Queens University Faculty of Law Changing Times, Changing Benefits Current Context for Pension Negotiations in Canada May 23, 2014 Murray Gold, Partner 20 – 900 Queen Street West, Toronto, ON M5H 3R3 Tel: ; Fax:

General Context Pensions – a balance between:  Adequacy, predictability and security;  Cost and risk Balance has multiple dimensions:  Member quality of life  Employer survival constraint  Macro-economic – aggregate demand  Political – middle class status, pension 2

General Context Pensions are mediated through the financial markets  C + I = B + E Post GFC, cost and risk drive the agenda  Financial market stability in doubt  Liabilities – interest rates at historic lows  Assets - values at record highs 3

General Context Compounding factors:  Mortality improvements – 3-4% increase in liabilities  Maturity – caused in part by exclusion of younger (contingent) workers from DB pension plans  Macro-economic: Weak labour markets Large government sector deficits 4

Canada – Public Sector Response Private sector employers: closed DB plans, substitute DC  Value of accrued rights protected Public sector employers:  Different response b/c: DC is inferior design Hybrid DB/target benefit design is a compromise AND Employee contributions fund deficiencies Extreme versions of ‘target’ design permit reductions in accrued benefits, surplus/deficiency asymmetries 5

Target Plans -Accrued Benefits in Focus Historic bedrock of pension legislation is the protection of accrued benefits  Contractual covenant  Employee consideration provided  Socially significant commitment  Protected by statute, regulatory structure However, accrued benefits underpin historically underfunded public plan liabilities in some jurisdictions 6

New Brunswick – Shared Risk Model (“SRP”) Essential characteristics:  Accrued defined benefits are converted into at- risk target benefits  Future contributions for current and past service are constrained within a contribution corridor  Benefits are substantially reduced upon conversion (i.e. early retirement benefits, final average benefits into career average benefits)  Benefit security representations on the basis of “stochastic modelling” rather than an employer covenant 7

New Brunswick – Shared Risk Model (“SRP”) Argument:  The New Brunswick SRP essentially treats the Province as insolvent, but only for pension purposes.  The Province has essentially defaulted on its promise, by converting its pension commitments into contingent commitments, withdrawing its covenant and capping its contributions.  No other creditor is affected. 8

SRPs Language of conversion:  ‘Defined benefit plan members think pensions guaranteed by law’;  ‘Guarantee only as good as sponsors’ willingness and ability to pay’; See: “Shared Risk Pensions, A New Model For New Brunswick”, Task Force on Protecting Pensions 9

SRPs Language of Conversion:  “Your pension benefits will be more secure into the future than they are in the current PSSA” See: ts/human_resources/pensions_and_benefits/p p/pssa/qa.html at point 19 ts/human_resources/pensions_and_benefits/p p/pssa/qa.html at point 19 Only true if NB is insolvent, but NB is not insolvent 10

SRPs What isn’t communicated – conversion to an SRP reduces benefit security, puts accrued rights at risk 11

SRPS See NB Auditor General’s Report, 2013: Section 3.27 “A significant question in the accounting analysis pertained to which party bears the risk in the pension arrangement: the employer or employee. The Province’s position was that the shared risk plans should be accounted for as defined contribution plans given the risks inherent in the plans are largely borne by the employees. This is due to plan provisions where the employer has a defined level of contribution with limited variability, there is a legal separation of the Province from the assets and liabilities of the plans and the fact that benefits, including base benefits, indexing and other ancillary benefits, are not guaranteed under the terms of the plans” 12

Current Anomalies Regarding target benefits, need to be mindful of: 1.Undue emphasis on cost and risk, at the expense of adequacy, predictability and security 2.Macro-economic implications of increased uncertainty in retirement incomes 3.Integrity of pension arrangement a)Accuracy in communications b)Undue reliance on actuarial models c)Appropriate regulatory oversight 4.Pension “deferred wage cuts” through conversion process 5.Proper measurement, funding of liabilities 6.Asymmetric deficiency/surplus arrangements 13