Public service pension fund has a whopping $42.4 billion surplus

By Staff

August 6^th, 2024

BURLINGTON, ON

You just might want to write your Member of Parliament on this one.

There’s a behind-the-scenes battle brewing over how to use billions of dollars of surpluses piling up in the federal public service pension plan.

The country’s largest pension plan has been running a surplus for years, but it has now reached a “non-permissible” level under the law, sources indicate. The government will have to reduce the surplus once the Office of the Chief Actuary provides an updated report on the plan and its surplus size this fall.

As of March 2023, Treasury Board reports the plan was running a $42.4-billion surplus. The plan has two funds. One is unfunded with benefits paid out of government coffers for service prior to 2000. The other is funded and invested by the Public Sector Pension Investment Board to pay benefits for service after 2000.

It is the surplus in the post-2000 fund that’s at the centre of a looming tussle. It’s unclear just how big that “non-permissible” level of surplus is. Sources, who are not authorized to publicly speak about the plan, say it was about $1.5 billion in March 2023, but may have grown tenfold since then.

The government has options to reduce the surplus. First, it’s required by law to stop its contributions. It could also allow members to reduce their contributions or transfer excess funds to the consolidated revenue fund until the unpermitted surplus disappears. Government and members split the cost of contributions, each contributing about $3.1 billion a year.

The unions want to see some of the surplus shared with employees. The government and its unions have clashed over a pension surplus before and the government always maintains that any surplus belongs to taxpayers, not workers.

Public servants have an enviable defined-benefit pension plan,, which have all but disappeared in the private sector, but not all public servants get the same generous benefits.

A two-tier pension system has been in place since the Harper government introduced it, a move that infuriated unions and sparked  a “hands off our pension” campaign in 2012.

Bureaucrats who joined before January 2013 are in tier one and can retire with full benefits at age 55 with 30 years. Those who joined after 2013 are in tier two and have to wait until age 60 with 30 years of service.

That move was supposed to save $2.6 billion by 2018 and an ongoing $900 million a year.

The giant Public Service Alliance of Canada (PSAC) has been quietly lobbying the government to do away with the second tier.

The Harper government also required public servants to contribute more to their pensions, a change that didn’t provoke much resistance.

Union leaders’ outrage over the tiered pension didn’t resonate much with workers at the time, largely because the change had no impact on them. It only affected new hires. Now, after a hiring surge over the past five years, Treasury Board reports employees in tier two now form the largest group of working members in the plan.

PSAC isn’t discussing the proposal or how much eliminating the second tier could cost, but it believes it’s affordable because of the surplus.

Unions are represented on the plan’s pension advisory committee, which advises and makes recommendations to Treasury Board President Anita Anand on how to run, design, and fund the plan.

“I think there would be a fight if they reallocated (the surplus) without giving consideration to the people who made it in the first place,” said a labour observer who is not authorized to speak publicly about the plan.

Pensions lead into the incomprehensibly murky world of accounting and different standards that have left experts at loggerheads for years. Some even question whether the fund or a surplus even exist given the money all comes out of the same government pot.

All these factors complicate an understanding of the pension plan’s financial health and the impact on workers and employers.

The government has the added complication that it operates some of the country’s biggest plans. It has one for public servants, one for the military, and one for the RCMP. They account for the government’s second– biggest liability after the federal market debt.

With rising debt and deficits, the performance of these plans becomes increasingly critical. The plans are also in the sights of some Conservatives, who want to reduce the cost of plans if they are elected as the next government.

The government’s defined-benefit pension plan is public servants’ most prized asset.  It is unlike most pension plans: it doesn’t follow normal pension standards and accounting rules. It isn’t jointly managed with employees. Public servants have zero investment risk. Their pensions are guaranteed by statute, regardless of how the pension fund performs or if it runs a deficit. The government is on the hook for any deficit, so it claims it is entitled to the surplus.

“Public servants take no risk, so they deserve no reward,” said pension expert Malcolm Hamilton.

“If that fund performs badly, you’re not going to have any members of the pension plan say ‘maybe we should take part of the pain.’ Yet, when it does well, they predictably turn up and say, ‘well, we should get part of that because it’s our pension fund.”

The pension plan impacts government finances, and the extent of the impact has been much debated over the years.

The C.D. Howe Institute has long argued public servants don’t contribute enough for their pensions, leading to an underestimation of future liabilities for taxpayers that are much larger than recorded on the books.

However, the Liberals may have emboldened the unions to ask for a share of the surplus. Anand recently promised to amend pension legislation so border officers and thousands of other front-line public safety workers can retire with pensions after 25 years of service – known as “25-and out.” The unions would like to extend that to other public safety workers.

Hamilton, the pension expert, argues that sharing a surplus and extending pension benefits to a larger class of public-safety workers are two separate issues.

The government may have signalled its intentions for the surplus with a little-noticed change in the budget bill. It allows the Public Sector Pension Investment Board to move funds to the consolidated revenue fund, the government’s main bank account, where its money is collected and spent.

The public-service plan, like other defined-benefit plans, has run surpluses because of high interest rates and market returns since 2019. In fact, the government amended the Income Tax Act to increase the allowable size of non-permitted surpluses to 25 per cent of liabilities.

The plan has also run deficits like, for example, in 2014, when prolonged low interest rates after the 2008 market crash, along with public servants’ increased life expectancy and lower-than expected market returns, came home to roost. The government made up for the deficit.

Public servants feel hard done by these days. Unions argue  that the employer should show some goodwill after the Phoenix and Canada Life debacles, especially with the mandatory order forcing employees back into the office three days a week. Public servants are also key voters in the National Capital Region, and the Liberals face what polls indicate will be a significant challenge in the next election.