Pensions are burdening governments and other public institutions in many parts of Canada.
The dilemma is clear and painful. Pension investment funds got hammered in the recession. Future investment growth is likely to be limited. The recession produced fiscal deficits. But pension costs keep rising for an aging work force.
A big fixed lump in the budget of a public institution for pensions will grow in size – in and of itself – and will eat up a greater share of the budget tomorrow compared to today. Something has to give.
That’s why public authorities are scratching their heads (as private employers have been doing) about how to respond. Public sector unions are understandably anxious that benefits be protected. Critics insist the answer lies in clawing back benefits, raising employee contributions or some combination of the two.
The weaker an institution’s fiscal position, the more vulnerable it is to higher pension costs. Which takes us to a province such as New Brunswick: significantly indebted, shouldering a deficit of $183-million, with limited economic growth prospects.
Whether New Brunswick has found a way out of its pension pickle won’t be known for some time, but the province is at least trying creatively to find the answer. Impressively, the government worked out a new model for itself and will see unions adopt it, too, including the New Brunswick Nurses’ Union, the New Brunswick Council of Hospital Unions and the New Brunswick Pipe Trades.
The model, apparently based on one used in the Netherlands, emerged from a task force of pension experts that understood New Brunswick needed a new way of doing things. The old model was based on premises no longer valid: high interest rates, more or less constant stock market growth, shorter lives. Pension plans designed on those assumptions now find they cannot deliver. Or, in order to deliver, governments have to step into the void.
So, rather than raid the treasury or keep promising what might not be delivered, New Brunswick has adopted a shared-risk pension plan that protects pensions and retirement age today but over time will increase contributions and raise pensionable age for younger employees.
Basic pension benefits will be almost completely funded, but extra benefits such as a cost-of-living allowance will depend on circumstances. In years when pension funds perform poorly, the benefits will be small or non-existent. When they perform well, benefits will rise accordingly and will include an adjustment for benefits foregone in previous years.
In other words, forget about a defined benefit per se and accept instead a basic benefit with some measure of uncertainty for anything extra. Extra benefits will be paid as and if money is available, instead of fixed indexing.
Experts who worked through many iterations of this model suggest that a 97.5-per-cent probability exists that the basic pension benefits will never be reduced and that the average indexation for extra benefits will be at least 75 per cent of the consumer price index. All one can say is that we shall see.
Retirement is going to be delayed, especially for new employees. Their contribution rates will almost certainly rise as well. But the chances of the plan collapsing are almost nil. If public sector union plans are put on a sounder footing, the chances are reduced that they will run to the government for a subsidy.
Making pension plans supportable is vexing governments, universities, teachers and other public plans. The traditional union response has been to demand money from the government – that is, the taxpayer. Alas, deficit-strapped governments are saying, “Too bad. Raise the contribution level from your members instead.”
New Brunswick is trying to slide toward pensions with variable amounts and higher contributions from younger employees. There is an additional element of risk in this approach – hence the term “risk-sharing.” Whether the new scheme will be enough to get the province out of its pension pickle remains unknown, as it will take years to unfold.
But at least New Brunswick and its unions are trying to be creative. So good on them.