How big are the obligations of pension plans covering workers in Canada's broader public sector, and how adequate are the assets in those plans to cover their obligations? Who bears the risks if these plans run into trouble? A new report from the C.D. Howe Institute argues that taxpayers and plan participants need more clarity about the risks in multi-employer plans, notably plans with benefits that are contingent on their funded status. When taxpayers are on the hook for funding shortfalls, argues the author, William B.P. Robson, CEO of the Institute, financial statements of employers and governments should spell that out. When participants face risks that their benefits may be smaller than they expect, they need transparency about that.
The report focuses on the pension plans that now cover hundreds of thousands of current and former employees of Canadian governments, and millions more who work, or worked, for organizations such as hospitals, school boards, and colleges. In "Gaps, Quirks and Fixes: Accounting for Broader Public-Sector Pension Plans in Canada" Robson surveys the treatment of these plans in the financial statements of the employers themselves, and the governments that control and/or fund them. He uncovers some gaps and problems, and makes several recommendations to foster more complete and transparent reporting of the costs and risks related to these plans.
Canada's multiemployer pension plans – so successful that the world talks of a "Canadian model" – include long-established plans such as the Ontario Teachers Pension Plan and newer plans such as the Nova Scotia Health Employees Pension Plan. While their joint governance and benefit flexibility are valuable features, financial reporting of their costs and obligations has not kept pace with their growth. Many employers who bear pension-related risks beyond the contributions they make each year do not report them. Some governments show liabilities on their balance sheets for plans that they have no formal obligation to support.
The Public Sector Accounting Board is reviewing accounting standards that could affect the entities governments include in their financial statements, and how they report their costs and obligations related to contingent pension plans. Robson urges stricter criteria for allowing employers to report only their annual contributions, arguing that such treatment is only appropriate when the risk that contributions will rise materially or that the employer will have to fund a shortfall is small enough to ignore. He also urges governments that do not have formal obligations to support pension plans not to show costs and obligations related to those plans in their financial statements. He notes, for example, that some plans that do appear in government financial statements cover private-sector employees also. Including costs and obligations related to those plans in their financial statements may tempt governments to plan a more active role in the plans and the employers than is appropriate. It may also lead employers and plan participants to expect a bailout in the event of a shortfall, which would work against prudent management of the plan.
"Canada's multi-employer contingent-benefit plans are large and growing," said Robson. "More transparency about their costs and who bears the risks in these plans would benefit taxpayers and plan participants alike."
Bill Robson took office as CEO of the C.D. Howe Institute in July 2006, after serving as the Institute's Senior Vice President since 2003 and Director of Research from 2000 to 2003. He has written more than 240 monographs, articles, chapters and books on such subjects as government budgets, pensions, healthcare financing, inflation and currency issues.