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Alberta Moving the Right Way on Pension Reform

10/03/2013 04:45 EDT | Updated 01/23/2014 06:58 EST

When Alberta's Finance Minister Doug Horner recently announced that the province will reform public sector pension plans, the reaction was predictable: government employees' unions set their collective hair on fire. Thus, Guy Smith, Alberta Union of Provincial Employees president, remarked that the province's planned reforms will "fundamentally" undermine the "the retirement security of more than 70,000 AUPE members."

Let's step back a moment: The case for pension reform is not difficult to make. As it is, Alberta's public sector workers retire, on average, two years earlier than private sector employees. Also, much of the public sector enjoys a type of pension plan rapidly becoming extinct in the private sector.

In 2011 in Alberta, 278,252 employees or 79.2 per cent of the public sector, had defined benefit plans; in the private sector, only 148,572 employees, just 9.4 per cent of that sector, possessed a defined benefit plan that year.

And that's the real problem: taxpayers, most of whom do not have a registered defined benefit plan, end up paying for pension promises to government employees' unions. Such promises have led to a $7.4 billion unfunded liability according to Alberta Finance.

The province has suggested several reforms to deal with part of that liability. Government workers who want to retire at age 55 will have to accept a reduced pension--a more than fair reform. Also, the province proposes placing a moratorium on benefit improvements until 2021.

Such reforms and others are long overdue and the finance minister and his colleagues should be commended for starting to tackle the difficult issue of public sector pension reform.

They still have a long way to go though. Another planned reform is to shift the public sector from defined benefit plans to "targeted benefit plans." In such plans, the eventual targeted pension benefit payouts are just that--targets. (The government of New Brunswick introduced a variant of this plan in 2012.)

In theory, if the targeted plan's returns perform better than expected, benefits can be increased; if the returns are worse, benefits are scaled back.

However, in practice, and in the case of the public sector, it is not difficult to imagine that targeted benefit plans would likely be treated as de facto defined benefit plans. If returns are less than forecast, it would be unsurprising if a government employees' union successfully lobbied governments to raise "employer" contribution rates (thereby raising taxpayer contributions to the plan), or secured a more obvious and outright bailout financed by the public treasury.

For taxpayers, the political realities mean targeted benefit plans offer little additional protection against future taxpayer bailouts for public sector pension plans. They must rely on future politicians to act in the broad public interest in opposition to the interests of a well-defined, vocal, vote-wielding minority.

Frankly, a superior reform came from Saskatchewan back in the 1970s under the New Democratic government of Premier Allan Blakeney.

There, the NDP government moved new government employees and other public sector workers into a defined contribution plan.

Decades later, the Saskatchewan government still pays a lot of money every year for employees who in 1977 worked for the government and could stay in defined benefit plans. But in Saskatchewan's public sector today, 25,930 workers are enrolled in defined contribution plans, creating no unfunded pension liability for the province.

Those almost 26,000 Saskatchewan public sector workers will fund their retirement in the manner much of the private sector does (with or without a registered pension plan): retirement income is determined by money saved/invested during one's working years plus the return on such investments.

It is only in defined benefit plans, which have rapidly disappeared from the private sector but are still widely used in the public sector, where a very different expectation exists: a set pension payment built from pension contributions plus the return on investment plus extra money from taxpayers, if the first two parts of the equation do not deliver the promised pension benefits.

The Alberta government is right to think about reforming public sector pension plans. But it should skip past the mild reform enacted by New Brunswick, which might ultimately turn out to be meaningless in practice. For a superior reform, Alberta's government can look to the defined contribution plans introduced by the Saskatchewan NDP government in 1977.

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