Bill C-27 could mean changes for DB pensions

Watch out if you’re a federal employee with a lavish pension plan

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Last April, the Department of Finance unveiled Bill C-27 on pension reform and it’s been winding its way through the House of Commons. Lately, it’s been getting a bit of interest because some parties see it as a threat to much-loved Defined Benefit (DB) pension plans for federal government workers and Crown Corporation employees, (such as Canada Post, CBC, Via Rail, etc.). Here’s what you need to know as interest in Bill C-27 starts picking up steam.

What is Bill C-27?

Bill C-27 is an Act to amend the long-standing Pension Benefits Standards Act. Those in favour of pure Defined Benefit (DB) pension plans have criticized Bill C-27, saying it would allow federally regulated employers to replace DB plans, which provide a guaranteed retirement income for life with no risk, with Target Benefit Plans (TBPs) which are also generous pensions but because they count on employees taking on some risk, final retirement guaranteed payments may not be as iron-glad.

What happens if it’s passed into law?

It would allow federally regulated private sector and Crown Corporation employers to offer a TBP to their employees, or to convert an existing DB pension plan into a TBP. Malcolm Hamilton, a retired actuary, believes Bill C-27 would allow for tiny steps in the right direction. “There are valid concerns that these DB federal pensions are unsustainable and the government wants to do something about it,” says Hamilton.

Who is for or against the changes?

Federal employees and their unions want to keep their federal DB plans as they are and will fight to do so. But this legislation helps envision a future for federally regulated pension plans that falls between the DB and Defined Contribution (DC) pension plan spectrum.

What’s the difference between TBP, DB and DC plans?

TBPs can place explicit limits on the volatility of employer contributions. So if a funding deficit arises in a TBP (because of underfunding, or lower-than-expected investment returns, say), part or all of it can be compensated for by reducing accrued benefits to employees whereas a traditional DB plan would require the entire deficit to be funded by increased contributions on the part of the employer—the federal government (and by extension, the taxpayer).

Less desirable than either DB or TBP plans are DC plans, which are mostly self-directed by the employees who own them. (If you have a pension with your employer you likely have one of these.) That means that contributions are completely fixed and mostly paid by the plan holder, and there’s a lot of uncertainty as to what retirement income payouts will be because that depends entirely on the way you managed and invested your DC pension money over time.

Are there payout risks to federal employee DB plans now?

No. Pension retirement income for employees with these federal plans is often fixed, regardless of the plan’s market performance. If there is any financial risk to the holders of these pensions, it is in the indexation of benefits. So the TBP is really a hybrid between DB and DC plans, with more variability in benefits for members than federally regulated DB plans but much less than DC plans.

Why is this happening now?

Several countries have already done away with these unsustainable federal DB plans which is why the federal government, through Bill C-27, may want to tinker with them—even on a very small scale. But federal public service unions are pushing back. “It’s such a good deal for them and the unions sense it, so they go berserk any time there’s a suggestion they’ll be moved in a sensible direction regarding these pension entitlements,” says Hamilton. “What they have now really shouldn’t exist.”

What’s next?

The feds prefer to see these DB plans slowly move to TBPs. As Bob Baldwin, a member of the C.D. Howe Institute’s Pension Policy Council succinctly explains in the association’s December 19 report, “A regime in which accrued benefits cannot be reduced places all financial risk on young and future plan members. Target benefit plans, such as multi-employer plans, avoid these problems by giving to the middle of the spectrum and spreading the risk sharing across all cohorts.”

But the truth is that while taxpayers want changes (since they often pay the difference for underfunded or underperforming federal plans at retirement time) unions don’t. “Unions will probably have to be brought kicking and screaming into the conversation,” says Hamilton. “But this pension set up where taxpayers take all the risks and employees take none is very unusual. The time for change is surely coming—albeit slowly.”

Stay tuned for what happens next, coming later this year.

—This article was updated 01/09/16—


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40 comments on “Bill C-27 could mean changes for DB pensions

  1. Please do not over-exaggerate the extent to which the public service pension plan is paid for by taxpayers. Every participant has contributed to these plans, so to say that they are totally paid for by taxpayers is blatantly untrue.

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    • That’s right. You misunderstood. Please see my reply to Daniel Bernier above for a more indepth explanation. j

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  2. DB pension plans are funded jointly by employee and employer, not “totally paid for by the Canadian taxpayer” as stated in this article.

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  3. It’s about time. Why would taxpayers keep subsidizing an overly generous pension for civil servants when most of them will never be able to afford a similar retirement plan? In order to get a 40K$ annual pension at retirement, the regular joe needs to put aside 1 million $ during his lifetime!!! Enough is enough.

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  4. Your statement that federal taxpayers pay for those pensions is wrong and a lie. Pensioners have paid into these pensions sometimes for 40 plus years … and sometimes they die before collecting a cent of their hard earned pensions. Stop the lies before writing another article.

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    • Hi George,
      You’re right, pensioners have paid into these plans. That’s not the point of the article. See my reply to Daniel Bernier to further answer your question, j.

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  5. Ummm bias much? I’ve never seen biased writing at MoneySense before this. First of all you make it sound like the employee contributes absolutely nothing to their own pensions which couldn’t be farther from the truth. They contribute huge amounts off each paycheck just like anybody else does! I also love how you labeled all DB plans as “unsustainable” without any proof to follow. Allow me to educate the reader like you should have…when the DB plan is in deficit usually BOTH the employer and the employees will have to increase contributions to shore up the pension. Conversely when the pension is in surplus BOTH the employer (taxpayers) and the employees get payment Holidays. See how that works? I find most of the acrimony towards public sector DB plans comes from a place of jealousy. Rather than try to take down good working conditions for others, why not try to improve conditions for workers that don’t have a nice DB plan. What a load of crap Julie. Do yourself a favour and read “The Pension Puzzle” and learn something about DB plans yourself.

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    • Hi Daniel, You’re right that federal DB pension employees contribute to these pensions through annual payroll deductions. Right now, younger workers (and the employer) pay for the pensions of older workers and their contribution amounts have been rising. But what happens if over the next few years, the number of federal employees drops by several hundred thousand because of automation, robots, etc? How much can these new, fewer workers afford to have their contributions raised to pay for retirees (who are living a lot longer) and their pensions? If you combine a federal workforce with less employees with a large number of actual retirees who are living longer and couple that with a major financial setback in world stock markets (all of which underfund the pension for a longer period of time than projected) you are left with the employer (federal government) and the taxpayer taking on most of that risk since they will have to keep their commitment and pay for these pensions down the road. Sure, you can tinker with inflation indexing and benefits but that will only go so far. I don’t think there will be huge changes through C-27 but it opens up a conversation regarding workforce trends that’s going on around the world right now. And if this Bill is in the House, and TBPs are a key topic, then the federal government thinks it may be becoming an issue for them. And yes, I’ve read “The Pension Puzzle”. Loved that book, j

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      • I think you need to study pension plans. For example check out the BC Public Service Pension Plans. You will notice that there are just about as many retirees as there are workers. Retirees have defined pensions BUT the plan is mostly funded by INVESTMENTS and not at all by current workers. The plans are fully funded because of the Management company’s investing. They actually entered this controversy you present and fully support defined pensions.

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    • Hi Daniel, See my reply above, j.

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  6. My DB plan is funded by compulsory deductions of nearly 25% of salary. It’s not taxpayer funded, it’s a smallish plan run by a few colleges. (When markets slow down we are required to raise our own contributions). If it becomes a TB plan, where is the management incentive to maximize returns? The option to simply reduce benefits seems to give pension managers a free pass for poor performance. Any legislation must include leverage that compels fund managers to perform to specified minimum standards, or face penalties, get replaced etc. Otherwise your TB pension is like a mutual fund you’re required to hold forever despite money losing results year after year.

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  7. in Defined Benefit Plans, the employee pays into it their whole career…taxpayers aren’t on the hook. Lowering benefits across the board to cover missed targets is theivery

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  8. The author of this article has a fundamental misunderstanding about how federal pension plans work. First, these plans are contributory, in other words *both* employees and the employer contribute to the pension plan (as is the case in many private-sector pension plans). Second, since 2000 pension contributions from both employees and the employer(s) are invested and pension payments are paid out of the money invested.

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    • Yes Simon, you’re right about contributions. But the risk of the final promised pension payout in retirement is taken completely by the employer or tax payer. Meaning, that if the pension plan after years of contributions by its employees and employer is underfunded, the employer (and in the case of federal government pension plans, the taxpayer) is responsible for making those guaranteed payments to federal pension holders for life, even if the plan is underfunded (whether through bad market performance or longevity issues with people drawing a pension for a longer period of time than projected by the pension fund overseers.).

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    • Hi Simon. Yes, these plans are contributory and the contributions of the younger workers pay for the pensions of the older workers. But what happens if the number of younger workers shrinks dramatically? And if a huge drop in the pension’s investment returns results because of bad stock markets. With automation and AI trends in the workforce this is very likely. That will leave employers (and taxpayers) on the hook to pay out the full amount of these pensions for retirees. I think TBP plans are part of Bill C-27 for a reason. Other countries are slowly moving this way and the federal government wants to start a dialogue about that option. Hope that helps, j.

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  9. Julie, what about private sector retirees on DB plans. Can there be retroactively changed?

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    • I highly doubt it. Even small changes will take years to go into effect. So enjoy your retirement Ron!

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  10. Pull up the ladder Jack ! Federal pensions maybe good but not gold plated . Read public company’s annual reports where the real gold plated pensions are paid to the upper deck . Another politicain looking to get a board of directors job after they collect a very sweet pension for lowering the bar for regular Canadains pensions . Could you print an artical about why pensions are good for the ecomony .

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  11. I don’t believe your article reflects all db pensions, you make it sound as though all federally regulated pensions are subsidized by the tax payers, federally regulated goes beyond just public employees, Canadian pacific railway is a private company which is federally regulated and bill c-27 will encompass it as well for example, zero tax dollars go into their pension plan.
    You also fail to say that it will go effect people already collecting a db pension paid into their entire career and their future plans while working relied upon that information. What do you think will happen to them? This bill will potentially put current pensioners into poverty if corporations are given the opportunity to make changes after the fact.

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  12. A more effective approach would be to cap the eventual pension benefit. Why should any employee have a pension that is valued at more than $50,000 a year. All an employer need do is a look ahead math calculation during the employees career. Assume the current regime (i.e. using the federal government details, an employee’s tax deductible annual pension contributions go towards their 2% per year x the best 5 years annual pay.. But when the $50,000 determination is reached, the employee and employer cease contributing. There may be a need for inflation indexing provisions to be fair. That can be worked out. The employer, being my old one, the Federal government, may say that they couldn’t attract the best and brightest with such a plan. Come on man! The federal treasury would save and the individual would have better cash flow after reaching the maximum pension benefit. That cash flow would come in handy at a time of a family’s educational needs, mortgage paydowns and the like. Or, the employee could, like the rest of the economy, TRY to contribute to a private plan.
    Disclosure: after being a federal employee for 27.5 years, I am making far less than a $50,000 annual pension benefit.

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  13. All pension plans must be sustainable through both employee and employer’s contributions. Younger people subsidizing older retirees is not the right thing to advocate. Federal Government has to take steps to start correcting now rather than funding the deficits later. Problem is that that social insurance contributions are too low for non-government employees to get decent benefit even after 40 years of contributions. So they all feel that government employees get more generous benefits.

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  14. It’s funny how the media and the average taxpayer didn’t complain when the Liberal government stole almost $30 billion from the federal government employees in 1999, but they have no problems complaining now. If the government at the time didn’t take the $28 billion back in 1999 then the pension would been fully funded at this time. Funny how the media never mentions these issues.

    Also, it is basically a given that in the not so distant future pensions for the public service will be adjusted to something like a DC plan or a hybid plan, every employer is doing this. I expect very soon all new employees in the public service will be subject to this when they are hired. I am just happy that I only have 7 years of work left for the feds and my DB pension won’t be affected. I feel for the new employees though being hired in the coming years. They won’t have as good a retirement benefit :(

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    • The current Bill C-27 effects retirees too.

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  15. Yeah – I get it. I am constantly belittled by retirees who hate DB pensions and loudly state that they all should be immediately abolished. The noise level reduces dramatically when I point out that the OAS and CPP that they receive are in fact DB pensions. Then the argument then becomes that they paid into OAS and CPP and therefore should receive the benefits – terribly ironic don’t you think. BTW, there is over 114 Billion dollars in the Pension Plan invested by the Public Sector Pension Investment Board.which covers retirees of the Public Service, the Military, the RCMP and members of the Reserve with an annual rate of return of 14% Except for a down year last year and the depression of 2008/9), returns from investment have almost always outstripped contributions. Older active members contribute over 10% of their salary over the YMPE to the plan and over 8% of their salary under the YMPE. The office of the Chief Actuary decides every three years what the contribution rates will be to sustain the plan – active employees are well aware of the fact that they will be contributing more and more each year and that is proper. I have read the Bill itself and it seems clear that current pensions cannot be changed unless all participants agree; this is the thin edge of the wedge for future intake. The possibility of more retirees’ benefits being paid by fewer contributors has been around for years related to CPP (which incidentally has over 300 billion in assets). Same arguments in another forum.

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  16. Why not put a cap on CEO pay and MP benefits first? Union Pension plans were an agreed to negotiation upon hire, much like the golden parachute that executives benefit from. Therefore it should be a case of breech of contract if one tries to back out, should it not? How would a CEO react to modify their golden parachute? If they want to change it going forward during fair contract negotiations, that’s fine, but for the feds to go behind everyone’s back is simply wrong. Did they even mention this in their platform during the election? In my mind this bill is a breach of public trust and yet another shot at sinking the middle class.

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    • I agree, it’s an all out assault on the middle class.

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  17. One other area you failed to mention in you biased article is the fact the Federal Liberals started hiving off the 28 Billion surplus from Public Service Pensions starting in 1990-1991. The 28B Public Service Pension surplus was used to pay down the national debt. You can’t have it both ways when you talk about the public being on the hook for deficits without talking about the mismanagement of the system, if the surplus had of been left to ride in the same manner as CPP funds there would be no issues to talk about other than what great shape the pensions were in. We need better research and less bias.

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  18. any changes to defined benefit pension plans will result in massive $$$ in IT consulting fees to organizations that operate defined benefits pensions plan systems. Like Morneau Sheppell’s defined benefits pension system.. Bill Morneau
    http://www.morneaushepell.com/ca-en/defined-contribution-pension-administration

    and people thought Trump has business related conflicts of interest.. Our finance minister has him beat on this one.

    http://news.nationalpost.com/news/canada/canadian-politics/conflict-of-interest-screen-enforced-on-bill-morneau-to-keep-him-from-participating-in-family-business

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    • Thanks for the links.
      I had read that in his book Morneau teaches the wealthy how to steal the GIS from poor Canadians. Teaching them that by deferring pension and living off TFSA’sr and money from their homes for the first year or so, they can collect GIS, appearing to have no income. Doesn’t sound like a guy I want managing Canada’s budget.

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  19. From 2001 to 2004, the federal government took or debited $28 billion out of the superannuation fund in its Consolidated Revenue Fund. If the government is going to force changes to our pension, they have to put back the $28 billion.

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  20. This would so not be an issue of the 1999 Liberals had not scooped up the federal pension plan surplus of $28B to pay down the debt. They robbed the pension plan and are now saying it is unsustainable? Wow that takes balls.

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  21. Let’s not forget that the last conservative government lapped up a 30 billion dollar surplus from the public service pension plan… The plan was quite clearly not unsustainable…

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    • You appear to have lost sight of the problem.

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  22. The big problem with C-27 is in the “poison pill” in this bill. Many private sector groups have negotiated new pension schemes through negotiation, on a “go forward ” basis. In those same negotiations. those who have paid into DB pensions stay in those plans and corporations gain benefit in the future with the new plan.
    What is totally unacceptable in C-27 is the retro active clause which would allow an “agent” ( ostensibly a union negotiator), bargain away DB plans retroactively , in favor of working conditions for a union group. At some point unions will have less DB pensioners , than pension holders of the DC or TB plans and it is conceivable that all pensions could be bartered over to the newer plans.
    This would count as a DB pension “surrender” and ALL DB Pensioners will revert to the TB plans RETROACTIVELY, losing a large part of their previously earned retirement income.
    While paying into a DB plan, an employee’s ability to contribute to RRSP’s is curtailed. In many instances…in order to be employed with your company, it is mandatory , to be part of that plan.
    Many DB holders have, over their time of employment , during negotiation, made huge concessions that were highly beneficial to their employer groups in order to retain their earned pensions.
    It is worth noting that in situations where pension earnings are reduced, or eradicated, the response is that those who would have retired at an anticipated date, choose to remain working, often at top wage rates to mitigate their pension loss. This reduces jobs available to younger generations.
    If those on DB plans,have their plans retroactively converted to the newer TB plans, they may find their reduced circumstances require them to depend on other governmental programs to survive. .
    The Canadian government, through time and many changes in leadership , have charged Canadians with “taking care of themselves”, and making sure we are prepared for our retirement.
    Those of us on DB plans have done so, through good times and difficult ones.We made the deal, we did the work, we gave up negotiated items to keep the promise of a well earned decent retirement. To propose a bill like C-27 , is akin to robbery . An understanding of rule of law would expect that our government would implement the previously agreed upon, long standing tenet of Defined Benefit Pension Plans,instead of drastically reducing the retirement expectations of those Canadians who have done the work to earn them. A deal is a deal.

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