Reform of Canada's public sector pension plans is no longer
limited to active employees – increasingly governments are
willing to address expensive components of retiree pensions as a
part of their reform initiatives.
Most recently, Prince Edward Island announced that, beginning
in 2017, it would only grant cost of living adjustments (COLA) to
its public sector retirees if the plan performs well, but otherwise
they would be removing the indexing guarantees. While the PEI
government pointed to an estimated $400 million pension plan
deficit in support of this change, it has also committed to making
an annual $25 million special payment into the pension fund for the
next 20 years to help ensure that "the plan does perform
well", and thus pay out indexing to pensioners.
Other PEI changes, such as increasing the age at which employees
may retire with an unreduced pension from 60 to 62 and moving from
a "best of three" or "best of five" to a career
average earnings formula, would impact active employees. However,
PEI has made it clear that retirees will not be immune from its
pension reform initiatives. Two of PEI's unions – the
Union of Public Sector Employees (UPSE) and the Canadian Union of
Public Employees (CUPE) – have expressed concern over the
changes, with CUPE calling them "too drastic" and UPSE
responding by organizing meetings with its members.
PEI's announcement, however, was welcomed by the New
Brunswick government, with Finance Minister Blaine Higgs stating
Pension plan reform in Prince Edward Island is further proof
that New Brunswick is following the right course.
New Brunswick has also addressed retiree entitlements as a part
of its strategy for tackling its underfunded public sector pension
plans. New Brunswick's changes to its Pension Benefits
Act arose following the appointment of a Pension Task Force
and a consultative process with unions in the province. Under New
Brunswick's shared risk plans, the base benefits are based on a
targeted pension formula (usually career average earnings) and
certain ancillary benefits, such as COLA, will only be provided
where there are sufficient funds in the plan. Further, all benefits
(i.e., both base and ancillary benefits for the past and the
future) may be reduced under the shared risk model if there are
insufficient funds. In the unlikely event that such a reduction was
required, it would affect all plan members, including retirees.
New Brunswick's willingness to include retirees in its
reform was considered novel at the time and has not been without
its detractors. Certain New Brunswick retirees recently launched a
fundraising campaign to potentially fund a legal action.
Nova Scotia also passed amendments to its Public Service
Superannuation Act implementing a five-year funding review
cycle commencing in 2015. Under this approach, COLA will not be
permitted unless the Nova Scotia Public Service Superannuation Plan
is 100% funded and even when fully funded, the plan's COLA will
be subject to restrictions dependent upon the amount of surplus in
Alberta has also moved forward with changes to its public sector
plans' indexation formulas. Last month, Alberta announced public sector pension
reforms to take effect as of January 1, 2016, which include
changes to their plans' COLA formula. COLA on benefits earned
after 2015 will be "targeted" at 50% of the Alberta
inflation rate. (Those already receiving pensions by the end of
2015 will continue to receive their pensions including COLA
covering 60% of Alberta inflation.) Contributions will be set so
that there is a high likelihood that the "target" COLA
will be paid, but it will no longer be guaranteed. COLAs could be
reduced or suspended if the pension plan's financial status
deteriorates, and "catch-up" COLAs could be made later if
the plan's finances improve. Alberta unions and employees have
until December to comment on the changes.
When considering changes to pension benefits as a part of a
strategy to address an underfunded pension plan, plan sponsors have
tended to focus on changes that would only impact active plan
members – with retiree entitlements often considered
"off limits". However, with underfunded pension plans,
inter-generational equity issues and taxpayers' wrath becoming
of increasing concern to Canadian governments, there appears to be
a greater willingness to explore alternative solutions that broaden
the impact of pension reform to include all plan beneficiaries.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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