5 facts about public-sector pension plans

Some commentators would have us believe that public-sector pension plans are badly underfunded and that such plans will become a crushing burden on taxpayers as the bulk of baby-boomers retire.

Accordingly, the way they propose to stem the coming “debt crisis” is to increase the age of retirement for public servants and eliminate defined benefit pensions altogether. The CAAT Pension Plan fundamentally disagrees with these arguments and here are five facts to help balance and inform the discussion.

Fact: Public-sector pension plans are adequately funded

Public-sector pension plans, such as the CAAT Pension Plan, operate in a highly regulated sector and we must file a valuation with FSCO (Financial Services Commission of Ontario) at least once every three years. If the Plan’s liabilities exceed its assets, the Plan sponsors are obliged to introduce special payments sufficient to amortize the deficit over time, or reduce future benefits, or both.

Many of the stories about underfunded pension plans originate from state and municipal pension plans in the United States where less robust regulations and breaks in contributions by employers have created large shortfalls in public pension plans. It’s a different story in Canada. Proper regulations and adequate contributions mean there is no looming debt crisis among public-sector pension plans in Canada.   

Fact: Risk is shared equally

The Plan is governed jointly by the sponsors, namely Colleges Ontario (on behalf of employers), OCASA and OPSEU. Member and employer representatives are appointed to the Plan’s governing bodies – the Board of Trustees and the Sponsors’ Committee. Professional staff of the Plan and actuarial and legal advisors provide advice and analysis to the governing bodies. Plan security with stable and appropriate contribution rates are the long-term goals.

In its most recent valuation, the CAAT Pension Plan showed a small surplus of $88 million (as at December 31, 2010). Whether in periods of cyclical surplus or deficit, in jointly sponsored pension plans, such as the CAAT Plan, responsibility to act in the best interest of members is shared equally among employees and employers. 

Fact: Public-sector pension plans are efficient, low-cost operations

The size of the CAAT Pension Plan gives it access to highly qualified investment and risk management experts. The Plan’s disciplined investment management team oversees the execution of the investment strategy set out by the Board of Trustees. The team selects investment management firms that excel in particular investment instruments and monitors their performance against targets for both returns and the level of risk appropriate to the Plan’s liabilities. This tailored approach reduces overall risk and balances benefit security with affordability while minimizing volatility in the contribution rate.

The cost to invest $100 of CAAT Pension Plan assets is about $0.48 per year. In 2010, the CAAT Pension Plan investments earned a 12.6% rate of return, after expenses.   

Fact: Plans help reduce poverty among the elderly and provide deferred tax-base

A defined benefit pension plan, such as the CAAT Plan, provides retirement income for life. Coupled with government pensions from CPP and Old Age Security, a defined benefit pension helps to ensure members have an adequate and reliable source of income throughout their retirement. In addition, adequate retirement income reduces reliance on government assistance and in fact provides government with a deferred tax base to fund essential programs that include healthcare and education in the future.

Fact: Plans provide long-term capital

The CAAT Pension Plan has $5.5 billion in assets, as at December 31, 2010. These well-diversified assets must be invested in a prudent and skillful manner to help ensure there will be enough to pay promised pensions for decades to come. Public-sector plans also make substantial investments in the Canadian economy. Because pension plans have an investment time horizon that is decades into the future, they can provide stable sources of long-term capital for investments such as infrastructure, bonds, real estate and private equity.