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Ontario Finance Minister, The Honourable Dwight Duncan spoke to the media and answered questions during a pre-budget press conference in his office in Toronto on March 26, 2012.

Deborah Baic/The Globe and Mail/Deborah Baic/The Globe and Mail

Ontario's cash-strapped government is considering the creation of two massive pension funds to manage the retirement savings of public-sector workers – everyone from nuclear engineers and university professors to hospital custodians.

The two funds together would manage just over $60-billion in pension assets. One, with $46-billion in assets, would emerge as the third-largest public-sector fund in the province, ranking behind the Ontario Teachers' Pension Plan and the Ontario Municipal Employees Retirement System.

The reforms are under consideration as governments at all levels grapple with massive deficits in their public pension plans, thanks to sluggish investment returns, relatively generous benefits and an aging work force that is retiring in record numbers. The problem is particularly pressing in Ontario, which is under enormous pressure to curb spending and erase a projected $14.8-billion deficit. Pension expenses alone will account for nearly 30 per cent of the total increase in program spending between now and fiscal 2017-18, Toronto-Dominion Bank economist Don Drummond warns in a report commissioned by the government.

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Pooling pension plans in the broader public service would be a win-win for the government. Economies of scale would reduce administration costs, and the funds would have greater buying power to make large investments, including in government projects. But there is pushback from labour groups. The big concern is that employees in funds where employers pay a disproportionate share of the cost will be forced to make higher contributions.

Officials in Finance Minister Dwight Duncan's office met this week with executives at several public sector funds to discuss the government's plans for putting pensions on a more sustainable footing, according to sources close to the talks.

A senior government official said finance officials are still investigating different options, and no formal policy decisions have been made. "It's very early days," he said.

According to the sources, employees of the province's four electricity entities, including Hydro One and Ontario Power Generation, would have their pension assets pooled together to create one fund with just under $15-billion in assets under management.

The Society of Energy Professionals, which represents 8,300 employees in the electricity sector, says in a written submission to an adviser hired by the government that consolidation should only occur as part of collective bargaining. The society is concerned that its employees will be subject to a 50-50 funding arrangement. Currently, employees contribute $1 on average for every $2 from their employer.

"The government is taking a long, hard look at those numbers," the unnamed government official said.

A second pooled fund would manage not only the pensions for employees in many universities and community colleges but also the $12-billion fund set aside to safely store decommissioned nuclear reactors as well as plans for members of the Ontario Public Service Employees Union and the Workplace Safety and Insurance Board.

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Fifteen universities have some form of defined benefit plan with combined assets of over $13-billion, according to the National Union of Public and General Employees. Combining these assets with OPSEU, which manages $13.7 in assets, as well as the others would create a giant pooled fund with $46-billion in assets under management.

One source close to the talks said he was "shocked" that Mr. Duncan was considering putting so many different funds under one roof.

"He was thinking big was better," said another source.

The government used the budget last March to signal to public-sector employees that it is no longer prepared to use taxpayers' money to bail out shortfalls in their pension funds. Total pension expenses grew 13 per cent a year on average from fiscal 2006 to fiscal 2011, says the Drummond report. Left unchecked, the report says, pension expenses will triple by fiscal 2018.

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