St. John’s city council leading by example on pension plans

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the last few years, the value of public-sector pension plans has taken such a huge hit that a large number of them have become underfunded, which means there is not enough coming into the plan to pay for all the commitments made to current and future retirees. Most of these pension plans are very generous because they are “defined benefit” plans, which provide plan members guaranteed retirement income based on a person’s best five to seven years of wages or salary. However, the change necessary to address the unfunded public sector pension liability, in particular, has been slow.

The prevalent view is that public-sector pension plans are bulletproof and will always provide members with safe and reliable retirement earnings. This is a dangerous delusion because any unfunded shortfalls in public-sector pension plans will be paid by ordinary, hard-working taxpayers like you and me. Considering the fact that the vast majority of Canadians don’t enjoy a pension plan of any kind, this seems very unfair.

Many argue that the unfunded pension lia- bility is a myth and all that needs to happen is an interest rate increase, maybe three or four per cent, to put the pension funds in good stead. This is misguided. The concern with public-sector pensions plans is structural in that there is not enough money being put into the plans to meet the growing demands of public-sector pensioners who are retiring earlier and living longer.

On Monday, St. John’s city council approved an important initiative to make the pensions of councillors more affordable for taxpayers. There will be a transition period to phase out the current pension plan and, going forward, councillors will receive the same retirement options as those who work in the private sector.

In one vote, councillors went from not making any contribution to their defined benefit pension plan (in other words, the plan was 100 per cent funded by taxpayers) and moved to a defined contribution plan. Beginning Oct. 7, they will make a specific contribution of six per cent of their annual salaries to fund their retirements. In fact, what St. John’s city council approved removes some of the burden and all of the risk from the taxpayer.

There is a reason why they are doing this. In its 2013 budget, St. John’s city council identified a $100 million unfunded pension liability. To cover it, the city had to make special payments, which increased from $3.2 million in 2012 to $7.8 million in 2013 and are forecast to increase even further to nearly $10 million in 2014. If these payments come to pass, the city will have to pay out almost $21 million over three years, with no improvements to services or programs for the taxpayers of St. John’s who are footing the bill.

This situation is not unique to St. John’s, however. Last month, municipal employees in Mount Pearl, Conception Bay South, Placentia, Marystown, Glovertown, Gambo and Holyrood found out that on Jan. 1, 2014, they will see changes to their pension plans to help address their respective unfunded pension liabilities. The provincial government, to its credit, recognizes that it also needs to do something to address its unfunded pension liability that will be around $6 billion by March 31, 2014.

Therefore, it is very important for municipal and provincial governments in Newfoundland and Labrador to adopt measures that will, over time, ensure the taxpayer does not bear the risks and costs associated with unfunded public-sector pension plans. To that end, all municipal councillors and members of the House of Assembly pensions should be converted to defined contribution plans or some form of the shared-risk model that has been positively received in New Brunswick. At the very least, any new members to public-sector pension plans should be enrolled in defined contribution or shared-risk plans to stem the future growth of unfunded pension liabilities. These actions would also bring the plans more in line with those who work in the private sector.

Make no mistake, there is still much work to be done, but St. John’s city council should be commended on taking the action it did. It is showing leadership, not only in the province, but in the country, and is an example of how to begin to address the state of public sector pensions. The taxpayers of St. John’s will benefit from their city council’s decision.