William Robson, president and chief executive officer, C.D. Howe Institute.Joy von Tiedemann
MPs' pensions are again in the news. No wonder: A recent report on their plans over the year to March 31, 2009 - a period when interest rates fell to unprecedented lows, the stock market lost a third of its value, and most Canadians' retirement dreams took a body blow - showed an 8 per cent increase in their accounts. The truth, however, is weirder, and worse. These accounts are a fiction. Extraordinarily rich and completely unfunded, MPs' plans are instructive examples of the worst in Canadian pension arrangements.
The spectacular performance suggested in the annual report tabled in Parliament would have been welcome if it had been real. These plans promise up to three-quarters of MPs' best five years' salary, starting at age 55, indexed to inflation, with eligibility after six years of service. Pensions that rich logically need some mix of prodigious contributions and spectacular returns.
Yet these returns were not real. No actual contributions have ever gone into these plans. They held no assets when the annual report showed their accounts at $689-million on March 31, 2008. And they held no assets when the report showed their accounts 8 per cent higher, at $744-million, on March 31, 2009. What looks like assets in the report are bookkeeping entries intended - although they do it poorly - to track liabilities. Not one dollar of real saving backs these pensions.
The recent crisis has underlined how important it is to ensure that retirement hopes and promises have something behind them. Many RRSP-savers and members of defined-contribution pension plans must now save more. Some defined-benefit pension plans - think Nortel - have failed, and others have big holes to fill. Backing pensions with adequate assets is a necessity, a fiduciary duty, a critical discipline.
A non-expert reader of the report on MPs' pensions - an MP him or herself - could easily think these plans were backed properly, that the reports' tallies represent honest-to-goodness assets. A truer view of these plans' obligations requires a visit to the website of Canada's Chief Actuary, where a valuation of them sits amidst a daunting list of other actuarial studies. Readers and MPs who find that valuation and navigate some dense terminology will learn two startling facts.
One is how much saving it would take to fund benefits this rich. The Chief Actuary puts their cost at 44 per cent of pay. But this estimate assumes those contributions would earn returns higher than is available on the asset that best matches an inflation-proofed, tax-backed promise: the yield on the federal government's inflation-indexed bonds. In the sometimes weird world of pension accounting, assuming returns on invested assets higher than prudent matching would allow is all too common - but with no assets to invest, it is clearly ridiculous. Calculate what the cost of matching these benefits with the assets most appropriate to the task, and the answer exceeds 50 per cent of pay - nearly three times more than the 18 per cent most Canadians can set aside in RRSPs or defined-contribution pension plans.
Startling fact two is, to repeat, that what looks like assets in the report tabled in Parliament is actually an arbitrary tally covering a big fiscal hole. The government pencils in notional contributions and notional interest received on them. But no actual investments occur. Whatever the numbers in the report, when the time comes to pay cash, the government must raise it then and there. It must borrow more, or tax more. The pensions are yet to be paid, and yet to be paid for.
Pension reform is in the air, and MPs have a key role in moving it forward. Correcting these misalignments between these plans, and what other Canadians enjoy and what good practice would dictate, should accomplish two things.
It should give Canadians more retirement saving room. MPs' plans implicitly provide nearly three times more than most Canadians enjoy. If that's a good amount, they should raise the limits on tax deferred saving for everyone to the same level.
And it should correct an egregious example of underfunding. Anyone who wants a pension can and should provide for it. Ottawa's authority to ensure that Canadians' pension promises are backed by the necessary assets would improve if MPs themselves properly backed the promises in their plans from now on.
MPs wondering how to improve pensions in Canada should look at their own plans. The flaws in those plans are serious, and instructive. They are the type of plans Canadians need to leave behind.
William Robson is president of the C.D. Howe Institute.