Provinces should nix defined-benefit plans: Fraser Institute

Since 2000, provincial governments have bailed out some public-sector pension plans and increased pension contribution rates.

CALGARY – The defined-benefit pension plans enjoyed by most government employees are bleeding provincial government finances and taxpayers dry, according to a study by public policy think-tank, the Fraser Institute.

“Ultimately, the cost of public-sector pension plans are borne by all taxpayers because tax dollars pay the government’s contributions as well as government employee salaries,” said Mark Milke, Fraser Institute senior fellow and author of Public-Sector Pensions: Options for Reform from the Saskatchewan NDP. “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.”

The study highlights how since 2000, governments in many provinces have been forced to bail out some public-sector pension plans and increase pension contribution rates.

Governments in Alberta, BC, Manitoba, Newfoundland and Labrador, Nova Scotia, Ontario, and Prince Edward Island have all increased public-sector pension contributions to cover funding shortfalls. Additionally, some provinces have had to bail out shortfalls in their public-sector pensions:

In Alberta, in 2002, the province made what was supposed to be a one-time payment of $60 million towards funding shortfalls for the so-called “pre-1992” Teachers’ Pension Plan. It took over that liability completely in 2007 and made another payment of $1.2 billion to the same fund in 2009.

  • In Newfoundland and Labrador, several pension plans have required topping up, including a $2 billion special payment into the Teachers’ Pension Plan in 2006 and $982 million for the Public Service Pension Plan in 2007.
  • In Ontario, the province has made special annual payments of $416 million towards funding shortfalls in the Public Service Pension Plan since 2007. The province is scheduled to make payments of $142 million per year for 15 years.
  • “For Ontario, it’s even more concerning that one outside expert, Don Drummond, says it’s unclear who’s responsible for funding deficits in some public-sector plans. Drummond urged the province to ‘clarify’ that matter,” Milke said.
  • But not only do taxpayers fund and guarantee government employees’ pensions, they pay for types of pensions—i.e. defined-benefit pensions—that many who work in the private sector are increasingly unlikely to have.
  • The study notes that in 2011, just over six million Canadians were enrolled in some type of registered pension plan (RPP).
  • In the public sector, 87% of employees were covered by an RPP in 2011, while in the private sector just 24% of employees were enrolled in an RPP.
  • Additionally, of those enrolled in such a plan, 94% of public-sector workers were covered by defined-benefit pension plans in 2011; In the private sector, only 52% of workers were in a defined-benefit plan.

Milke argues that policies adopted by Saskatchewan’s 1977 NDP government under premier Allan Blakeney provide today’s politicians with a successful model for addressing future pension liabilities: shift civil servants to defined-contribution pensions and away from the current defined-benefit plans.

“Saskatchewan stands as the one province that foresaw the looming problems with defined-benefit pensions in the public sector. By moving to defined contribution plans, the 1970s-era NDP government took the necessary steps to protect future generations of Saskatchewan taxpayers,” Milke said.

Download the report here.

The Fraser Institute is an independent Canadian public policy research and educational organization with offices in Vancouver, Calgary, Toronto, and Montreal and ties to a global network of 86 think-tanks.