And so it continues: the ongoing, antagonizing relationship between the government of Alberta and the Alberta Teachers’ Association (ATA). This saga could be chalked up as entertaining if it were not for the thousands of Alberta students and teachers caught in the crossfire, and the taxpayer and union dues-paying teacher left to clean up the financial mess. However, this latest go-around, which involves the transfer of teacher pension management from the Alberta Teachers’ Retirement Fund (ATRF) to AIMCo (Alberta Investment Management Corporation), is far from entertaining. Individual retirement savings are not a laughing matter.
The current Alberta government, which typically advocates for free markets, has used its legislative powers to move teacher pensions from a private investment manager to a Crown corporation, and the ATA is rightfully fighting back. Why the government would do this is unclear, although it alleges that substantial savings will benefit the taxpayer. But there is another side to this issue that is going unnoticed. When the public is properly schooled on public sector pension plans, will there be support for public pensions? Today’s lesson is about defined-benefit pension plans.
Defined-benefit pension plans guarantee a person a specific amount of money upon retirement. The money comes from three sources: contributions made by an individual (teacher in the ATA), contribution made by the employer (government of Alberta) and money made on investment returns. However, when these three do not add up to the defined benefit, the contributing employee (teacher) and employer (taxpayer) cover the shortfall by increasing contribution rates, or as happened in 2007, the government of Alberta picked up this tab to the tune of $2.1 billion. This is called an unfunded liability and this is what makes defined-benefit pension plans controversial, political and recently in the private sector, obsolete.
On November 22, 2019, Bill 22 became law and required AIMCo to take over the investment management services previously held by the ATRF, which represents 83,688 members. The ATRF was promised that it would continue to act as the plan’s trustee, maintain ownership of the assets and provide strategic controls and recommendations as to how the funds are invested. Transferring the management services from the ATRF to AIMCo is expected to save Albertans an estimated annual $41 million.
AIMCo currently manages eight public sector pension plans and the larger economy of scale allows for fewer administrative costs, hence a substantial savings to the teachers and the taxpayer. However, the ATRF has provided contrary evidence to demonstrate that it outperforms AIMCo, leaving $422 million in added value, which leads to reductions in contribution rates, thereby saving both teachers and the taxpayer tens of millions of dollars. It is reasonable to conclude that both the ATRF and AIMCo have incentives to prudently invest on behalf of their clients but is it reasonable to expect a defined benefit upon retirement? Can investors accurately forecast the volatility of markets, life expectancy and the financial needs of people 30+ years into the future?
Approximately 79 per cent of public sector workers in Alberta receive defined-benefit pensions compared to nine per cent of workers in the private sector. All legislation pertaining to teacher pensions falls under the Teachers Pension Plans Act. The act does not explicitly state that the taxpayer is responsible for a bailout, as in 2007; rather, the taxpayer is responsible for increased contribution rates if the funds are underperforming.
However, a political precedent has been set. The ATA was successful in putting the pension’s unfunded liability on the agenda for the Progressive Conservative leadership campaign in 2006. The ATA and the government reached a historic agreement. The premier at that time promptly delivered a helping hand to the teachers for their pension shortfalls. To date, according to the ATRF 2020 Annual Report, the funding ratio sits at 96 per cent, not fully funded, and in 2019 it received an additional $489 million from the Alberta government.
With the province’s economic downturn and the collapse in our energy sector, coupled with the COVID-19 pandemic’s devastation of our economy, will the taxpayer be in a financial position to support increasing contribution rates for teacher pensions? Or worse, get caught in the middle of a political hot-potato game and be obligated to bail out failing defined-benefit public sector pension plans 30 years from now? If not, what is the solution?
In 1977, the NDP government reformed Saskatchewan’s public sector pensions by grandfathering existing employees in defined-benefit pension plans and enrolling all new public service employees into defined-contribution plans. This move alleviated the risk and uncertainty of guaranteeing a benefit, and created substantial savings for the taxpayers. Defined-contribution plans are based on contributions and returns and provide a much more fair and equitable pension program. This could be a starting point for pension reform in Alberta.
This is an evolving issue and it is unclear how it will end. The government is busy playing politics with teachers’ pensions and the ATA is busy launching letter-writing campaigns and legal action against the government. Meanwhile, the vast majority of private sector employers are working tirelessly to keep their businesses open while the 2021 unemployment rate soars to a predicted 9.5 per cent. It is indeed a mess and unfortunately, the unsuspecting taxpayer and teacher will be left cleaning it up. Time to end this game and rethink public pension funding.
Janis Nett is a research associate with the Frontier Centre for Public Policy.
Photo by Mark Timberlake on Unsplash.
