Market Crash Rips $160 Billion Hole in Public Sector Pensions

October 4, 2011

You may or may not have been directly affected by Thursday’s market crash, but you will be picking up part of the tab for the tens of billions in losses suffered by Canada’s public sector pension funds, whether you work in the public sector or not.

We give the catastrophic  estimate based on Thursday’s close, which has seen equity markets lose 15% of their market value this year so far.

“The pension funds for government employees had more than $800 billion in assets at the start of 2011,”  “In addition to the actual value writedown, these pension funds typically project a 6.5% gain every year in order to fund their payouts to retirees. This means the actuarial loss for the funds is closer to 21%. The hole in these pensions is well over $100B from this year’s dismal stock market performance. ”

This is in addition to the current $300 billion deficit the funds faced at the end of 2010, the current eyar to date losses bring the total shortfalls in public sector pensions close to a half trillion dollars.”

Unlike your RRSP, which is based on investment performance, most public sector pensions are defined benefit, meaning the pension benefits are guaranteed, regardless of the performance of the investments in the funds. The difference between the value of the fund and its obligations is the pension shortfall or  “underfunded.” portion. If the funds don’t achieve their goals, this underfunding has to be made up by the taxpayer or through higher premiums on current public sector employees.

In our new book Pension Ponzi: How Public Sector Unions are Bankrupting Canada’s Healthcare, Education and Your Retirement co-written with journalist Lee Fairbanks, describes these public sector funds as Guaranteed Investments for public sector employees.

“Public sector employees share none of the risk of the markets,” “These pensions are usually based on the final – or best – 5 years of earnings, even though employee contributions have been based on lifetime earnings. In theory governments match these contributions for a 50/50 split (66/33 in the case of federal employees) but in reality taxpayers pay up to 80% of the true cost – and that’s when the markets are healthy.”

Pension Ponzi, due in stores in October, predicts this market meltdown and the financial consequences.

“It doesn’t take a genius to realize that this half-trillion hit on the taxpayer will severely limit the country’s ability to fund education, healthcare and other government services. Especially when you realize that our existing services are all funded with deficit budgets.”

The collapse of equities is a huge problem for pension funds, since equities typically provide the lion’s share of fund growth. Money market funds (based on lending rates) offer little or no value to funds in our current low-interest environment, and the bond market – the third of the three pillars of investment – has been hammered by the Bank of Canada’s refusal raise to interest rates.

The true costs of public sector pensions have been hidden from the taxpayer through “voodoo accounting”. In 2008 for instance, in the wake of the biggest stock market collapse since the Depression, pension funds were allowed to amortize their losses over 10 years instead of the traditional 3-year valuation period. This process known as “smoothing” or by its official name “Pension Solvency Relief” postpones dealing with losses in the hopes of an economic recovery.

If however, the markets do not recover, the shortfall must eventually be paid by employee deductions, or more likely taxpayer contributions.  Employee deductions must be negotiated with the employees through their unions. Taxpayer contributions are guaranteed by law.


Leave a Reply