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New pension model 'proven'

BY JOHN CHILIBECK  Telegraph Journal Legislature Bureau

It was at a meeting two years ago that powerful players in New Brunswick's Tory government decided something radical had to be done. At risk, they believed, were the pensions of tens of thousands of public service workers, whose plans were seriously underfunded and quietly heading toward a financial meltdown.

Premier David Alward, Finance Minister Blaine Higgs and Justice Minister Marie-Claude Blais had just met with the New Brunswick Task Force on Protecting Pensions, made up of three experts.

The advisers told the politicians in no uncertain terms that two private pension plans - for pipe-fitters and nurses and other health professionals - were in deep trouble and required changes in law.

'It was either Premier Alward or Higgs who then asked, 'Well, what does this mean for the plans in the public service?' And we agreed to take a look,' said Paul McCrossan, who had been hired along with his two colleagues, lawyer Susan Rowland and Université de Moncton economics professor Pierre-Marcel Desjardins, in December 2010 to sit on the task force.

More than two years later, the task force finds itself embroiled in controversy, with angry public pensioners hiring their own actuary and a top pension lawyer from Toronto to give them legal advice.

'We maintain we have vested rights,' said Clifford Kennedy of Pension Coalition NB, the group that formed to fight the Tory government's proposed changes that would affect 33,000 retired civil servants and teachers. 'What government is basically looking at doing is like expropriation of our rights.' The task force had originally been assigned to look at private-sector plans following the failure of a couple of paper mills, when retirees lost significant portions of their retirement incomes and many workers the prospect of a pension in their golden years.

But it didn't take long for the trio to warn that public plans had to be changed as well. It told the Tory government there was a fatal flaw with the assumptions behind pension plans - mortality tables hadn't been properly updated to reflect a big change after the year 2000. Studies showed people were living dramatically longer lives, making centenarians celebrating their birthdays a far less noteworthy item in community newspapers.

With plenty of retirees drawing income from pension funds and a big part of the workforce getting older and closer to retirement, the pension plans faced the prospect of eventual collapse.

'We knew that if the private plans were in such terrible shape, the public plans would be the same way,' said Rowland, the task force's chairwoman, who pointed to the changing economy and demographics for the trouble.

'We're trying to avoid a system failure of these plans and keep them sustainable for everyone. The goal is to prevent these plans from being ruined. A plan can easily reach a stage where it's still paying retirees, but you know it's eventually going to run out of money.' McCrossan, 71, has a similar message. He's what you could describe as Canada's preeminent pension policy guru. The only actuary to ever sit as an MP in Ottawa, in both Joe Clark's and Brian Mulroney's Progressive Conservative governments, he was behind many of the most important pension reforms in the federal government over the last 30 years, including key changes to the Pension Benefits Standards Act and the Canada Pension Plan Act. Once the head of the Canadian Institute of Actuaries, McCrossan has been retired since 2006 but has never really stopped working. His latest venture was being lured to New Brunswick by Rowland, who had been familiar with his work in Ottawa when she served as legal counsel to the Ontario pension commission in the late 1980s.

McCrossan has an unusual arrangement with the New Brunswick government. When it said it could only pay him the rate of a local actuary, he offered to pay his own expenses - airfare to travel back and forth between his Toronto home and lodgings at the Crowne Plaza Hotel in downtown Fredericton for two weeks every month.

'At first I thought this would be a very short stint,' he said. 'I was just interested in the project. I am a bit of a policy wonk, you could say.' But soon after being hired, emergencies kept cropping up that kept the task force busy. In July 2011, the New Brunswick Court of Queen's Bench looked at the nurses' pension plan that was at risk of failure. It ruled that benefits could be cut, but not to former employees who had already retired. The task force knew something different had to be done because it would mean doubling contributions or cutting benefits in half for active workers, something no one wanted.

The task force began meeting with the unions involved, which had their own actuary. The trio soon began testing models McCrossan had learn¬ed in his travels, the so-called Dutch model. In a nutshell, the model from the Netherlands is a shared-risk model that counts on all parties - active employees, retirees and the sponsor - to share some of the risk of the fund's investments losing money. For example, retirees get cost-of-living increases only when the plan can afford it, and contribution levels for workers fluctuate, again depending on market conditions.

It is more secure than a defined-contribution plan, in which employees bare all the risks, but less secure than a traditional defined-benefit plan in which the sponsor - either the government or a company - has to pay for any shortfalls, even if their own finances are teetering.

McCrossan learned about the Dutch model in 2006 when he and other world experts were hired by the International Monetary Fund to solve an emerging crisis in Switzerland's financial sector. During his stint in places such as Bern and Zurich, he roomed with a Dutch pension regulator named Hans Popping. It turns out the Netherlands had been using the shared-risk model for more than a decade, based on ideas borrowed from Canada's banking insurance regulation, something McCrossan himself had worked on.

'It's proven that it works,' he said. 'It's shown it can best handle the emerging problems of aging populations and rapidly improving mortality.' Using what he had learned from Popping, McCrossan and the task force tested several models with the nurses union. Every time the union had a concern, the task force tweaked the model. After five months, they had the model they wanted and an amendment in law was quickly introduced to the legislature to change the plan.

A similar crisis emerged in the City of Saint John's pension plan for municipal employees. When McCrossan saw the details, he said he had never seen a pension plan in such bad shape. The task force followed the same pattern, trying to build consensus among the parties and working with municipal officials and unions to make changes, which eventually passed in the legislature.

In the meantime, the trio continued working on the province's public pension plans, following the same practice McCrossan had used when introducing pension reform in Ottawa back in 1985, by consulting with opposition parties and trying to get everybody on side. After the task force had talked with the unions, McCrossan briefed the Conservative caucus, Rowland talked to the Liberals and Alward to the NDP. Unions were given the responsibility of communicating with retirees. Initially, the trio thought they had all parties in agreement before presenting the plan to the public.

But there has been a big backlash from retirees, who argue they have fulfilled their contracts and can't be expected to take any cuts to their benefits, regardless of how unlikely that might be.

McCrossan said it took him by surprise. Hugo Berkouwer, a retired chief actuary of the Dutch ABP (covering all government employees in the Netherlands), had told him when reforms were introduced in his country, fewer than a dozen workers and pensioners wrote letters in protest. McCrossan believes this is because the Dutch have a collective mindset in which all members of society work for the betterment of all rather than the North American mentality, which is more along the lines of every man for himself.

'I heard the argument raised by one former deputy minister in New Brunswick, 'I had a contract, my benefits are hard-wired, you have to deliver what you promised me, no more, no less' kind of thing and there shouldn't be this intergenerational sharing of risk and rewards. That surprised me. But maybe I shouldn't have been surprised. It's societal.' Still, McCrossan believes the reforms will prevail. The concerns the retirees have, he says, can be addressed by going back and forth with ideas over the next several months. He firmly believes solutions will be found that will be palatable to the majority.

On this note, Pension Coalition NB says it's willing to listen.

'We're doing our part in looking at all the potential scenarios and potential solutions,' Kennedy said. 'We agree the situation is unsustainable. That's why we hired the actuary and the lawyer for advice.' As for other private plans in New Brunswick, McCrossan says the task force has already shared information with seven actuaries being retrained to handle the plans and they are well on their way to fixing their plans, using a similar model. The difference is those plans are not bound by laws that are as strict as the ones governing the public service and no changes will have to go forward to the legislature.

He's looking forward to New Brunswick solving its pension problems.

'I'd like to go back to retirement. You know, 15 years ago I used to travel to Europe twice a month on business but now I'm finding even travelling to Fredericton twice a month is too much strain on the system.

'Besides, I have grandchildren.'