Pension plans eat into budgets

Public agencies struggle with escalating contributions

Public sector pensions are chipping into the budgets of towns, school boards and hospitals across the province as contribution rates rise and plan administrators grapple with poor interest rates, a growing number of retirees and low investment yields triggered by the recession.

Increasing contribution rates are also hitting the paycheques of tens of thousands of public sector workers in Alberta. And as pension plans come under review, unions fear future retirement benefits may be cut or employees may be forced to work longer.

The largest public sector pension in the province is the Local Authorities Pension Plan (LAPP), a defined-benefit plan that relies on contributions from more than 400 employers and 200,000 workers in Alberta.

The LAPP has been forced to raise its contribution rates by roughly 35 per cent over the past five years. Those rates will jump further in 2014.

It’s a means a slew of local public sector organizations are paying more, including school boards, where the pension covers thousands of non-teachers across the province.

“It’s challenging because your benefit costs are increasing,” said John Deausy, the Calgary Catholic School District’s chief financial officer.

“It becomes a cost that we try and manage in the best way possible. Really, as members of the LAPP pension plan, it’s somewhat out of our control.”

It’s an expensive plan, but it has good benefits … DWANYE SMITH,

Last year, the Catholic school board paid $5.91 million in local authorities pension contributions, an 83 per cent increase from four years ago. By contrast, the total amount paid in non-teacher salaries rose just 41 per cent (last year it was $63.81 million).

Non-teacher pension contributions represent a little greater than one per cent of the Catholic board’s budget. Increases mean every education assistant in the classroom or secretary in the principal’s office now costs more in benefits.

The employees are paying, too. A public sector worker in Alberta who makes an annual $65,000 salary will have $6,691.06 redirected to the Local Authorities Pension Plan this year, a $1,700 increase from five years ago.

Organizations are also spending more. In 2011, the City of Calgary paid $96 million into the LAPP. Alberta Health Services spent $362 million. Both are increases from prior years.

It’s the same with police departments. Contribution rates for the Special Forces Pension Plan were bumped up by 31 per cent in 2010.

That rate jump, combined with increasing salaries and added police officers, means Calgary Police Service payments into the pension plan rose to $24 million in 2011, twice that of 2006.

Calgary police commission chairman Mike Shaikh said employers are bearing the risk of defined-benefit pensions.

And from the perspective of a business person, he said it may be time for the federal government to begin encouraging a transition to hybrid plans.

The chairman of the special forces plan, Lethbridge police officer Dwayne Smith, said a review began two years ago when contribution rates were raised.

The in-depth look is ongoing, and various benefit options are being considered, Smith said.

Contribution rates are not expected to rise further and are believed to be enough to pay down the liability.

“It’s an expensive plan, but it has good benefits that go along with that expense,” he said.

As the 2008 recession rolled through North America, public sector pensions took a bruising. Alberta has not been immune to the problem.

It’s led to some significant reviews by pension administrators and a number of Alberta public sector pensions have instituted “sustainability” plans.

Local Authorities Pension Plan CEO Meryl Whittaker said employers and employees registered have told administrators they’re reaching the upper threshold of what they are willing to pay.

By 2014, the members contribution rate is set to hit 10.39 per cent for salary under the year’s maximum pensionable earnings and 14.84 per cent over. Employers are paying 11.39 per cent and 15.84 per cent.

The pension fund was struck by both the bursting of the tech bubble at the beginning of the millennium and the recent recession. Investments lost value and interest rates are low. As well, retirees are living longer and there are more of them.

“It’s the reality of our current economic times,” Whittaker said. “The world is different than it used to be. The demographics have changed, the economic situation has changed.”

The most recent evaluation pegs the unfunded liability at $4.6 billion. In 2006, it was just $746 million.

The Local Authorities Pension Plan has tweaked its investments to improve returns without burdening the plan with too much risk. And

CHAIRMAN OF SPECIAL FORCES PLAN

contribution rates have risen.

But how much employers and employees contribute can’t go up forever, Whittaker said, and there’s now deeper discussion and consultation on changing benefits.

That makes some workers nervous. Peter Marsden, president of the union that represents city of Calgary indoor workers, said he fears there will be a move to raise the age of retirement, or chop cost-of-living increases.

“We’re very concerned on where this government’s going, where Local Authorities Pension Plan is going with these issues,” Marsden said. Others are happier to take a wait-and-see approach, and see whether pension administrators craft a way out. “I don’t think there’s an interest on our part or the employers to be paying any more. Hopefully it won’t come to that,” Calgary Police Association president Howard Burns said.

“But no one has that crystal ball to see what the world economy is going to do and whether interest rates are going to go higher sooner rather than later.”