TORONTO, April 2, 2014 /CNW/ - Federal public servants have pension
guarantees in their defined-benefit pension plans that are mispriced,
causing Ottawa to seriously underestimate the cost of the pension plans
and the total compensation of its employees, according to a report
released today by the C.D. Howe Institute. In "Evaluating
Public-Sector Pensions: Are Federal Public Servants Overpaid?"
respected pension expert Malcolm Hamilton says this advantageous
situation for members of the main Public Service Pension Plan
exacerbates the growing compensation gap between federal public-sector
employees and their private-sector counterparts.
"Back in 2006, a government report acknowledged that federal
public-sector salaries generally out-stripped those for comparable jobs
in the private sector," notes Hamilton. "Steady pay increases since
then and rising pension costs mean that federal employees are probably
significantly overpaid by now. And while salaries for senior-level
mandarins may still lag those in the private sector, they have some
extraordinary pension benefits."
The federal government appears to believe that pay in the federal public
sector should be comparable to pay in the private sector on a total
compensation basis, he says, noting that recent government reports are
generally consistent with this view. However, to implement this
principle pensions must be valued appropriately.
"Fair values are the best measure of a pension plan's worth in a
transaction where employees provide their labour in exchange for
compensation that includes a valuable pension," says Hamilton. However,
the government appears not to apply fair value principles, preferring
instead to use funding estimates developed in accordance with
public-sector accounting standards.
"It is undeniably more convenient for the federal government to continue
to use the numbers it has been using. But it is also wrong," says
Hamilton. To do so is to collectively guarantee federal employees a 4.1
percent real rate of return on their retirement savings at a time when
other Canadians must accept a 1 percent guarantee if they seek one or,
alternatively, must bear significant investment risks in pursuit of a
4.1 percent real rate of return, says Hamilton. "These guarantees are
very advantageous yet public-sector accounting standards attach no
value to them and the federal government appears to ignore them when
assessing the reasonableness of employee compensation," he adds.
The payroll for members of the federal Public Service Pension Plan was
about $20 billion in 2012, with pension contributions totaling about $4
billion, says Hamilton. The fair value of these pensions was about $8
billion. As a consequence, the federal government underestimated the
2012 compensation of these members by $4 billion and reached a long
list of erroneous conclusions about the cost of its pension plans and
the compensation of its employees.
How can this be? The culprits appear to be actuarial and accounting
standards that are incompatible with market prices and designed for
purposes other than compensation management. "In this sense, actuarial
and accounting standards have become the enablers of bad financial
practice even though the standard-setting bodies do not advocate or
condone bad practice," he says.
Hamilton does not advocate slashing salaries, setting absurdly high
employee contribution rates or converting to defined-contribution
pension plans. "The easiest fix is to eliminate the guarantee and
transfer the investment risk to employees, as has become common in
provincial public-sector plans and in Europe," says Hamilton, who
suggests shifting to target-benefit plans. "If Ottawa is to meet the
goal of general parity with the private sector, it needs to stop
tinkering with its pension plans and to start making some meaningful
changes," concludes Hamilton.
The C. D. Howe Institute is an independent not-for-profit research
institute whose mission is to raise living standards by fostering
economically sound public policies. It is Canada's trusted source of
essential policy intelligence, distinguished by research that is
nonpartisan, evidence-based and subject to definitive expert review. It
is considered by many to be Canada's most influential think tank.
For the report go to: http://www.cdhowe.org/evaluating-public-sector-pensions-are-federal-public-servants-overpaid/25345
SOURCE: C.D. Howe Institute
For further information:
Malcolm Hamilton, Senior Fellow, C.D. Howe Institute and former Partner Mercer; Alexandre Laurin, Associate Director of Research, C.D. Howe Institute, 416-865-1904; E-Mail: email@example.com