Auditor General of Alberta on Public Sector Pensions

28 February 2014FinancePolitics

Earlier this month, the Auditor General of Alberta released a report detailing the findings of a recent audit titled Treasury Board and Finance Department—The Department’s Oversight Systems for Alberta’s Public Sector Pension Plans. The audit began in 2011 with a focus on assessing the risk management systems within Alberta’s public sector pension plans, but added a second objective in late 2012 in response to the Minister of Finance’s decision to initiate a pension sustainability review. The findings related to this second focus – assessing the adequacy of the department’s sustainability review support processes – are of interest to me given my prior writing on the topic of pension sustainability.

Cover of the February 2014 Report of the Auditor General of Alberta

I encourage you to read the entire report, specifically the section starting on page 28 regarding Sustainability support processes, but the key findings and recommendations are discussed below.

We recommend that the Department of Treasury Board and Finance validate the objectives for the pension plan sustainability review with stakeholders

The department’s plan for reviewing governance, funding and benefit design reform proposals includes obtaining feedback from employee and employer stakeholders. However, the purpose, content and necessary resources for the planned consultations were not specified at the time of our audit.

While employers have been consulted, employee stakeholders have been completely shut out by the Government. Labour groups have requested face-to-face negotiations, but according to Alberta Federation of Labour president Gil McGowan, “the Redford government seems determined to dictate, not negotiate.” The lack of communication with key employee stakeholders is especially surprising given that the Minister of Finance is also the trustee of Alberta’s public sector pension plans. How can he fulfill his fiduciary duty as plan trustee without obtaining feedback from the beneficiaries of said plans?

We recommend that the Department of Treasury Board and Finance evaluate and report on how each proposed change meets the objectives for the review

The department’s comparison of options considered how some options for reform aligned with the government’s principles. However, that analysis was not thorough. For example, the vision for reform indicated that the plans would be adaptable in changing circumstances in good times or bad; however, the plans had not yet been stress-tested with all options incorporated into the testing to support this conclusion.

Furthermore, one of the objectives was to ensure there was intergenerational fairness for members and taxpayers; however, we did not see how the analysis compared options considered against this principle.

If the stated goal of pension reform is to make public sector pensions more sustainable, any changes need to increase the likelihood of achieving that goal. Without proper evaluation, how can Albertans be satisfied that the Government’s proposals will be effective? Given the complexity of pension plans, it is very time consuming and expensive to make changes; but if changes are going to be made, they should be studied extensively so that the impacts are fully understood and additional reforms aren’t required again down the road. That said, it is debatable whether any changes are required to Alberta’s public sector pensions in the first place.

We recommend that the Department of Treasury Board and Finance cost and stress-test all proposed changes to assess the likely and possible future impacts on Alberta’s public sector pension plans

The department indicated to us that it had capacity to analyze costs as well as a range of potential outcomes resulting from proposed plan design changes. Its processes do not indicate whether it will quantify the costs of each option or whether it will assess a range of potential outcomes for all combined proposed plan design changes. It is therefore unclear whether the proposed reforms significantly increase the likelihood of the plans’ sustainability.

If the proposed reforms aren’t going to increase the likelihood of plan sustainability, what’s the point of wasting time and money implementing them?

We recommend that the Department of Treasury Board and Finance conduct or obtain further analysis of the impact of proposed pension plan design changes on employee attraction and retention

The department has not assessed the impact of the proposed plan changes on employee recruitment and retention. A difficulty for the department is that responsibility for assessing compensation strategies of public sector employees is spread across public sector employers. This makes it difficult for the department to obtain the information needed to assess the potential unintended consequences of plan changes on employers’ ability to achieve their human resource objectives. Some of the plan boards have gathered qualitative survey data about the value of the pension plans to employees and their relative competitiveness with other public sector employers. However, we did not identify a coordinated process amongst public sector employers that would enable the department to assess the impact of proposed changes to the pension plans on employee recruitment and retention.

On paper, reducing the dollars employers contribute to pension plans makes sense. Saving a few percentage points across an entire payroll for a large organization like Alberta Health Services would create millions of dollars of savings a year. However, pension reform won’t take place in a vacuum, and many factors (all of which are very difficult to quantify today) will adjust in response.

In theory, each employee views his or her pension as part of their total compensation (salary + pension benefits + other benefits = total compensation). If the Government imposes a reduction on pension benefits, the market will naturally adjust the other terms of the equation (notably salary) in order to keep total compensation stable. So while employers might contribute less to pensions, labour unions may press for higher wage adjustments as collective agreements are renewed. Employers can obviously resist such increases, but only to a certain extent since they don’t have a monopoly on jobs – public sector employees can look for jobs in the private sector, where total compensation might be higher. In the long-run, public sector employers must remain competitive with the broader market from a total compensation perspective.

There are also potential impacts from increasing the minimum retirement age. Will a higher average age for employees lead to more long-term disability claims? What about sick leave and absenteeism? Will the cost of employer-sponsored benefit plans – group life insurance, vision, dental, and supplementary medical – increase? Will older workers remain as productive? The answers to these questions haven’t been addressed by the Government while formulating its proposed pension reforms.

We recommend that the Department of Treasury Board and Finance prepare a detailed implementation plan for the changes

At the time of our review, the department had developed the main steps to review governance, funding and benefit design reform proposals. This plan included an overall timeline for the review, consultations, announcements and approvals. The department also shared educational material with stakeholders on its website. However, we did not identify plans for continuous education as the review progresses and concludes.

The department had not developed a detailed implementation plan at the time of our review. We note that our review of their processes was underway while the department was still working out the details for this process.

The changes proposed by the Government, which will affect some 320,000 Albertans directly and countless others indirectly, deserve to be well researched and implemented in a thoughtful, measured, manner after collaboration and consultation with stakeholders. Based on the Auditor General’s audit, there have been serious lapses in the public sector pension sustainability review. It doesn’t appear as though the Government will act on the various audit recommendations, instead deciding to push forward with legislation next month to implement changes to public sector pensions.

As the Auditor General’s report concludes, there are serious implications and risks if his recommendations are not implemented:

Without clear alignment between proposed plan changes and the government’s objectives for the review, adequate financial analysis and consideration of human resource objectives, the department may not achieve its sustainability review objectives.

The Minister of Finance agrees that Alberta’s public sector pensions are not currently in a crisis; unfortunately, the Government’s unwillingness to consult with stakeholders or to undertake thorough analysis of potential changes could lead to policies that actually contribute to a crisis in the future.

As an active member of LAPP, I have a vested interest in receiving the biggest pension benefit at the lowest cost. Despite this potential conflict of interest, I have tried my best to present a fair, fact-based critique of the Government of Alberta’s pension sustainability review. The views expressed in this article are solely my own and do not necessarily represent the views of my employer or LAPP.