Two years ago, when pension plan solvency was under serious threat in the wake of the 2008-2009 financial crisis and a run of poor market returns, certain financial columnists had a field day. We all remember the headlines: "GOLD-PLATED RETIREMENT FOR CIVIL SERVANTS," "MILLIONAIRE PUBLIC SERVANT ON A PENSION," "FAT CATS OF THE SYSTEM," and so on. It would seem that bad-mouthing civil servants is a great way to sell copy (or boost ratings).
The order of the day was to question the very existence of defined benefit pension plans. Yet these plans not only provide much-needed income to hundreds of thousands of retirees, they also benefit society as a whole. People who have paid into these plans throughout their lives acquire a level of financial independence that makes them much less dependent on government assistance in old age. So let's not throw the baby out with the bathwater.
The solvency of defined benefit pension plans has improved markedly over the past two years. For example, the employee-funded portion of the Quebec government's largest pension fund--the Government and Public Employees Retirement Plan (RREGOP)--posted a net return of 13.6% in 2013. As of December 31, 2013, the market value of the fund stood at $49.9 billion and its actuarial value at $46.5 billion (with deferred gains of $3.4 billion). With the actuarial value of accrued benefits currently pegged at $48.6 billion, RREGOP members are near 100% capitalization of their portion of the pension fund.
Capitalization of the employer portion of the RREGOP fund is also up significantly. Since 1994, the government has gradually accumulated assets in a special fund called the Retirement Plans Sinking Fund (RPSF) to assume its 50% share of pension obligations. By last year, it had the funds to cover about two-thirds of its obligations. RPSF assets are invested by Quebec's Caisse de dépôt et placement.
It should also be noted that the pension benefits paid under the government plan are hardly a pot of gold at the end of the rainbow. The average annuity received by RREGOP retirees in 2013 was $19,027.
But let's get back to the issue at hand, and that is the ongoing litany of attacks, this time aimed at municipal pension plans. No later than August 21, a newspaper headline trumpeted "NEARLY $1 MILLION TO LIVE AS A MUNICIPAL RETIREE."
The article came up with this figure based on the retirement income of an average municipal employee. If he or she retired at 65 with an end-of-career salary of $50,000, this hypothetical employee would receive $35,000 annually -- $22,540 from their municipal pension plan, and $12,460 from the Quebec Pension Plan. So far, so good.
But the article then proceeds to lead the reader down the garden path by affirming that to enjoy an equivalent annuity, the average Quebecer would need total savings of $896,000. The 25,500 professionals who we represent refuse to let this blatant miscalculation go unchallenged.
First of all, the average Quebecer is also entitled to Quebec pension plan benefits since, like the municipal employee, they will have paid into the plan throughout their working life.
Second, those without a pension plan will need to have saved a significant sum to enjoy access to an equivalent to our municipal employee ($22,540). But $896,000 is still a little steep!
The actual amount required is estimated at around $350,000 for RRSP savings, and $250,000 for savings accumulated in another vehicle such as a TSFA. Money taken from a TSFA is not taxable upon withdrawal, which is why less capital is required to obtain the same after-tax annuity as with an RRSP or registered pension plan.
Using real numbers as a starting point for this debate would be a good idea, don't you think? Because to paraphrase an old expression, figures can be to the pundit like streetlamps to the drunk: something to lean on when they can't see straight -- instead of a source of illumination.
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