Queens University Faculty of Law Changing Times, Changing Benefits

Queens University
Faculty of Law
Changing Times, Changing Benefits
Current Context for Pension Negotiations in
May 23, 2014
Murray Gold, Partner
20 – 900 Queen Street West,
Toronto, ON M5H 3R3
Tel: 416-595-2085; Fax: 416-204-2873
Email: mgold@kmlaw.ca
General Context
• Pensions – a balance between:
 Adequacy, predictability and security;
 Cost and risk
• Balance has multiple dimensions:
Member quality of life
Employer survival constraint
Macro-economic – aggregate demand
Political – middle class status, pension
General Context
• Pensions are mediated through the
financial markets
• Post GFC, cost and risk drive the
 Financial market stability in doubt
 Liabilities – interest rates at historic lows
 Assets - values at record highs
General Context
• Compounding factors:
 Mortality improvements – 3-4% increase
in liabilities
 Maturity – caused in part by exclusion of
younger (contingent) workers from DB
pension plans
 Macro-economic:
• Weak labour markets
• Large government sector deficits
Canada – Public Sector
• Private sector employers: closed DB plans,
substitute DC
 Value of accrued rights protected
• Public sector employers:
 Different response b/c:
• DC is inferior design
• Hybrid DB/target benefit design is a compromise
• Employee contributions fund deficiencies
• Extreme versions of ‘target’ design permit reductions in
accrued benefits, surplus/deficiency asymmetries
Target Plans -Accrued
Benefits in Focus
• Historic bedrock of pension legislation
is the protection of accrued benefits
Contractual covenant
Employee consideration provided
Socially significant commitment
Protected by statute, regulatory structure
• However, accrued benefits underpin
historically underfunded public plan
liabilities in some jurisdictions
New Brunswick – Shared Risk
Model (“SRP”)
• Essential characteristics:
 Accrued defined benefits are converted into atrisk target benefits
 Future contributions for current and past service
are constrained within a contribution corridor
 Benefits are substantially reduced upon
conversion (i.e. early retirement benefits, final
average benefits into career average benefits)
 Benefit security representations on the basis of
“stochastic modelling” rather than an employer
New Brunswick – Shared Risk
Model (“SRP”)
• Argument:
The New Brunswick SRP essentially treats the
Province as insolvent, but only for pension
 The Province has essentially defaulted on its
promise, by converting its pension commitments
into contingent commitments, withdrawing its
covenant and capping its contributions.
 No other creditor is affected.
• Language of conversion:
 ‘Defined benefit plan members think
pensions guaranteed by law’;
 ‘Guarantee only as good as sponsors’
willingness and ability to pay’;
• See: “Shared Risk Pensions, A New Model
For New Brunswick”, Task Force on
Protecting Pensions
• Language of Conversion:
 “Your pension benefits will be more
secure into the future than they are in the
current PSSA”
• See:
p/pssa/qa.html at point 19
• Only true if NB is insolvent, but NB is not
• What isn’t communicated – conversion
to an SRP reduces benefit security,
puts accrued rights at risk
• See NB Auditor General’s Report,
• Section 3.27
“A significant question in the accounting analysis pertained to which
party bears the risk in the pension arrangement: the employer or
employee. The Province’s position was that the shared risk plans
should be accounted for as defined contribution plans given the risks
inherent in the plans are largely borne by the employees. This is due
to plan provisions where the employer has a defined level of
contribution with limited variability, there is a legal separation of the
Province from the assets and liabilities of the plans and the fact that
benefits, including base benefits, indexing and other ancillary
benefits, are not guaranteed under the terms of the plans”
Current Anomalies
• Regarding target benefits, need to be mindful of:
1. Undue emphasis on cost and risk, at the expense of
adequacy, predictability and security
2. Macro-economic implications of increased uncertainty in
retirement incomes
3. Integrity of pension arrangement
a) Accuracy in communications
b) Undue reliance on actuarial models
c) Appropriate regulatory oversight
4. Pension “deferred wage cuts” through conversion process
5. Proper measurement, funding of liabilities
6. Asymmetric deficiency/surplus arrangements