Quebec budget makes significant pension changes

March 22, 2012


Quebec came out with some significant pension policy on their budget yesterday. With the Sunshine List tomorrow and the two budgets next week, it is hectic.

Solvency Relief
One thing that concerns me is the ease with which government are starting to use solvency relief to solve pension problems rather than develop long term solutions. Solvency relief was implemented to deal with the “black swan” implications of the market collapse in 2008. It turns out it may not be a black swan after all and part of a new longer trend in the markets. This Japan with the Nikkei down over 75% over two decades or down 42% over the past decade.

This chart shows it was not a Black Swan event but government have continues on with the “Solvency Accounting”

It is hard to explain it in a way for policy makers and governments to understand that this is kicking the can down the road. Especially when the real problem continues to exist.

I refer to it as Enron accounting. Enron booked future year’s sales into current profit numbers to makes sales look better than they were. Pension solvency does the opposite. It takes the costs of today and puts them down the road.

At one time there were accounting rules for pensions but they have been thrown out the window. Yesterday Quebec implemented 10 year solvency relief. Ontario has done it two times now.

In accounting terms the ARC or Annual Required Contributions for pensions were calculated  based on the three year valuation cycle. Pensions were required to be fully funded every 3 years or if not feasible changes made to the plan ie. contributions, accruals, indexing etc. Now the ARC has been thrown out the window and for future generations to pick up the debt.

In the US the GASB regulations have required a tightening of these rules and shorter amortization periods. Why is the Canadian public sector accounting boards not responding? I saw heard a presentation from this expert in California at a pension reform conference I was invited to.

Canadian government are just implementing solvency relief (smoothing). This means that rather than changing the pensions to defined contribution or hybrid they just eliminated the solvency rules.

This happened with the Ontario teachers plan

One that really made me mad is the Dahousie University plan. The plan is short $270 million, up from just $130 million short last year. The government gave them solvency based on them committing to making changes to the plan. As the labour negotiations heated up the government finally stepped in and absolved the requirement for solvency funding.

This despite commitments to change the plan to make it sustainable.

As a result the final labour deal is no changes to pensions, no requirement to fix pensions and the problem is kicked down the road 10 years. Of course the staff heartily endorsed the plan. They get to keep their gold-plated plan with no changes to benefits or contributions and taxpayers pick up the cost.

See how bad the pension situation is now from Chart 20 in this Bank of Canada report.

The good news is the Quebec government announced an expert panel on pensions and a review of the municipal pension system. Lets hope it is not like the other provinces’ expert reviews which were simply ways to develop more creative accounting to kick the can down the road.

Tags: , , ,

Leave a Reply