Every time there is a shortfall in a public-sector pension fund, it's the taxpayer who must cover the shortfall, according to a new report by the Fraser Institute, which recommends governments replace defined-benefit plans with defined-contribution plans.
"If governments want to get pension shortfalls under control, they should take a page from the Saskatchewan NDP government of 1977 and convert all public-sector pension plans to defined contribution from defined benefit," says Mark Milke, author of Public-Sector Pensions: Options for Reform from the Saskatchewan NDP.
A defined-benefit plan guarantees a predetermined amount to the employee, based on salary and years of service, according to Sun Life Financial.
A defined-contribution plan, by contrast, does not provide a pre-set pension income, but rather is based on the assets within the plan upon the time retirement, and therefore there is less liability on the employer (the government) to cover shortfalls.
The private sector has been moving away from defined-benefit pension plans to defined-contribution plans. But, with the exception of Saskatchewan, most governments in Canada have stuck with defined benefits.
In 2011, 87% of public-sector employees were covered by a defined-benefit plan; just 24% of private-sector employees are covered by such plans.
Since 2000, governments across Canada have had to increase their contributions to defined-benefit plans for government workers to cover shortfalls, and in some cases have had to provide bailouts.
In 2002, for example, the Alberta government covered $60 million for the Teachers' Pension Plan. Then, after assuming full liability for the plan in 2007, it ended up paying another $1.2 billion to the same fund in 2009.
"Saskatchewan stands as the one province that foresaw the looming problems with defined-benefit pensions in the public sector," Milke said. "By moving to defined-contribution plans, the 1970s-era NDP government took the necessary steps to protect future generations of Saskatchewan taxpayers."
B.C. should not be lumped in with other provinces, when it comes to the way it funds public-sector pensions, said Oliver Rohlfs, communications officer for the B.C. Government and Service Employees Union (BCGEU).
In B.C., public sector pension plans are pre-funded, he said.
"Unlike other provincial pension plans, each generation is paying in advance for it's own pension benefits," he said. "That means B.C.'s public-sector pensions are stable and are pre-funded.
"In some other provinces, what's happening is current contributors are paying for current retirees. There isn't that generational pre-funding, and that increases risk and instability to the system."
That doesn't mean the B.C. government must not still top up plans if there is a shortfall, but the way it works in B.C., that risk is reduced, Rohlfs said.
