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Don’t find comfort in Consultant’s soothing words ...

Don’t find comfort in Consultant’s soothing words on Teacher’s and Public Service pensions

By
Ernest MacKinnon
Former Deputy Minister responsible for Provincial Government Pensions
First CEO of the New Brunswick Investment Management Corporation (NBIMC)

(Published in the Daily Gleaner, Fredericton, March 15, 2013)

In a recent Telegraph Journal OP-ED piece Susan Rowland, the Alward Government’s Chief Pension Consultant, offers a very benign analysis and soothing words aimed at teachers and public service pension plan members.

Plan members of the teachers and public service plans, both working and retired, had better beware of the results of her advice to government. What this government is doing with that advice is going to be anything but soothing.

The Alward government’s first step has been to repeal legislation which currently spells out in law what the pension deal is for teachers and public servants. Free of the encumbrance of specific legislation governing benefits they can really go to work. Promises of placing these plan members under the same legislation as private sector employees is meaningless. One only has to look at the track record of our provincial pension regulators of private plans to see they are not effective. They are a part of government and will do the bidding of the political masters who pay their salary.

The Rowland solution for the provincial plans is the same as that proposed for the City of Saint John. Seems that one size fits all. A one tune consultant. This idea does not result in shared risk at all. That is unless you accept that a model which results in 100% of the risk shifting to plan members is sharing. The province will make its’ contribution on payday along with employees and that will be it. Since the plans are underfunded it is inevitable that benefits will be lower than expected at some point, probably sooner than later.

What is not fair or right about that is the fact that people who retired last year, 5 years ago, 10 or 20 years ago, on the basis of a contractual pension benefit promise, are now facing the potential likelihood of reduced benefits long after it is practical or even possible to return to work to mitigate the effect. A significant portion of these people were induced to retire by government sponsored early retirement programs designed to either reduce payroll or provide renewal through new hiring. They received offers in writing which spelled out in clear terms their compensation including benefits in retirement. What is more contractual than that? It remains to be seen how the courts will decide, as this matter will almost certainly end up there.

Critics of these pension plans also fail to mention that the average pension is in the order of $21,000 and $10,500 if you are a surviving spouse.

Rowland piled on with other critics who are pleased to see public servant pensions being reduced in future. Pension plan members need not be ashamed of their benefit. They were offered employment on these terms and they accepted and earned the benefits their employment contract provided. It goes without saying that Rowland is not about to forego the fat consulting fees Bay Street lawyers like her charge. A bill that is no doubt being charged to the pensioner’s Pension Funds to boot.

Rowland or the government itself fail to accurately describe why there is a problem with the funding of teacher and public service pension plans. She says it is not because government did not make contributions. She is wrong. (To see recent media report on NBIMC performance please read: New Brunswick Investment Management Corporation-managed pension funds maintain strong performance.)

It is precisely because government did not make their share of contributions and even pocketed employee contributions in the early years of the plans. This created a hole in the two plan’s funding which grew ever larger over time. The McKenna Government tackled the problem in 1989 and in 1993 put in place a 25 year amortization to cover that hole in plan funding. The Lord Government discontinued those amortization payments less than 10 years into the 25 year plan. With interest this hole in the plan started to grow again.

Similar to what happened in Saint John, I wonder if the actuary for the two provincial plans will be urged to take a very pessimistic view on plan cost assumptions in order to inflate the liabilities. The government can then make a false but stronger case for urgent action.  We can expect to hear soon that there is now a huge funding shortfall.

Rowland throws out phrases about investment risk management and overly volatile returns on pension funds. This is largely nonsense in the case of both the teachers and public service plans. The problems in these pension plans is not investment returns, risk management or volatility of returns. Over the past 35 years average returns to the funds have met and exceeded the level specified by the plan actuary as necessary to fund current service. It is not current service which is not being covered, it is the early years funding hole previously mentioned. Since 1996 the Board, who look after management of the funds for the teachers and public service plans, have followed a very prudent path of careful risk management and low volatility investment mix, more so than almost any other plan in Canada or the US.

Their investment mix, also referred to as the Asset mix, is more heavily weighted toward lower risk and less volatile fixed income assets. New Brunswick has been served very well by this, in contrast to the City of Saint John example, where poor oversight of the pension fund resulted in disaster for the City.

In sum, Rowland’s soothing words are not to be taken seriously. Future pensions for teacher’s and public servants are being put at greater risk, and that risk is now going to be 100% on the backs of the members of the two plans. Benefits will be reduced as we go forward.

The Provincial Government wants to shed itself of the unfunded pension liability even though it was government error that created it. Pensioners who accepted at face value the promises they received on retirement are now facing a betrayal of that promise. It is made worse by the Alward Government’s failure to be informative and open about their intentions.

There has been no consultations at all, none.

Where is their principle of public engagement now? In the Conservative Party’s 2010 election platform, ‘the Path Forward’ they said:”……every policy area, will be shaped by an underlying principle of public engagement.  Mr. Alward where has this principle gone? You are going forward with pension changes affecting tens of thousands of New Brunswickers who have not been properly informed or consulted in advance. There is no crises in these pension plans which demand action today. You hide behind Consultants and make unilateral changes affecting so many people in secret rooms.

It should come as no surprise that people are angry and scared.