OTTAWA – A new C.D. Howe Institute report suggests that changes to federal public pension plans still haven’t gone far enough to bring overall employee compensation in line with the private sector.
It says the value of the retirement benefits for federal employees causes Ottawa to underprice the total compensation it pays by about $4 billion annually.
The report by pension expert Malcolm Hamilton says the government hasn’t yet achieved its goal of bringing what it pays its employees in line with what similarly qualified workers earn in the private sector.
The report compares what is called “fair value” in compensation and finds that the guaranteed pension benefits paid out to retired public servants put them in a class of their own.
The report’s author says richer public service pensions could have been justified by generally lower salaries, but that is no longer the case.
Last year, the government enacted changes to increase employee pension contributions so they equal to that of the employer — a so-called 50-50 cost sharing model— an raised the minimum retirement age for new employees.
“Bringing public sector pension contributions more in line with the private sector is the right thing to do,” Treasury Board President Tony Clement said at the time.
While public service unions railed against the changes, Hamilton says the government has not gone nearly far enough if it really wants to close the gap between the public and private sector in terms of total compensation, which includes pensions.
In fact, the former partner of the Mercer pension consulting firm, says the government has underpriced the true value of public service pensions, causing it to seriously underestimate the cost of the plans and the total compensation of its employees.
The gap between public and private pensions plans is greatest among senior bureaucrats, the report says, because of their ability to enrich already generous plans offered lower rungs of the public service.
“Steady pay increases (since 2006) and rising pension costs mean that federal employees are probably significantly overpaid by now,” he says.
“And while salaries for senior-level mandarins may still lag those in the private sector, they have some extraordinary pension benefits.”
Hamilton says at the heart of the miscalculation is that the government essentially guarantees a 4.1 per cent real rate of return on retirement savings.
That was an acceptable level in the 1980s and 1990s when interest rates were considerably higher — a fairer guaranteed real rate of return today is more like one per cent.
And the risks are all assumed by the government, or by extension taxpayers, because the benefits are guaranteed regardless what happens in the economy or markets.
That has caused Ottawa to seriously underestimate its exposure — since public pension plans are defined benefits and guaranteed — but also to underestimate the fair value of the compensation it is paying its employees.
According to the report, total compensation to public employees is likely $4 billion annually greater than the $24 billion the government estimates, including $4 billion in pension contributions.