What does Canada do better than any other country?
Play hockey? Let’s not go there.
Run an effective, efficient and sustainable retirement income system for the general population?
It doesn’t do that as much as we’d like. Canada rates fourth in the best-known international comparison in this area, the Melbourne Mercer Global Pension Index. There are reasons why we’re currently discussing potential reforms for our retirement income system.
Read: Canada’s retirement income system ranks high
Responsibly and effectively manage sustainable pension arrangements for our public sector workers? Maybe that’s it. I suggest that claim does hold up to scrutiny.
Canada’s largest public sector pension plans have successfully pioneered new approaches to institutional investing and have subsequently earned reputations as Maple Revolutionaries.
In addition, many Canadian public sector pension plans have been innovators in governance, sharing risk and plan design. The innovations have largely broken down the dichotomy between defined benefit and defined contribution programs in the public sector. Most Canadian public sector workers today are members of an occupational pension plan that’s neither a conventional employer-sponsored defined benefit pension plan nor a typical defined contribution arrangement.
Read: Sounding Board: How OPTrust builds long-term sustainability
What people are less aware of is the fact that Canada rates best in the world at responsibly funding its public sector pension liabilities.
Moody’s Investors Service is a good source for internationally comparable metrics on public sector pension plan finances. As an agency that rates the credit worthiness of sovereign governments, Moody’s has a keen interest in the financial sustainability of government-sponsored pension plans. Its preferred metric for making international comparisons is the total of all public sector pension plan unfunded liabilities in a country divided by its gross domestic product.
In April 2016, Moody’s released a report that looked at government employee pension liabilities compared to social insurance programs in the United States. The report also included, for context, comparator statistics for the other developed countries that have high credit ratings in its data set.
Moody’s cited Canada as having the lowest unfunded liability burden at 12 per cent of GDP in 2014. For comparison, Australia came in at 21 per cent, the United States at 40 per cent and Britain at 66 per cent. Nobody beats Canada at keeping public sector pension liabilities under control.
Read: CPPIB shares winning conditions for long-term investing
Canada has a very heterogeneous set of public sector pension arrangements. Plans vary widely across the country in terms of design, governance and financial status. There’s no national regulator overseeing these arrangements and no unitary government sponsoring all of the plans.
But overall, the system seems to work. Perhaps it’s a good example of federalism in action. Individual plans, provinces and municipalities have scope for innovation. Plans monitor each other and learn from the collective experience. While diversity remains, the arrangements overall gradually improve.
And when a Canadian public sector pension plan benchmarks itself against its Canadian peers, it’s measuring against the best peer group in the world.
Bruce Kennedy is the executive director of the B.C. Public Service Pension Plan.
B.C. Public Service Pension Plan at a glance- 116,000 – Number of members
- 91 – Number of employers
- $27 billion – Plan assets at Dec. 31, 2015
- Governance – Jointly sponsored and trusteed by the provincial government and the BC Government and Service Employees’ Union
- Cost-sharing – 54% employers; 46% members
Risk sharing for non-indexed pension: A defined benefit promise with 50/50 sharing of contribution rate increases or decreases
Risk sharing for inflation adjustments: Set contribution rates with plan members bearing 100% of investment and inflation risks
- $21,800 – Annual average lifetime pension for new pensions (fiscal year 2014-15)
- 101% – Funded ratio on a going-concern basis at March 31, 2014
- 105% – Funded ratio on an accrued basis at March 31, 2014
- 2.75% – Actuarial net discount rate (assumed investment return less assumed salary growth)
- Actuarial method – Entry age normal cost
Asset mix, at Dec. 31, 2015:
- 51% – Public equities
- 19% – Bonds and short-term fixed income
- 30% – Other
Annualized rates of return, to Dec 31, 2015:
- 20 years – 7.9%
- 10 years – 7.3%
- Five years – 9.6%