A “made in New Brunswick” solution, a first in North America, updates a pension system that was designed for 1980’s economic and demographic realities with a new one that avoids large, unfunded liabilities and better protects retirement benefits for future generations.
The new model, based on a Dutch model, was developed by a task force of experts appointed by the government of New Brunswick who then collaborated with union representatives. The mandate of the task force was to examine the long-term affordability and security of pensions in New Brunswick and take steps to improve them for the benefit of all members.
After an extensive analysis of reports, electronic submissions and stakeholder consultation, the task force came up the new model that offers an innovative way to address current issues as it is flexible in order to meet the needs of various pension plans.
“Under this model, employers and employees share the costs when the plan performs poorly and share the benefits when it does well,” explained Susan Rowland, an expert in the restructuring and funding of pension plans and chair of the task force. “One of the characteristics of this model is that it can be adapted to most public and private sector plans.”
Some of the features of this new model include no decrease to the benefit level currently in place for retirees; moving to conditional indexing with the goal of having it provided the vast majority of the time; moving toward plans based on enhanced career-average earnings; and changing targeted year of retirement from 60 to 65 but gradually implemented over a 40-year period. The model will also ensure that pensions will be secure for many years to come.
The model was tested thoroughly on many levels with many pension plans.“Tests showed that this solution was much more robust than the current plans in terms of dealing with economic downturns and would be able to maintain benefit levels in greater than 97.5 percent of possible economic scenarios,” said Rowland.
Key results showed that this new model:
- is safer and more secure, discouraging riskier investment practices as a means of recovering losses;
- has built-in flexibility to better absorb declines in the markets, and does not decrease benefit levels currently in place for active members when the plan is converted; and
- is likely to result in marginal increased contributions.
The new model is heavily focused on security and risk management and includes many strict requirements to achieve those goals, including an investment mix that is far less volatile than other models, adequate contribution rates, and firm rules to guide management of surpluses and deficits. “Therefore, the odds of base-benefit reductions are very low so that retired workers will not be harmed,” said Rowland.
The new model also focuses on addressing issues early before they become a large problem. “Our goal is to protect the present amount payable under the plan for future increases. When surpluses occur, they are to be distributed to members prudently and with an eye to the fund’s long-term stability,” Rowland explained.
The model has already been adopted by the New Brunswick Nurses Union, the New Brunswick Union, the Canadian Union of Public Employees Local 1252 (New Brunswick Council of Hospital Unions), the New Brunswick Pipe Trades, for specific plans, and the City of Saint John.
Interest has been generated from unions, other governments, pension administrators and employers throughout Canada.
The New Brunswick model attracted interest when the Council of the Federation – attended by the 13 provincial and territorial leaders – met in Halifax in late July 2012. At that time, New Brunswick Premier David Alward delivered a presentation on pension reform. The province of Newfoundland and Labrador expressed interest in reform and Prince Edward Island indicated it is studying what New Brunswick is doing.
New Brunswick also hosted a two-day National Summit in February 2013 to explore pension reform issues. The forum was designed to identify the leadership actions required from government, labour and the private sector to meet Canada’s pension challenges.
“We are very proud of our new model,” said Rowland. “We strongly believe that we have designed a model that can work for most public and private sector plans. We encourage other jurisdictions, unions and employers to review the model and see how they, too, might benefit from it.”