Ottawa shortfall C$65bn higher than previously thought

The C.D. Howe Institute analysis said the gap between their estimate of C$207.8bn and the official figure of C$142.8bn, is the result of the federal government's reluctance to use accounting methods which private sector firms are obliged to use when determining pension solvency.

The report says government-backed defined benefit funds make obligations look smaller by discounting them at interest rates which tend to be higher than those available in the market. In the private sector, liabilities must be measured and funded on a solvency basis, using the market value of assets and discounting liabilities using yields based on government bonds.

It warned the shortfall could mean member contribution rates could rise to "eye-popping" levels in order to plug the gap.

"The contribution rates for this plan are not high enough to fund it properly and the unfunded gap is growing over time," said institute president William Robson, one of the co-authors of the report.

"So it would be a good idea to get those contribution rates up so that there is actually money in the plan and we are not continuing to draw on some future taxpayer who doesn't know this bill is coming."

Pension-plan members, including Public Service (PS), Canadian Forces (CF) and Royal Canadian Mountain Police (RCMP) employees, account for a third of total contributions to the three funds whereas the government - through the taxpayer ¬- makes up the rest.

The report adds the gap between federal pension promises in the three plans and the assets that back them could be a problem for members if future taxpayers refuse to fill the hole left by inadequate contributions.

"Sensitivities provided in the Chief Actuary's most recent valuations of the PS, RCMP and CF plans suggest that backing their promises with RRBs would require eye-popping contribution rates: 35%, 41% and 42% of pay respectively," said Robson.

"Actual contributions to these plans are currently 19%, 22% and 21% respectively, of which more than two-thirds is already borne by the employer - that is, taxpayers. So simply to keep pace with benefit accruals and stop the gap from growing, contributions in the latest fiscal year would have had to be almost double what was actually paid in, and filling that entire gap would require the federal government to borrow or otherwise find an additional C$65bn over and above the C$143bn unfunded liabilities already recognized in Canada's national debt."

The reports says mitigating this risk would be a useful part of a larger reform of federal employee compensation to increase current compensation and adopt a pension model like the jointly governed, shared-risk plans that have proved successful elsewhere in Canada's broader public sector.

A spokesman for the funds was not immediately available for comment.

 

 

 

 

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