MORE WORK NEEDED TO STABILIZE CITY PENSION FUND
BY HEATHER MCLAUGHLIN
03 JULY 2012
The new chairman of the City of Fredericton’s
superannuation board says more measures will have to be put into place to
stabilize the pension account and continue to diminish its unfunded liability.
Coun. Mike O’Brien was appointed to chair the board at
its June meeting.
“Even though we’ve put ‘stop gap’ measures in place to
address the current situation, we will be working towards a long-term
sustainable pension plan strategy for not only current employees but for the next
generation to come. We realize pensions are important to employees and want to
make sure we have a reasonable long-term sustainable plan that is affordable,
can withstand significant market fluctuations,” O’Brien said.
Fredericton’s pension fund shortfall was largely
created by the 2008 financial market downturn which created a $37.5 million
deficit.
Negotiations and discussions with employees spanned
two years, and changes to the plan, to address the immediate short term
challenges, were introduced in 2011. Those changes included hikes to employee
and employer contributions coupled with benefit reductions to claw back the
deficit over 15 years, O’Brien said.
Both the city and its workers agreed to pay an extra
0.9 per cent in contributions. The definition of pensionable earnings was
altered to exclude overtime earnings. The indexation of the pension — which
provides for annual inflationary hikes in pensions — was reduced to two-thirds
of the change in the annual consumer price index.
“The good news is that the $37.5 million deficit the
city had to address has decreased to $31.6 million in 2011,” O’Brien said.
“The changes made to the pension plan are working as
planned for the short-term, although there are challenges ahead. The plan is
not out of the woods,” he said.
Over the years lower interest rates mean lower returns
on investment and increased liability. An aging work force where fewer
employees are paying into the pension plan compared to the number of retirees
drawing benefits is going to mean less money coming into the plan compared with
the dollars flowing out.
“People are living longer, therefore the pension plan
is paying retirees for a longer period of time,” O’Brien said.
“We will start to see the impact of these challenges,
especially the low interest rates, impacting the pension plan most likely for
the 2012 valuation of the plan. This means in addition to the deficit that we
just put a plan in place to address, we will need to start planning to make
further changes in 2013,” he said.
For the city’s superannuation board, creating a
long-term sustainable plan for the pension account is going to have to take
place, O’Brien said.
“All stakeholders will be engaged along the way. It is
my hope that any new short term measures would be part of the upcoming 2013 or
2014 budget discussions, and that a new long-term sustainable strategy will be
formulated and implemented soon after,” O’Brien said.
Recently city council took another step to limit city
and employee contributions in 2012 and in future years for those employees who
are unfairly contributing earnings to the fund that they can never draw out.
City council approved the amendment to the Fredericton
Superannuation Fund bylaw at a recent council meeting.
Under the federal Income Tax Act, there is a cap on
the amount of pension funds a person can receive.
“Employees earning above the Income Tax Act pension
cap are making contributions to the plan on the portion of their earnings for
which they cannot receive a pension. The (superannuation) board recommended
that council address this fairness issue by amending the plan bylaw,” says the
report handed to city councillors on the bylaw amendment.
“This means that both the city and employee pension
contributions in 2012 and future years will be capped at the earnings producing
the Income Tax Act pension limit in that year,” the report stated.
The change doesn’t impact the amount of pension that
plan members get, only the contributions over and above the maximum pension
identified under the federal pension law.
Council also switched out a member of the Fredericton
superannuation board. Coun. Dan Keenan will replace Coun. David Kelly as a
member.
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