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Public pension plans at risk over longer life spans, says auditor general

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OTTAWA - The auditor general says Canada's public pension plans could pose a significant threat to the government's financial footing because little attention is being paid to looming costs, such as the longer life spans of retirees.

In his spring report to Parliament, Michael Ferguson also warned that prolonged rock-bottom interest rates and lower-than-expected returns on assets could cost taxpayers billions down the road.

He recommended that public pensions be evaluated periodically, undergo any necessary changes to ensure their sustainability and that the state of the funds be better explained to the public.

"It's important information for members of the pension plan, for future members of the pension plan and for taxpayers because ultimately ... it's the taxpayers, I guess, through the government that is guaranteeing the pension obligations," Ferguson told a news conference Tuesday after tabling his report.

"If you think about a brand-new employee in the government starting today at say, 22 years old, they want to know that pension plan is going to be around for, let's say, 70 years."

The report examined the pension plans for the public service, Canadian Forces and RCMP, three major funds that represent 95 per cent of the government's pension liability.

The paper said in 2012-13 these massive plans carried net liabilities totalling nearly $152 billion, which made them the federal government's second-biggest liability after market debt.

Ferguson warned the financial burden of these plans could deliver a significant blow to the public purse.

His report projected that the employer's share of the pension benefits for these funds could climb to 1.6 per cent, or $13.5 billion, in 2050 from 1.2 per cent, or $3.3 billion, of total program expenses in 2017.

Some signs of the financial strain have already begun to surface, the audit revealed.

The findings said that the plans experienced funding deficits totalling $6.5 billion over the last three years.

To help close the gap, special payments amounting to $741 million in 2013, and around $1 billion over the last two years, were necessary.

Looking at the long-term risks, the auditor general said Canadians on average are working fewer years, retiring earlier and already living longer than was expected only a few years ago.

Ferguson also said pension plans were battered by increased volatility and prolonged low interest rates since the 2008 financial crisis.

The report said the plan sponsor did not follow "good practices" in its governance, prompting Ferguson to recommend the pension funds review their approaches to make sure they address current and future conditions.

Treasury Board President Tony Clement said Tuesday that public pensions are already subject to actuarial evaluations on their sustainability at least every three years, as required by law.

"This is perfectly in line with other Canadian pension plans," he said after the report was made public.

Clement, who noted that Ferguson's report was focused on pension governance and not sustainability, said the federal government has already taken steps to address pension liability concerns.

The government, he added, has phased in hikes to public-sector employee pension contributions so they equal that of the employer. The adjustments also increased the minimum retirement age for new employees to 65 from 60.

"I think the evidence is on the table that we've acted," Clement said, adding the measures will save taxpayers $2.6 billion until 2018 and about $900 million annually in subsequent years.

Clement said he did agree with Ferguson's recommendation that more information be provided about the pensions to taxpayers, who provide half of their funding.

The findings were released as Ottawa promotes a new option for pension plans rather than expanding the Canada Pension Plan.

The federal government has touted the voluntary target-benefit plan, also known as a shared-risk plan, as a middle ground between defined-benefit plans and defined-contribution plans. Target-benefit plans could be adopted in Crown corporations, it said.

A report released last month by the C.D. Howe Institute think-tank concluded that federal workers are still far ahead of their private-sector counterparts when it comes to their pensions benefits.

The paper found that recent changes to public pensions had not gone far enough to even the playing field.

On Tuesday, C.D. Howe president Bill Robson agreed with the auditor general's warning that significant, emerging risks are real.

But Robson said he had hoped the report would shed more light on who, exactly, would be on the hook.

"The risks to the taxpayer are understated and I think that it's too bad that the auditor general's report doesn't make clear who bears these risks," Robson said.

He also said the methods of governing and evaluating the financial perils of pension plans have come a long way since Canada's decades-old schemes were created.

"So, the federal government has still got quite a bit of catching up to do," he said.

Follow @AndyBlatchford on Twitter

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