FREQUENTLY ASKED QUESTIONS (FAQs) ON LAPP/PSPP Labour Coalition on Pensions January 21, 2014

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1 What are the LAPP and PSPP? Pensions are deferred wages and they are a part of public sector workers agreement with the government. The LAPP and PSPP are defined benefit plans, meaning workers receive a set amount as pension income. Defined benefit pensions are better for retirees and better for the economy. About the Local Authorities Pension Plan (LAPP) 146,535 contributing members in ,137 retirees. Average pension is $14,500/year or $1,208/month. A defined benefit pension plan for front line workers in health care, cities and towns, colleges, school boards and other organizations and institutions. About the Public Sector Pension Plan (PSPP) 40,260 contributing members in ,181 retirees. Average pension is $13,000/year or $1,083/month. A defined benefit pension plan for front line provincial government workers. Are Alberta s public sector pensions in crisis? Alberta s public sector pensions are not in crisis. Even the government acknowledges this. All investors and all pension plans were hit hard by the 2008 financial crisis, but things have been improving since then. In fact, pensions like the LAPP and PSPP are in better shape now than any time in the last ten years. In 2012, the LAPP s assets grew by 16.3 per cent. The PSPP s assets grew by 12.6 per cent. Independent analysis shows both plans will be fully funded by What is the government planning to do to Alberta s public sector pensions? The government intends to change two key areas: The 85 factor: members whose age plus service equals 85 have been allowed to retire without pension reductions at 55 or older. This is especially important for front line workers who do physically demanding 1

2 work. By eliminating the 85 factor, the government will force these workers to keep working to the bitter end. Cost of Living Allowance: the Cost of Living Allowance, or COLA, adjusts pension benefits to keep up with increases in the cost of living. The government plans to remove COLA guarantees so pension incomes will not keep pace with the rising cost of living. What effect will the government s changes have? If the government goes through with its proposed changes to the LAPP and PSPP, members will have to work longer and pay more for benefits that are smaller and less secure. More alarming is that these changes could undermine Alberta s public sector pension plans to the point where they re no longer viable. Pensions work by new and active members pooling funds to invest in order to support retirees, so the biggest threat to the plans is employee and employer withdrawal. If the government goes through with these changes, there will be a disincentive for employers and employees to participate in the plans. The government says there s a $7.4 billion unfunded liability. Is this true? The government is misleading Albertans on the scale of the unfunded liability. As a participating employer, the government s combined share of the liability for the PSPP and LAPP is $2.43 billion, not $7.4 billion. The remaining liability is shared between the workers and other employers, like municipalities, colleges and universities. $2.43 billion is a lot of money, but some perspective is needed in this debate: the LAPP and PSPP have combined assets of more than $30 billion. The combined liability of these plans is less than 10 per cent of total assets. Although stakeholders other than the provincial government hold the majority of the liability, they ve been excluded from meaningful decisions on the future of our pension plans. The government says that Alberta s contribution rates are among the highest in Canada. Is this true? This is not true. For both employers and employees, Alberta s contribution rates are well below the national average of other public sector pension plans. The LAPP contribution rate for employees is 9.43 per cent significantly below the national average of per cent for comparable plans. 2

3 The Redford government claims we have an aging population, and the retiring baby boomers are going to cause a pension crisis. Is that true? Changing demographics have been factored into the sustainability studies conducted by independent pension experts. They still concluded the LAPP and PSPP are healthy and sustainable pension plans. The experts note that Alberta has the youngest working population in Canada. While it s true that many baby boomers will soon retire, we also have an under 30 demographic bubble. As the baby boomers retire, there will be a new generation of workers ready to participate in the economy. The LAPP has three workers for every single retiree, which is one of the most stable demographic ratios in Canada. The PSPP has two workers for every retiree, and is projected to remain healthy. As Alberta s baby boomers retire, as Generation X retires, as Generation Y retires, and eventually as the Millenials retire, the LAPP and PSPP are in good shape to enable each generation to enjoy a dignified retirement. If the Plans aren t in crisis, why is the government making these changes? The PSPP and LAPP are in good shape and getting better. We re not sure why the government wants to undermine pensions that support tens of thousands of retired Albertans (and more in the future), but indications are that this is about politics, rather than pensions themselves. It would be very disappointing, not to mention financially catastrophic to thousands of Albertans, if this was the case. The government says they need to make changes to my pension plan and my union says the changes aren t necessary. Why should I believe my union? Because your union exists to ensure you get treated fairly by your employer. Your union is there to stand up for you, your family, and a decent retirement for all Albertans. Politicians sometimes make decisions for political reasons, and we suspect that s what s happening here. Decisions about pensions are being made by people who are more concerned with an election in the next couple of years than they are with the long term consequences of those decisions. The Redford Conservatives are also playing pure politics with public sector pensions. They want to look like they are being tough on unions as the PCs want to shore up their right wing support in the face of growing support of the Wildrose Party. By contrast, your union only has one interest to defend: yours. 3

4 I would like more information about our pension plans. Where can I find it? A lengthy analysis of Alberta s pension plans can be found here. The author explains the impact of demographic changes, the aging population, and LAPP contribution rates in great detail. After a careful and objective analysis, he finds the government s claims to be grounded in politics rather than fact. The government says that the pensions of current retirees and longservice employees won t be affected. Is this true? The government s changes include hard caps on contribution rates. This change ties the hands of the pension boards if we have another period of economic instability, such as a recession. The first way the boards will address the problem is by reducing benefits for future retirees, but if that isn t enough they will be forced to reduce benefits for current retirees. Other governments in Canada most notably in New Brunswick are making similar changes. Doesn t it make sense for Alberta to follow suit? Alberta s pension plans are much healthier than plans in other provinces. There is no comparison between New Brunswick s pensions and Alberta s. New Brunswick s plans are less than 50 per cent funded and were poorly managed. By contrast, Alberta s plans made it out of the recession in decent shape and are on their way to being fully funded in just a few years. Who is recommending these changes? Nobody is recommending these changes to Alberta s pension plans. Nobody except the politicians. The LAPP and PSPP boards recommended against these changes. LAPP annual reports show there is no need for these changes. Independent actuaries have shown these changes are not necessary. The government has not produced any evidence to support their claims that these changes are needed. Alison Redford has so far refused to release their actuarial reports to the public. It s possible the Redford government is keeping their studies hidden because they show there is no pension crisis in Alberta. 4

5 The government says these changes will increase inter generational fairness. Is this true? The government s changes are unfair to young workers. Part of the government s proposed scheme is to reduce the benefits that today s workers will be able to access in the future. Young workers will be hurt by these changes far more than workers who have already retired or will retire soon. The government says it s taking decisive action. What s wrong with that? There s a big difference between negotiating and dictating. The LAPP and PSPP are sustainable, yet the government appears determined to push though changes that are not only unfair, but will have the perverse effect of undermining the plans. No other stakeholder in these pensions is proposing such radical and reckless changes: not the pension boards, not other employers, and certainly not the unions representing the workers. The provincial government is the only party pushing for these changes. And it seems they re willing to impose them using the power of the Legislature to do so. What is an unfunded liability? Unfunded liabilities are not debt. An unfunded liability is the difference between future pension payments and the present value of the pension plans. They re best estimates even the best pension fund managers cannot accurately predict the future. Like other investments, pensions were hit hard by the 2009 economic crisis. Since that time, the health of the plan has been steadily improving. Last year, the LAPP was 81 per cent funded and earned a $2.2 billion return on its investments almost an 11 per cent return. The PSPP was 76 per cent funded and earned $780 million in 2012 an 11 per cent return on investments. Independent analysis shows that both the LAPP and PSPP are entirely sustainable and will be fully funded without major cuts. What s a discount rate, and why is it important? The amount pension plans will benefit retirees in the future is not an exact science. Most members will work for several decades before they re ready to retire, so calculating the amount of benefit they ll receive is a best estimate based on several factors, such as the estimated future income for retirees and the future rate of inflation. 5

6 The discount rate is used to translate future pension benefits into a present day obligation used to compare to the pension s current assets. If the discount rate is set too low, then the pension might look like it s in worse shape than it really is because the value of future pension obligations will look like they outweigh present day assets. At 5.75 per cent, a case can be made that the LAPP discount rate is too low. Other public pension plans use higher discount rates. The PSPP uses 6.4 per cent. The Teachers Retirement Fund uses 7 per cent. What difference does this make? Plenty. Assumptions such as the discount rate can have a huge impact on the outlook of a pension. If the LAPP used a 7 per cent discount rate, the same as Alberta teachers pension, it would be 100 per cent funded. What kind of alternatives are there to the LAPP and PSPP? The LAPP and PSPP are good for workers and the economy because they are a definedbenefit pension plan. As a worker, you know what your retirement income will be. The other type of pension is a defined contribution plan usually RRSPs or some kind of private investment. Defined contribution plans are far more risky for retirees, because the only guarantee you have is your contributions and your employer s contributions. You have no guarantee of your income. Research shows people who receive definedcontribution pensions are far more likely to live below the poverty line and have to rely on social programs when they retire. What s the solution? The government s admitted there s no crisis when it comes to the LAPP and PSPP. That s a start, but now they have to act like there s no crisis. First and foremost, the government should treat workers and the unions representing them as equals and immediately bring in joint governance. This would allow members a voice on important issues facing the pensions. The government of British Columbia did this With the workers and government co operating, B.C. s public pensions are in great shape. The unions representing pension plan members have submitted proposals to strengthen the plans once joint governance is in place. 6