a strong point as the money could have been put into PSP Investments and used to negotiate lower contribution rates.
But what if things turned out the other way? What if those non-marketable government bonds lost value due to high inflation and rampant government spending? What then? In that case, the shortfall would have been borne by the Government as unions would argue that those "legislative records" were not assets that belonged to them.
This is why the risk of any pension plan should be equally distributed among employees and plan sponsors. If that was made clear from the get-go, any surplus or deficit would have been equally shared.
As I commented a few weeks ago, Canada's public servants are at a tipping point. Given the new cost sharing structure of these plans, it only makes sense that unions have more of a say on how their pension assets are being managed. This means direct representation on the board of PSP Investments or, at a minimum, they have a say in who gets nominated on that board.
Below, CBC reports on the Supreme Court decision saying that several major public unions are not entitled to a $28-billion pension surplus that the government hived off to help pay down the debt.