Rebuilding New Brunswick: The Case for Pension Reformleg-horizon.gnb.ca/e-repository/monographs/... · 2015. 6. 24. · The latest Melbourne Mercer Global Pension Index paints a sobering

Rebuilding New Brunswick:The Case for Pension Reform

A GOVERNMENT OF NEW BRUNSWICK REPORTFEBRUARY 2013

About New BrunswickNew Brunswickers count on their government to provide a high standard of social services including education, housing, roads, health care, income assistance and justice. Providing this wide range of services is a massive effort and takes the combined contributions of over 47,000 dedicated public sector workers. At the same time, due to growing cost pressures and global economic conditions, the government has been focused on ensuring that these services can continue to be provided on a sustainable and affordable basis.

New Brunswick has a diverse economy and the government has taken a lead role in fostering growth in areas such as information and communications technology, biosciences and industrial fabrication, while continuing to support traditional industries such as forestry and oil and gas. Despite being home to Canada’s largest oil refinery, New Brunswick has long realized that innovation is the best rocket fuel for the economy. Now, New Brunswickers have applied that same innovative spirit to solving pension issues that, while not unique to New Brunswick, are being felt particularly acutely given the province’s relatively small size, limited tax base and aging demographic.

IntroductionCanadian public finances continue to feel the effects of the recent recession. Federal and provincial governments continue to run deficits, and the return to economic prosperity will likely be slower, and more modest, than had once been hoped. Pensions place considerable pressure on public finances, both through expenditure requirements, and mounting deficits within pension funds. Many private companies and not-for-profit organizations face the same challenge. Across Canada, there is agreement that pension issues must be reviewed and addressed.1

In approaching this challenge, the Province of New Brunswick and Canada’s Public Policy Forum have partnered to launch Pension Reform: the New Brunswick Model and Direction for Canada. This forward-looking initiative will build upon the recent pension reform efforts in New Brunswick, seek to draw out the lessons-learned, and understand how these changes could play a role in the broader pension reform effort across the country.

Canada, while having weathered the 2008/09 recession in better shape than most other developed countries, still grapples with pension challenges in the public and private sector. While the major national pension programs (like Canada Pension Plan – CPP) are also on a stronger footing than international comparators, serious deficits persist in many government and private sector funds.

The Province of New Brunswick faces similar issues, and so in 2012 it put forward an innovative, made-in-New Brunswick approach to tackling these problems: the New Brunswick Shared Risk Pension Model. This case review will detail why the province decided to bring in the new model, how they achieved cross-sector collaboration on its development and implementation, and what impacts this new model will have on the sustainability, equity and risk profile for pensions throughout the province. 1 Jeffrey Simpson, New Brunswick tackles its pension pickle, The Globe and Mail, June 2, 2012

4 | Rebuilding New Brunswick: The Case for Pension Reform

Executive Summary The Case for Pension Reform in New Brunswick

Canadian pensions were designed in a different era, for a different economic reality. Eight decades ago, when many plans were conceived, people worked longer, had shorter life expectancy and relatively stable economic growth provided a consistent source of returns for pension investment.

This is no longer the case. Life expectancy has risen between one and one-and-a-half years each decade since the mid-20th century. Canadians retiring in their sixties can now expect to live 26 years in retirement. By 2050, another five years will be added to that expectancy. Longer lifespans in retirements have added tremendous costs to pension programs. Combined with trends of early retirement, a modern pensioner will be paid out for 11 more years than would have been expected at the time many plans were developed.

The economic climate has shifted as well. Prior to 2000 economic growth was relatively consistent, and offered stable sources of investment income for pensions. The economic volatility of the last decade, and the extended period of extremely low interest rates, has created an unenviable position for many pension plans. The onset of the recession in 2008 only worsened these issues, and brought into sharp relief the increasing costs that had long been masked by strong investment returns.

With predictable investment revenue unavailable, low interest rates affecting fixed-incomes, and increasing costs due to longer retirement periods, the fundamental structure upon which many Canadian pensions have been built is at risk.

In response to these pension challenges, the typical approach has been to draw upon a combination of three relief measures:

i. to exempt some employers from funding solvency requirements;

ii. to extend deficit funding periods; and/or, iii. to require higher contributions from active

members combined with lower future benefits.

These approaches appear to be based on the assumption that the current economic climate is a “blip” in ordinary events and that economic recovery is at hand. However, such solutions are temporary and do not address systemic pension problems to ensure that plans become sustainable in the long term. Many plans have converted to defined contribution arrangements, with pension risk now borne individually, which although solving funding risk issues for employers does not provide the security of shared risk for plan members.

Government Action

Premier David Alward recognized the need for public and private sector pension reform in New Brunswick. A commitment to establish a task force on protecting pensions was one of the first acts of his new government. On October 28, 2010, Premier Alward announced a three-member Task Force on Protecting Pensions with an initial mandate to examine the state of private pensions. This mandate was subsequently extended to cover all pension plans in New Brunswick.

The task force set out to rebuild the foundations of the provincial pension system, guided by the conviction that the status quo was no longer an option in New Brunswick. The Task Force undertook an extensive engagement process, in partnership with unions, private sector leaders and government, to select the most crucial principles which all sectors agreed should form the basis of a new pension model. Building upon these principles, the Task Force put forward a new model for the Province’s consideration.

Employees in the private and public sector deserve the peace of mind that comes with knowing that the pensions to which they have contributed all their working lives will be there when they retire. We look forward to examining the Task Force’s findings and working with its members and New Brunswickers to protect pensions.

Premier David Alward, October 28, 2010

Rebuilding New Brunswick: The Case for Pension Reform | 5

The Result

The result was a new comprehensive Shared Risk Pension Model launched in May 2012. This “made-in-New Brunswick” pension model was enshrined in provincial legislation effective July 1, 2012. It has garnered considerable attention and interest for its capacity to make pensions in New Brunswick more secure, transparent, sustainable, reliable, affordable and predictable. This model represents a significant shift in how pensions are funded and managed. It has a strict focus on risk management. It provides realistic pension benefits to plan members and enhances protection in all but the worst of economic circumstances. The model also provides stable and predictable funding requirements, thereby not exposing taxpayers, sponsors and/or employees to unpredictable and potentially unmanageable risks.

This case study presents the story of the development of this model. It explores the problems faced by New Brunswick pension plans, the case made for reforms to ensure their security and sustainability, the mandate given to the Task Force, the fundamental principles that lead to the model, and the approach taken in its development.


1.0 The Pension Challenge 1.1 The Global Context

Public finances across the world are strained by tepid economic growth and challenging debt loads. Global investment volatility contributes to growing income insecurity across many countries. These issues create a problematic environment for pensions. An increasing number of private pension plans around the world are failing, with a significant number of public pension plans in many jurisdictions also incurring challenging funding deficits. Smaller not-for profit organizations are feeling similar pressures.

The latest Melbourne Mercer Global Pension Index paints a sobering comparison of pensions in 16 countries based on several criteria, including the relation between state pensions and supplementary private pensions, the income of pensioners and the degree to which elderly people take part in employment.2

Global powerhouses Japan, India and China placed last, each with a grade of D, indicating that their systems have “major weaknesses and/or omissions that need to be addressed.” Nations including Brazil, the United States, France and Germany received a grade of “C”, indicating their systems have “major risks and/or shortcomings” that need to be addressed.

Sweden, Switzerland, Canada and the United Kingdom received a grade of B, indicating they each had “a sound structure, with many good features,” but they have some areas for improvement. No country received an A, meaning a “first-class and robust retirement income system that delivers good benefits, is sustainable and has a high level of integrity.” The highest rank in the world is a B+, achieved by the Netherlands.

Pension challenges have hit jurisdictions large and small across the globe. The European Commission has reported that pension plans among member nations have become unsustainable.3 Protests have erupted in Greece, Italy, Spain, Portugal and the United Kingdom. Several U.S. municipalities have fallen into bankruptcy

under the weight of their pensions. Ratings agencies are increasingly looking at pension obligations in determining their long-term outlooks – in many cases, the outlook is unfavorable.

1.2 Canadian Responses

In Canada, most jurisdictions resorted to short-term relief measures. Generally speaking, these have consisted of moratoria on required payments to reduce solvency deficits (i.e. “special payments”), or extending the amortization period so that special payments can be paid over a longer period of time. Some jurisdictions exempted certain types of pension plans from having to make deficit-reduction payments. Others allowed the use of letters of credit and permitted the consolidation of previously identified deficiencies. All of these approaches offer only temporary relief and cannot respond in a sustainable way to further deterioration in pension finances if it were to occur.

Many employers took advantage of these “solutions”, but as the 2008/09 recession worsened and subsequent recovery proved weak, employers increasingly moved to defined contribution or group RRSPs for their employees.

1.3 The New Brunswick Economic Context

All of New Brunswick’s public sector pension plans, and almost all of its municipal, nursing home and university plans are underfunded and are susceptible to large swings in the value of their assets. Further, the pension liabilities are concentrated in mature pension plans (established in the 1970s or earlier), which are particularly vulnerable to investment volatility.

2 Melbourne Mercer Global Pension Index: www.mercer.com/articles/global-pension-index3 Ageing Europe warned of ‘unsustainable’ pensions, BBC News, July 7, 2010: www.bbc.co.uk/news/10545280


After the early 2000’s recession, the problems became more apparent. Tactics of requiring higher contributions were put in place, and when this became unaffordable, benefit cuts were instituted. Finally governments were asked for relief, which was granted in allowing extended solvency payment amortizations to full exemptions from solvency payments for certain entities. However, these short term ‘remedies’ are now all but exhausted.

For public sector plans, the reaction to increasing deficits following the 2008/09 recession by the general public was not positive. Many in the public complained openly about the generosity of these schemes and the fact that they have to pay extra taxes to cover pension deficits for benefits that they cannot afford for themselves, and for protections of savings they themselves don’t receive in their RRSPs. Yet a good pension is an important component of the compensation package for public servants, and the maintenance of public services is a key consideration for governments in determining whether or not to bear these costs.

Commercial rating agencies became increasingly focused on pension liability issues. In New Brunswick, Moody’s Investor Services downgraded its credit rating in 2009, and, in the following year, Standard and Poor’s Rating Services placed New Brunswick’s finances on a negative outlook. In 2012, New Brunswick was downgraded for the second time.

The private sector was similarly affected by pension challenges. Some employers asked governments for funding relief on the basis that increased pension contributions undermine their competitiveness and put both pensions and future employment at risk because paying down the deficit could result in employer insolvency or bankruptcy.

New Brunswick does not have the economic capacity to guarantee huge pension deficits or underwrite extensive guaranteed cost-of-living indexed pension benefits. Neither do employers in the private or not-for-profit sector. There is no money available for bail-outs. Recent examples from plans such as Fraser Papers

and St. – Anne-Nackawic demonstrate that in the face of severe shortfalls, retirees have had to adjust to drastic and sudden drops in their retirement standard of living. A guaranteed pension is only as good as a plan sponsor’s willingness and ability to pay. Premier Alward noted that these two cases demonstrated that, too often, a “guaranteed pension” is not actually guaranteed at all.

1.4 Risk Management

The challenges facing pension plans in New Brunswick are due largely to the fact that risk-management procedures were not required when they were created. These plans did not take into account future risk and volatility; they were designed in a time of market growth and prosperity. The fundamental problems created by a recessionary economic environment were not addressed. This is true for all of Canada. Risk-management procedures were not instituted, despite the fact that the International Monetary Fund called on Canada to do so in 2007.

While at least one Canadian pension plan has voluntarily introduced a form of risk management, nowhere in Canada (or even in North America) is a pension plan required to risk manage as part of the governance of the plan. With the launch of the new Shared Risk Pension Model, New Brunswick has become the first jurisdiction in North America to develop comprehensive funding and risk management procedures in the administration of pensions that cover both asset and liability management and can address the fundamental challenges faced by pension plans today and into the future.

Those workers and pensioners found out that what they thought was a guaranteed pension plan was only as strong as their company’s ability to pay for it. When, the company failed, the pension failed with it.

Premier David Alward, May 31, 2012


2.1 Creating the Task Force

In December of 2010, the three members of the Task Force on Protecting Pensions were appointed to review private sector pension plans (see appendix A). Subsequently, in September of 2011, this mandate was extended to include the provincial public sector.

The appetite for change was tangible throughout the government, and among Task Force members. The initial meeting between (what would become) the Task Force members and the Premier, Minister of Finance, Minister of Justice and Attorney General and various officials lasted hours over schedule as they examined the pension challenge in-depth. Concluding the meeting, the Chair of the Task Force asked the Premier if he was looking for a report, or would he want a “hands-on Task Force” implementing solutions. The Premier (and all others in attendance) agreed that they wanted New Brunswick’s pension problems “fixed”. The members of the Task Force immediately accepted the assignment.

Drawing inspirations from collaborative approaches to reform undertaken in the Netherlands, and in Canada during the 1985 legislative changes on pensions, life insurance and banking, the members of the Task Force resolved to take an inclusive path to reform.

2.2 The Task Force Mandate

• To design pension plans that will offer affordable and sustainable pension promises to the people of New Brunswick in both the public and private sectors.

• To provide the template and enabling legislation that will provide sufficient financial stability so as to encourage the continuation and expansion of pension plan coverage in the province.

• To provide a transition to a new pension regime that minimally disrupts the financial retirement arrangements of pension plan members.

2.3 Goals and Principles of the Task Force

The Task Force met shortly after the initial meeting with the Premier and resolved to adopt the 2007 recommendations made to Canada by the International Monetary Fund. It then began several months of in-depth consultations with the union leadership of three of the pension plans that had the most severe deficits or which were able to foresee substantial deficits mounting in the future.

Based on its mandate, the studies it had already undertaken, and the collaboration with the unions, the Task Force established a set of principles to be followed when designing a pension solution that would promote the establishment, continuation and expansion of appropriate and affordable pension protection for New Brunswickers.

The principles for reformed New Brunswick pensions included:

1. Pension plans must be subject to robust risk management, and be checked annually, including stress tests, to ensure that the plan complies with that task.

2. A pension plan must provide benefit security. This means:

(a) risk management targets are focused on delivering a high degree of pension security for members and retirees; and

(b) the Plan must be governed by an independent

2.0 Meeting the Challenge: The New Brunswick Task Force on Protecting Pensions


trustee(s) who can force employers and employees to increase (or decrease) contributions when appropriate, subject to realistic and manageable limits.

3. A pension plan should be able to demonstrate that it will be sustainable over the long term.

4. A pension plan must be affordable, which means that contributions must be stable and affordable for both employer and employees.

5. The Plan must be equitably designed - no single age cohort should unduly subsidize another, and no one should be able to ‘game the system’.

6. The Plan must be transparent. The pension goals and risks must be clearly stated up-front; who shares in the risks and rewards and by how much must be clear and pre-established.

7. Benefit changes as a result of conversion will apply only in the future; everyone keeps the pension amount that has already been credited.

8. There should be no sudden shocks to members and retirees’ retirement plans.

9. All groups of employees should be treated consistently, including part-time employees.

10. At inception, the actuarial assumptions must be closely related to market benchmarks such as International Accounting Standard #19.

(See appendix C for full description of all principles)

2.4 Choices for Change

Taking account of the agreed-upon principles, the Task Force set out to explore options for reformed pension models in the province. The options were varied, each with its own set of strengths and weaknesses. The Task Force was required to weigh these potential models, and determine how to make best use of their various components.

At the outset of Task Force work in 2010, there were four basic plan designs available to deliver pension benefits in Canada: traditional defined benefit plans, target benefit plans, defined contribution plans and group Registered Retirement Savings Plans (“RRSP”s).

Traditional defined benefit plans define the benefit to be received by the plan member, whereas defined contributions define the contribution to be made to the plan. Group RRSPs operate much like defined contribution plans. A target benefit plan is a combination of both – it defines the contributions to be made to the plan and if the contributions are insufficient to provide the benefit, then the benefit is cut or there is a negotiated contribution increase. The Task Force set out to review each of these existing designs, as well as leading international comparators, to see which fit best for New Brunswick.

i. Traditional Defined Contribution plans and Defined Benefit plans

Traditional defined benefit plans are vulnerable to capital market and other investment volatility and potential swings of hundreds of millions in a plan’s funding level. This makes them unaffordable during recessions and unsustainable in the long run because history has shown us that in good years actions taken can increase risks for the next recession. In effect, traditional defined benefit plans typically require higher contributions from plan sponsors when they can least afford it (in economic downturns) and require the least contributions in periods where plan sponsors are better positioned to contribute more (good economic periods).

Defined contribution plans (which includes group RRSPs) download all of the investment risk on members who typically do not have the financial literacy to manage that risk. If the member is due to retire during a period of extreme market volatility, then there is the potential for a sudden reduction in expected retirement income. Furthermore, pooling of retirement funding risks is virtually eliminated, and by definition less effective than a pooled risk approach. Finally, and perhaps more importantly, the principles


of “no sudden shocks” and “benefit security” would be violated. That is not to say that defined contribution plans cannot be used in some circumstances, it only means that in terms of meeting the objectives set out for the work of the Task Force, they do not make the cut.

ii. The Dutch Model

The Dutch model is a Shared Risk regime that adopts the best features of Defined Contribution and Defined Benefits systems. It comprises three tightly connected pillars:

• A mandatory state pension, roughly equivalent to the Canada Pension Plan and Old Age Security in Canada.

• A quasi-compulsory labour-based pension based on an employee’s average salary.

• Voluntary annuities, similar to registered retirement savings plans in Canada.

In the Netherlands, trustees commonly outsource their investing and strategic duties to fiduciary managers. Pensions there are required to maintain a buffer – a surplus amount of funding – amounting to 130 %.

The Dutch model has been adopted throughout much of northern Europe and has most recently been proposed in the United Kingdom. It has been identified as the world’s best pension system for three consecutive years (2009, 2010 and 2011) by Mercer based on about 40 indicators measuring adequacy, sustainability and integrity in 16 countries, including Canada. (See appendix B)

iii. A Whole New Approach

The Task Force concluded that all of the traditional Canadian plan designs could not be used if long-term sustainability of pension plans was to be achieved. However, there were features that each plan design offered which were positive. Working to isolate the positive fundamentals of each plan design, the Task Force, together with the union leadership of pension plans with the most serious deficiencies, researched, developed and tested what ultimately became known as the Shared Risk Pension Model. This model is based on the pension experience of the Netherlands, combined with the risk-management process developed in Canada for our banks and insurance companies (generally viewed as being among the best-regulated financial institutions in the world).



3.1 Establishing the Model

To arrive at a pension solution, the Task Force began a process of collaboration with the leadership of those unions whose pension plans were at considerable risk of ruin.

Starting in 2011, the Task Force began to build and test the Shared Risk Pension Model. The model is heavily focused on security and risk management and incorporates many strict requirements to achieve this goal, including:

• an investment mix that is far less volatile relative to the liabilities of other models;

• adequate contribution rates and firm rules to guide management of surpluses and deficits;

• a focus on addressing issues early before they become a large problem; and,

• prudent distribution of surpluses to members with an eye to the fund’s long-term stability.

An increase in contributions is not an inherent part of the new model. Since many existing plans are underfunded, however, moving to a more secure plan naturally requires an increase in contributions to address accumulated past deficits.

The Task Force developed a template for target benefits and risk management that consists of eight characteristics:

• Employers AND employees share risks

• Comprehensive risk management

• Shared contributions – known in advance

• Clear, strict funding guidelines for managing surpluses and deficits

• Sound investment policy

• Clear disclosure to members

• Conditional indexing

[The Task Force] worked in close collaboration with union leadership, responding to their proposals to build a new pension plan model – one which provides New Brunswickers with the security they need in their retirement. This was a significant undertaking on the part of the Task Force, and I appreciate that [it was] only able to accomplish this through an unprecedented level of collaboration with the unions involved.


• Management by an independent trustee or board of trustees

• No absolute benefit guarantees, but sound management to minimize risk to members

The Task Force recommended that each public sector pension plan be converted into Shared Risk Pensions. The Task Force also suggested that all public and private pension plans, once converted to the new model, should be made subject to Part 2 of the Pensions Benefit Act. This way, public and private sector pensions would be operating on the same statutory basis.

The Task Force had taken on a significant challenge in examining the pension system in New Brunswick. While the final, made-in-New Brunswick pension model is a significant departure from the existing defined benefit and defined contribution models, it is also substantially more resilient and sustainable. Ultimately, risk-management techniques were developed to ensure that the model will function well in all but the most severe depressions.

3.0 Creating the New Brunswick Shared Risk Model


3.2 Testing of the Shared Risk Model

The building of the Shared Risk Pension Model initially required an assessment of all risks associated with a pension plan with a goal of coming up with realistic, yet prudent assumptions to carry out costings of pension options considered by the Task Force and the employers and the unions involved in the process. This included a review of the most up-to-date information on life expectancy and the development of mortality tables appropriate for different demographic cohorts. This was followed by the costing of different benefit options to estimate the level of contributions that may be required, and determine the range of benefit options that may meet all of the objectives of the Task Force (Sustainability, Stability and Affordability) and the benefit objectives of the parties to the plan.

With a small number of preferred benefit options identified, the next phase consisted of testing the performance of the plan under 1,000 different economic scenarios over the next 20 years, solving for the asset mix that provided the best risk management results. The last step was to determine the level of contributions for each benefit option which were required to meet the risk management goals established by the Task Force. Further testing was then considered for other options to ultimately arrive at the selection of an option that met all of the risk management goals and also met the three objectives in the Task Force Mandate.

Risk-management procedures, also known as “stress-testing,” have been the hallmark strength of Canadian banks and insurance companies since 1991 and have been adopted internationally. The Task Force examined these practices; studied recommendations in

We wanted to make sure that the pension model that we developed would be robust and that it would manage the risks in a robust way. And then we tried to break it, over and over. It can stall, but it does not break.

Susan Rowland, Chair, Pension Task Force, May 31, 2012

recent major reports addressing the pension situation globally; and consulted extensively with the public – including employees, contributing employers, union representatives and pensioners.

The risk-management template was applied to seven pension plans, in both the public and private sectors, and proved to be robust. ”Stress-testing,” using 20,000 computer simulations, demonstrated there is a high probability of delivering sustainable benefits under adverse financial and economic circumstances.

The model was designed to prevent any reduction in the base benefits in a minimum 97.5% of scenarios and to provide enhanced such as cost-of-living increases which on average over all scenarios produce at least 75% of the indexing defined prior to the conversion to a Shared Risk Pension. Even in the remaining 2.5% of scenarios, representing the most severe economic depressions, the decreases to the base would be temporary and tightly managed.

The new model provides stable conditions with no required increases or decreases exceeding the greater of 2% of earnings or 25% of the initial contribution rate. The general expectation is that the model may only require modest mid-course corrections – rather than drastic increases in contributions or changes in benefits – over the long term. (See appendix D)

While no pension plan, no matter how well-constructed, can eliminate risk entirely this model does have much greater security than others. The simulated scenarios in which the model performed poorly were very severe and highly unlikely. In such scenarios, other pension plans would perform drastically worse than this model.

To be prudent, as recommended by the Task Force, amendments made to the Pension Benefits Act include mandatory annual stress testing for shared risk benefit plans. These stress tests enable pension plan administrators to take corrective measures as required to ensure targeted benefits will be achieved.


4.1 Presenting the Model to Stakeholders

When the provincial government presented the new Shared Risk Pension Model developed by the Task Force it received immediate support from a number of public and private sector pension plans, including unions representing more than one-third of provincial government bargaining employees.

At that time, it was announced that the New Brunswick Nurses Union, the New Brunswick Union, the Canadian Union of Public Employees (CUPE) Local 1252 (New Brunswick Council of Hospital Unions) and the New Brunswick Pipe Trades would be adopting the new model for specific plans. These are the CUPE Employees of New Brunswick Hospital Pension Plan; the Pension Plan for Certain Bargaining Employees (CBE) of New Brunswick Hospitals Plan (the New Brunswick Nurses Union and the New Brunswick Union) and the New Brunswick Pipe Trades Pension Plan.

Subsequently, the City of Saint John and Co-op Atlantic have filed for approval of shared risk plans in late 2012 and other plans are in advanced stages of studying to do so.

4.2 Implications of Shared Risk Model for Individuals

The Shared Risk Model changes the way in which pensions in New Brunswick apportion risk among stakeholders, and how secure individuals can be with their respective plans during an increasingly longer retirement period.

For new employees and early career employees, there is greater certainty that their pension will be there when they need to collect it, though they will likely pay a marginally higher contribution. For mid-career employees, they can protect their existing accrued pensions while transitioning to a model with greater security. They will also likely face marginally higher contributions, but also may receive a slightly higher pension at retirement. Late-career employees will see little difference, and can work only a short time longer

in order to receive the same anticipated pension. Retirees will enjoy greater plan security than ever before, and while exposed to the same small risk as all other plan members, plans have the ability to be designed so that future cost of living increases will no longer be capped, but rather based upon investment performance. Depending on the plan, over time, employees will be expected to work slightly longer in order to receive the same pension. If a plan converts from final averaging to career averaging, employees experiencing more rapid increases in salary will see pensions slightly reduced relative to systems which employ a base of highest annual salary for calculation of benefits. For non-bargaining provincial executives, supplementary arrangements were proposed by the task force to address this issue. (See appendix E for full detailed breakdown of implications for each sub-set of employee).

4.3 Release and Reception

The culmination of all the work done to develop and test the new pension model came on May 31, 2012, when Premier Alward announced the model to New Brunswickers. The Premier was joined for the announcement by the Task Force and the leaders of the four unions taking part in the first phase of the new pension model.

At that time, the participating unions spoke highly of the new model and the security it gives to their members’ pensions. They also spoke of the spirit of collaboration and joint problem-solving with which the new model was developed, tested and launched.

The launch of the new model garnered significant expressions of interest from the public and private sectors in all corners of the province and the reception was generally positive. Following the launch, other jurisdictions and major private sector companies expressed an interest in exploring whether the New

4. 0 Launching Shared Risk for New Brunswick


Brunswick model could be adapted to address their own pension issues.

During a meeting of the Council of the Federation, held in Halifax in July 2012, Premier Alward was asked to deliver a presentation to his fellow premiers on pension reform due to the level of interest received in the New Brunswick Model and experience.

His presentation resulted in Newfoundland and Labrador Premier Kathy Dunderdale expressing an interest in the new model and Prince Edward Island Premier Robert Ghiz indicating his province was also studying what New Brunswick is doing.

4.4 Collaborative Implementation

The Government of New Brunswick is moving forward in a collaborative way on this file, extending similar opportunities to other public sector employees, potentially those in line departments, nursing homes, universities, schools and municipalities.

It is critical for the success of the new pension model to bring as many employee groups on board as possible. Work was ongoing during the summer of 2012 to reach out to both public and private sector unions to begin that conversation. In the plans which have converted

I would encourage all New Brunswick employees and companies to examine this model and see the advantages that it has over the existing system. The new model is not ‘one size fits all,’ but we believe it will provide all those who choose to use it greater security in pensions. It is an example of people working together to build a better future for New Brunswickers.


to date labour fully collaborated in the design of the new model in key areas as: benefit security objectives; base benefits; ancillary benefits and the governance and funding policies for the plans. Generally, consultations took place over many weeks with various plan designs being examined for each Shared Risk Pension Plan. At the completion of plan design, a Memorandum of Understanding was signed by the unions involved in each particular plan and a communication plan was agreed between the plan sponsor and the relevant unions. The unions were the presenters of the new plan design to their members while the plan sponsors presented the new plan design to plan members who were not members of a union.

Implementation of the Shared Risk Model requires continued partnerships and collaboration across many sectors, including review of how the Government of New Brunswick addresses pension regulation. The Shared Risk Model creates a new environment in the regulation of pension plans in New Brunswick. The first decisions made in reference to this model will be important in achieving the necessary consistency required from any regulatory body. This will be especially true given the interest that other jurisdictions have shown in the model - these decisions will be closely watched. In addition, there are greater discretionary powers within the model, giving greater authority and responsibility to the Superintendent. Further, as with any new model, it is difficult to anticipate the innovation and ingenuity pension consultants may show in applying the rules of the shared risk model to their particular client base.

The Shared Risk Model also introduces new operational responsibilities for plan administrators. With regards to disclosure obligations to members, the new regulations require clear, plain language statements and information


resources on funding, benefits and the conversion of benefit provisions. The significance of this requirement is magnified given the complexity of concepts which can include conditional indexing, enhanced career average, and base benefits. In addition, there is an annual requirement to disclose to members, employers and other stakeholders information on items which include funded ratios, termination ratios, investment performance, funding policy liabilities, asset liability modeling, the administrator’s assessment of the need to reduce or increase benefits, and a description of how members’ benefits are to be calculated if the plan were terminated.

The ongoing administration of pension plans under the new model also entails additional functions and effort. Ongoing activities following the transition to the new model would include, but not be limited to, annual stress testing, the conversion of past benefits to base benefits, the annual recalculation of individual member base benefits, the calculation and tracking of conditional indexing, and system modifications following any future changes resulting from the funding policy. Further to this point, the initial transition to the Shared Risk Model would necessitate the transition of governance structures, in addition to preliminary system modifications required to accommodate the new plan.



5.0 Conclusion

The Shared Risk Pension Model being put forward by the Government of New Brunswick is the result of an extensive collaborative approach led by The Task Force on Protecting Pensions with the provincial government, public and private sector unions and other stakeholders.

This made-in-New Brunswick pension model is based on the New Brunswick experience, where the independent spirit of its residents combines with a deep-seated sense of community to bring differing views together to work for the common good.

The development of this model, as discussed in this case study, demonstrates the necessity for an open, transparent and creative approach to pension reform. Demonstrating the problems faced by New Brunswick pension plans and the case made for changing them to ensure their security and sustainability through this case is an essential component of advancing this

effort. It is also essential to bring to the forefront the impeccable work of the Task Force and its partners to develop this new Shared Risk Pension Model which has put pensions in the province on a secure and sustainable footing while reducing the burden on taxpayers.

The work done in New Brunswick to examine and revamp its pension system is a significant achievement. It is proof that the public and private sectors can come together to work on solutions to problems that affect them both.

The New Brunswick Model and the collaborative approach taken to develop and test it is a critical example for other pension plans in other jurisdictions and sectors to begin the process of reforming their own pension systems.

This is a pension model that can work for both public and private sector plans, and I encourage other unions and employers to review the model and see how they, too, might benefit from such changes to their plans. I believe we have set workers on a stronger course for the future in our province, and I am looking forward to continue building on the partnership we have established with New Brunswickers.

Premier David Alward, Miramichi Leader, September 5, 2012


The Task Force on Protecting Pensions was appointed on December 7, 2010 to examine private sector plans, and was made up of three experts with distinguished careers in law, economics and accounting, actuarial science and public policy and administration. The members had many years of experience in dealing with the issues surrounding both public and private sector pensions, their administration and their restructuring. Although originally appointed in December of 2010 to address private pension plans, their mandate was expanded in September of 2011 to include all of the pension plans of the Province.

Susan Rowland

The Chair of the Task Force is a graduate of Osgoode Hall Law School. Ms. Rowland has focused her career on pension and benefits law, with particular expertise in the restructuring and funding of pension plans. Appointed as representative counsel by the Superintendent of Financial institutions for Ontario, she has assisted in resolving the under-funding of several high-profile pension plans, including: Algoma Steel, Ivaco Inc., General Motors of Canada and Chrysler Inc. Ms. Rowland has published numerous papers in professional journals and has been frequently invited to speak before groups interested in pension and insolvency issues.

W. Paul McCrossan

Throughout his career as a consultant and actuary, Mr. McCrossan held various positions, culminating in being appointed the head of the Canadian Institute of Actuaries and the International Actuarial Association. He has written and lectured extensively on the topic of finances and pensions. Elected three times as an MP, he was involved in the reform of a number of key pieces of pension-related legislation, including the Pension Benefits Standards Act and the Canada Pension Plan Act. In 2007, he undertook studies for the International Monetary Fund for the Swiss Financial Sector Assessment Program.

Pierre-Marcel Desjardins

Dr. Desjardins has a PhD in economics and has been teaching economics at the Université de Moncton since 1990. He is also a researcher at the Canadian Institute for Research on Public Policy and Public Administration. He is vice-president of the Fédération des caisses populaires acadiennes, the executive director of the Canadian Regional Science Association, a member of the board of directors of the Caisse populaire Kent-Sud, and a member of the advisory committee for the Sainte-Marie-de-Kent local service district.

Shortly after their appointment, the Task Force members requested written submissions, received many briefs, and identified the fact that almost New Brunswick’s entire public and private pension plans were troubled – some more severely than others. The Task Force conducted research to find the best regulated pension systems in the world, and to adopt worldwide best pension practices.

Appendix A – The Task Force


Appendix B – Global Pension RankingsThe latest Melbourne Mercer Global Pension Index compares pensions in 16 countries based on several criteria, including the relation between state pensions and supplementary private pensions, the income of pensioners and the degree to which elderly people take part in employment.

Japan, India and China placed last, each with a grade of “D”: their systems have “major weaknesses and/or omissions that need to be addressed.”

In descending order, Poland, Brazil, the United States, Singapore, France and Germany received a grade of “C”: their systems have “major risks and/or shortcomings” that need to be addressed. Chile earned a “C+” with the same challenges identified.

In descending order, Sweden, Switzerland, Canada and the United Kingdom received a grade of “B”: they each had “a sound structure, with many good features,” but they have some areas for improvement that differentiate it from an A-grade system.

The highest marks went to but two nations, each with a grade of “B+”: the Netherlands, which placed first, and Australia, which came second. This was the third year in a row that the Netherlands had been ranked best in the world.

No country received an “A,” meaning a “first-class and robust retirement income system that delivers good benefits, is sustainable and has a high level of integrity.”


Appendix C – Shared Risk Model Development Principles1. Pension plans must be subject to robust risk management, and be checked annually to ensure that

the plan complies with that task. This principle was the first one accepted by the Task Force and is in accordance with the 2007 recommendations for Canadian pensions made by the International Monetary Fund. Every year each plan must be actuarially valued, stress tested (stochastic asset liability test), and the plan’s funding agreement and Statement of Investment Policies and Goals must be reviewed.

2. A pension plan must provide Benefit Security. This means:

(a) risk management targets are focused on delivering a high degree of pension security for members and retirees; and

(b) the plan must be governed by an independent trustee(s) who can force employers and employees to increase (or decrease) contributions when appropriate, subject to realistic and manageable limits.

3. A pension plan should be able to demonstrate that it will be sustainable over the long term.

4. A pension plan must be affordable, which means that contributions must be stable and affordable for both employer and employees.

5. The plan must be equitably designed - no single age cohort should unduly subsidize another, and no one should be able to ‘game the system’. Also, by necessary implication, if pension plans amalgamate, no one plan may subsidize another.

6. The plan must be transparent. The pension goals and risks must be clearly stated up-front, who shares in the risks and rewards and by how much must be pre-established in the pension plan documents and everyone should know what the “pension deal” is or be able to find out what it is easily.

7. Benefit changes will apply only in the future. At the conversion date, each member or retiree will keep what he or she already has accrued, as measured under the pension plan’s pre-conversion rules.

8. There should be no sudden shocks to members’ and retirees’ retirement plans. Individuals should be given time to adjust to the new system, and those who have made extensive financial and family planning around retirement should not find their plans suddenly de-railed.

9. All groups of employees should be treated consistently. This means that part-time or casual employees should be in the same pension plan offered to full-time employees.

10. At inception, the actuarial assumptions must be closely related to market benchmarks such as International Accounting Standard #19.


Appendix D - The Fine Print of the Shared Risk Model*These circumstances may vary depending upon the specifics of the plan used

Benefits

• Benefits are split into two parts:

Base benefits, which is the amount of all benefits paid or payable based on vested ancillary benefits at the relevant date.

Ancillary benefits, which are plan features such as cost-of-living increases, early retirement subsidies and improvements in the normal form of the pension. Using funding excesses to improve ancillary benefits is only allowed after all past indexing of the base benefit has been provided.

• Base benefits are very strongly funded, using a standard of success of at least 97.5% likelihood that base benefits need not be reduced. Extra benefits such as cost-of-living increases or early retirement provisions are strongly funded, using a standard of average replacement of the previous formula of at least 75%. In some rare and unforeseen economic circumstances, the nature of Shared Risk plans is such that base benefits may be reduced. In this circumstance, the reduction is borne by all plan beneficiaries (actives, deferreds and retirees) in the same proportion.

• Comparing benefits under previous models with those under the new model depends on many variables such as actual economic performance as well as differences between groups and between age cohorts within those groups.

• The model decreases future benefit accruals to a sustainable level to reflect mortality changes.

• Up until the transition point, benefits are calculated as before. The new model establishes that amount as a base, and then increases it based on earnings and the performance of the plan moving forward. Benefits will be recalculated each year. In the unlikely event that the number should decrease, the decrease will be temporary and restoration will have priority in any future year.

• Vested amounts as well as indexation already granted to current retirees are retained as part of the base benefit. The future benefit accruals are set at a level that can be supported by the agreed contributions.

• Benefits for existing retirees will not decrease at conversion but are subject to the same future risk as all other plan members.

Contributions

• The model adopts new funding methodology to fund unfunded liabilities using a general target open group funded ratio of 110% to 120% over 15 years. This target is expected to be adequate to provide two-standard deviation security for target benefits and three-standard deviation security for base benefits.

• Increased contributions are not an inherent part of the new model. However, there may be a need to increase contributions in the future to secure continued payment of base benefits. These automatic increases are capped at the greater of 2% of earnings or 25% of the initial contribution rate.


• Contribution holidays are not permitted for employers and employees unless required under federal taxation rules.

Cost-of-living indexing

• Freezes accrued final average benefit.

• Converts final average benefits to enhanced career average benefits prospectively.

• Automatic cost-of-living indexing replaced by contingent indexing.

Risk management

• Uses new liability-based asset management.

• Appropriate stress-testing is mandated to provide the flexibility and forewarning that enables plan administrators to take corrective measures so that target benefits are achieved with a high degree of confidence.

Solvency test

• Measures the market value of a plan’s assets plus the value of planned future contributions in excess of current service costs on an “open-group” basis over no more than 15 years against a market-consistent value of the plan’s liabilities. The employer must act in good faith in communicating a material planned reduction in plan membership.

• Annuity rates are no longer taken into account as they are now when commuted values are calculated.

Investment policy

• Employer and employees share the investment risk.• Must be established annually.

• Tailored to achieve desired confidence levels. To raise certainty, increases to fixed income investment ratios may be required.

Funding policy

• Must be established to determine in normal times when the financial position of the pension fund is adequate to grant indexing and other additional ancillary benefits.

• Significantly different from the solvency test used for Defined Benefit plans, where specific points in time are used to measure the market value of assets and liabilities at that specific time, and current insurer profit margins are built into the calculations.


• Explains when contingent indexing starts or stops and at what levels contingent indexing payments are to be made.

• Required to meet minimum standards to address underfunding situations. These standards allow the superintendent of pensions to issue guidance on what constitutes a minimum standard.

• Must include an explicit deficit recovery plan and an explicit surplus utilization plan.

Trustees

• Plan operates at arm’s length from the employer and is administered by a trustee or trustees. • Each year, the trustee or trustees must:

• Ensure an actuary values the pension plan.

• Review the statement of investment policies and goals in view of the desired security levels.

• Ensure that the plan is exposed to risk-management procedures (“stress-testing”).

Actuarial liabilities

• Prudently valued (currently close to 4.5% discount rate and life expectancy derived from the most recent mortality studies reflecting current best estimate rates of mortality improvement).

Termination value

• Benefit on termination is equal to the greater of accrued liability times the termination funded ratio of the plan, and member contributions with interest.

• Does not include any provision for future contingent increases.


Appendix E – Detailed Listing of Shared-Risk Implications*These circumstances may vary depending upon the specifics of the plan used

New employees and early career employees

• They can be confident that their pensions will be there when it is time for them to collect it and for as long as they need to collect it.

• They will likely have to pay marginally higher contributions.

• The targeted retirement year will increase by about four years for new employees and for three to four years for early career employees.

Mid-career employees• They have time to plan and can have confidence in the security of their pensions. Everything they have

earned up to now is protected at transition.• They will likely receive a slightly higher pension at retirement than they would have under the previous

system. • They will likely have to pay marginally higher contributions. • The targeted retirement year will increase by two to three years.

Late-career employees• The changes are incremental so they should see little difference. Future cost-of-living increases will

depend on plan investment performance. • If their planned retirement is still a little way off, they can retire as planned with only a very small

reduction. • Alternatively, they can work slightly longer than planned – one year or less – and receive the same

pension.

Employees who have career paths with sudden jumps in their salaries• They will receive slightly less generous pensions than they would under a system that bases their

pensions on their highest-earning years.

Retirees• Their pensions are generally better protected than ever before. • The amount they currently receive will not decrease at conversion but is subject to same small risk as

all other plan members in the future. • At a minimum, future cost-of-living increases are strongly funded and given the highest priority in the

surplus utilization plan. Further, future cost-of-living increases are potentially no longer capped; but can instead depend on plan investment performance. Removal of the cap has been undertaken by those plans which have been converted to date, but is not a requirement of the model.

PENSION REFORMTHE NEW BRUNSWICK MODEL AND DIRECTIONS FOR CANADA

Documents

Rebuilding New Brunswick: The Case for Pension Reformleg-horizon.gnb.ca/e-repository/monographs/... · 2015. 6. 24. · The latest Melbourne Mercer Global Pension Index paints a sobering