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Pension problems could cost Tories election - retiree

$1-billion shortfall in public-sector plans

BY CHRIS MORRIS Daily Gleaner Aug 5 2013

The pension time bomb that is exploding in New Brunswick started ticking in the good old days of economic growth, strong world markets and stable populations.

Talented people were attracted to the province's public service by employment packages that included highly desirable defined-benefit pension plans that came with guaranteed cost-of-living increases to protect retirements from the ravages of inflation.

New Brunswick's public-sector pensions reflected the good times across Canada during much of the latter half of the 20th century and they are typical of other plans in other provinces.

Butthegoodtimesareover,especially in debt-ridden New Brunswick, and the repercussions from the pension time bomb are reverberating through the halls of government and the homes of retirees who suddenly feel much less certain about their incomes and their futures.

Premier David Alward and Finance Minister Blaine Higgs said they became aware of the looming crisis after the pension task force looking into troubled private plans made it clear there were also big issues on the public side.

'This is an issue across this country and in most countries,' Higgs said in an interview.

'If we have a funding formula that pays for itself on an ongoing basis, then it is one less liability the province has to keep showing on its books, which the credit agencies look at and say, 'How are you going to pay for this down the road?' ' The numbers surrounding the debate over pension reform are bewildering in both their size and complexity: • A $1-billion funding shortfall in public-sector plans.

• A 25 per cent chance the shortfall will double in the next 20 years.

• An estimated $5.5 billion in cash contributions that would be required to guarantee 100 per cent security of the plans.

• More money going out than coming in: $270 million out versus $225 million in. And the shortfall is increasing.

Analysts say there are many reasons why New Brunswick is in a pension pickle, ranging from insufficient employer contributions in the early years of the public-sector plans to market volatility and continued low interest rates.

Over the past 20 years, Higgs says New Brunswick governments have paid about $673 million in special payments to top up the Public Sector Superannuation Act (PSSA) - the largest single plan with 20,000 active members and 13,400 retirees.

He says there have been only three years in the past 20 when the government has not had to make the special payments. The payments have ranged from $40 million to $140 million.

'How did we get to where special payments are a way of life?' Higgs asks rhetorically.

'It just isn't going to recover without the special payments unless interest rates are running at eight per cent plus for the foreseeable future, and no one is predicting that. So therein lies the problem.' Welcome to the shared-risk pension debate in New Brunswick, one of the most divisive issues the Progressive Conservative government has faced during its first term in office.

Some retired public servants, furious with the proposed changes that they see as a breach of their retirement contracts, predict that this subject is so damaging for the Tories, the government may not survive the 2014 election.

'This is the kind of issue where people don't get mad just once,' says retiree David Wiezel of New Maryland, whose family's Tory roots run deep in the province.

'When you get a group mad at you for ethical, moral and pocket-book issues all rolled into one - they stay mad.' While the government and its supporters call the new pension model shared risk, its detractors say it is more accurate to describe it as 'shifted risk.' Under the existing public-sector plans, the risk of market downturns is borne solely by the provincial government. Under the reforms, the risk would be shared by both sides.

As well, pensioners would have to say goodbye to guaranteed costof-living increases. Instead, those increases would be conditional upon market performance.

Retired civil servant Ernie MacKinnon, a former deputy minister responsible for provincial government pensions, said he understands where the Alward government is coming from - but he can't support the imposition of shared risk on existing pensioners.

MacKinnon is a member of and an adviser to Pension Coalition NB - a group of retired public servants who oppose the proposed reform of their pensions.

'Intellectually, I'm attracted to the shared-risk model,' says MacKinnon, who was the first CEO of the New Brunswick Investment Management Corporation.

'But I understand completely and I don't quarrel with a large segment of the retired population who feel they have a commitment, a contract, and they want that contract honoured. I see the pickle the government is in. I see the problem with the volatility and what it does to their annual budgets when you get swings in the market. I can appreciate them wanting stability going forward and to know for the long term what their commitment is going to be.' 'I understand all of that and I understand the shared-risk model would meet their goals. But we're going to be drug kicking and screaming to the altar.' MacKinnon says people were aware years ago that defined-benefit plans, like those in the province's public sector, were flawed.

The plans, often called DB plans, are considered the gold standard for pensions. They are common in the public sector across Canada but less so in private business.

In the public sector, the DB plans often have guaranteed cost-of-living allowances and guaranteed benefits. Any shortfalls in the plan's funding have to be made up by the employer.

'I know there is a flaw in the design of the defined-benefit plans that we have,' MacKinnon says. 'I knew that 15 years ago. We basically dawdled and have continued to dawdle until today. Everybody is in the same soup.' For Higgs, longevity is the nub of the problem. For the past couple of decades, the goal of many public servants was to retire early and live as well and as long as possible - something many are accomplishing.

'The pensions were never designed for people retiring longer than they worked,' he says.

'We have a wave of demographics going through the province where in 1985 for every retiree in the PSSA, there were four people working. Today for every retiree, there are roughly 1.3 people working. In 2023, the projection is we will have less than one person working for every retiree. It puts it in perspective. People are retired for longer, so the demands on the system are much more significant than they ever were intended to be.' MacKinnon says the lengthening human life span has thrown a wrench into pension plans around the world.

'The longevity issue is a big one,' he says.

'If you expected to pay somebody a pension for 15 years and they are going to live 25 years, you are going to have to either add more money to the pot or spread the butter thinner.' Higgs is the main point man for the New Brunswick government on pension reform - one of Alward's most approachable and knowledgeable ministers.

He is known for not pulling his punches. The Tory government has been sideswiped by the intensity of some of the anger over pension reform, and in his frank, low-key way, Higgs sees deep into the heart of the problem.

'We are trying to solve a problem many people didn't know we had. That is always difficult.' Higgs says that, unfortunately, the bond-rating agencies knew that public sector pensions and their growing, unfunded liabilities were a problem for the province.

He reads from a recent credit review by Standard and Poor's, which gave New Brunswick a stable outlook.

'The stable outlook reflects our expectation that New Brunswick's continuing program review initiatives and pension reforms will be successful at achieving cost savings,' Higgs said, quoting from the report.

'So you see, the credit-rating agencies are looking at the liabilities this province has and they are saying, 'We expect this to move forward and as a result we are maintaining your positive outlook and holding your rating the same.' Pension reform is a big factor in moving in that direction.' MacKinnon says he can see the province's point of view, but he fundamentally sympathizes with the public sector retirees.

He says they would be treated unfairly under shared risk, especially with the loss of guaranteed cost-ofliving increases - the main bone of contention for the pensioners.

'There are an awful lot of people with quite modest pensions and singleearner families who rely on the costof-living allowance to keep up with the bills,' MacKinnon says. 'So the prospect of losing that guaranteed increase is foremost in their fears.' 'For those who understand, that is their main fear. For those who don't have as much information, they also fear a reduction in the basic pension they are earning today. That is not so much a risk. But the cost-of-living reduction is very probable, I think.' Higgs said people do not have to worry about the basic security of their pensions. They will be there for them under shared risk.

However, he agrees that the cost-ofliving issue is a major sticking point.

'The escalation is a big issue for us - to pay out a cost of living allowance that doesn't exist in the market. That is a very big liability for the province.' 'That is what this is all about getting to a contribution program that is realistic so you are not putting all the burden onto the employer and employees of the future and getting to a point where the pension rises with the actual cost of living as opposed to an artificial index.'