Taxpayers on the hook for federal pension shortfall: report

Taxpayers are on the hook for the unfunded liability of federal pension plans, says a new report by the C.D. Howe Institute.

The report, Retiring Employees, Unretired Debt: The Surprising Hidden Cost of Federal Employee Pensions, by William B.P. Robson and Alexandre Laurin, argues that the official figures for the federal pension obligations understate future costs.

“The federal government in particular presents a misleadingly rosy picture of the situation of its plans,” says a release, quoting Robson. “Ottawa’s unfunded pension liability is nearly $100 billion worse than stated.”

These defined-benefit pensions have pension promises guaranteed by taxpayers, and the pensions are indexed to inflation.

Read: CPPIB reports 11.6% return, adds $39.4B in fiscal 2018

The official figures on the current cost of these plans and their accumulated obligations are based on notational interest rates that are too high for this kind of commitment, says the release. The report suggests that the appropriate rate for discounting the value of future payments should be based on the yield of the federal government’s real-return bonds, which have been lower than the assumed rate in the official figures.

Adjusting for the interest rates “would produce a fair-value estimate of $245.9 billion for Ottawa’s unfunded pension liability at the end of 2016/17—around 27,000 per family of four and $96 billion higher than the reported figure,” says the report.

The report recommends the federal government change to a different type of pension plan with benefits based on the plan’s funded status, in addition to salary and years of service. Such plans are commonly used in the provincial public sector, says the report, and have a variety of labels, including shared-risk and target-benefit. The plan sponsor and the employees share the costs and benefits of a new situation when things don’t go as planned. The federal government could also protect taxpayers from liability risk by capping employee contributions at a fixed share of pensionable pay.

“More economically meaningful reporting of the plans’ benefit values and their cost to taxpayers would foster improvements in Canada’s retirement saving and income system generally,” says the report. “And it would foster reforms that would provide federal employees with better-funded pensions and taxpayers with protection against risks too few know they face.”

Read the full report here.

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