August 1999

Facts about the Federal Superannuation Plan surplus

With the tabling of Bill C-78 (Public Sector Pension Investment Board Act) in the House of Commons on April 15^th, 1999, a great deal of public debate has taken place on the question of who is entitled to the current "actuarial surplus" in the federal superannuation account. PSAC members have raised a number of questions and concerns about who is entitled to the surplus and what impact Bill C-78 will have on the surplus. This document provides answers to some of the questions raised about Bill C-78.

What is meant by an "actuarial surplus" in the Superannuation Account?

An "actuarial surplus" refers to a situation where at any one particular point in time, the accumulated assets of the superannuation account exceed the anticipated benefit payouts. The anticipated payouts are based on projections about such things as future interest rates, salary rates, mortality rates and employment terminations. An actuarial surplus is created when the calculated value of the assets of a pension fund (including the estimated growth in those assets) has been determined to be greater than the eventual payment of all benefit entitlements to plan stakeholders using established projections. These projections are generated by certified actuaries who specialise in the science of establishing probabilities of future events. In the case of the federal superannuation plans, the projections are the responsibility of the Chief Actuary of Canada who operates within the Office of the Superintendent of Financial Institutions.

How much is the current actuarial surplus in the Superannuation Account?

The actuarial surplus of the federal Superannuation Account is often referred to as an amount of $30-billion. In actual fact, this figure represents an estimate of the combined actuarial surpluses in the superannuation accounts maintained for federal public service workers, the Canadian Armed Forces and the Royal Canadian Mounted Police. Each of these groups is governed by separate superannuation acts and accounts. The amount of the actuarial surplus for each plan is as follows:

As illustrated, the current actuarial surplus for employees covered under the Public Service Superannuation Act (PSSA) amounts to $14.9 billion.

Why are there actuarial surpluses in the Superannuation Accounts?

The PSSA states that all employees are required to contribute 7.5 percent of salary minus the required contributions to the Canada/Quebec Pension Plans (except air traffic controllers and operational employees of Correctional Services Canada, who contribute more). Each year the federal government is required to credit the Public Service Superannuation Account with an amount sufficient to fund the benefits accrued by employees for the corresponding year. In the event of an actuarial deficit in the Public Service Superannuation Account, the federal government is required by law to contribute any additional amounts to eliminate this shortfall over a 15-year schedule.

Thus both employer and employee contributions to the Superannuation Account are fixed by legislation and continue even in the event of an actuarial surplus. In addition, the last several actuarial reports of the federal superannuation plan have contained a number of projections on increases in inflation, superannuation indexing and public service salaries which have proven to be inaccurate.

In many cases the projections exceeded reality. For example, the majority of federal superannuation participants were subject to a six year salary freeze as the result of wage restraint legislation. The wage freeze had not been part of the actuarial projections.

Finally, the latest actuarial report (as at March 31, 1996) uses projections beyond the year 2000 (e.g. annual inflation and pension indexing increases - 3 percent) which seem somewhat unrealistic given current economic and financial circumstances. The result of these actuarial differences is that the combined employer/employee contributions to the Superannuation Account are greater then what is necessary to fund the benefits which are accrued each year.

Former Treasury Board Minister Marcel Massé stated on several occasions that according to the terms of the Public Service Superannuation Act (PSSA) the federal government has been responsible for funding previous actuarial deficits in the federal superannuation accounts and therefore, is entitled to all the actuarial surplus. Is this true?

The PSSA states that the federal government is responsible for funding any actuarial deficits which may emerge in the federal Superannuation Account. It is also true that in the past, actuarial shortfalls have developed in the Superannuation Account and mechanisms have been implemented to address these situations. These facts are a matter of public record.

However, what the federal government fails to explain when presenting this position are the underlying factors which led to the development of the actuarial shortfalls. It is the PSAC’s position that actuarial shortfalls which have developed in the past are primarily due to the federal government’s own mismanagement of the Superannuation Account.

For example, in the 1980s the Auditor General of Canada released a series of reports highly critical of the financial and accounting practices associated with the various federal superannuation accounts. Among the Auditor General’s recommendations was a proposal to have the superannuation funds for federal employees gradually invested in marketable securities in order to provide a sound financial basis for future pension benefits. The PSAC shared this position and also put forward proposals for joint management of the federal superannuation plan. If the federal government had followed the Auditor General’s advice at the time there would have been no actuarial shortfalls to fund.

There is also significant evidence that the requirements to fund previous actuarial shortfalls in the federal superannuation accounts had virtually no impact on the actual finances of the federal government. Prior to the 1990s, the various federal superannuation acts included provisions which allowed for scheduled payments to eliminate previous actuarial deficits to be taken from any "excess interest" earnings generated in the respective superannuation accounts. The generation of "excess interest" was quite common given the traditional conservative approach utilised by the Chief Actuary of Canada in conducting the periodic evaluations of the superannuation accounts. As a result, the government often met its responsibility to fund the actuarial liabilities by withdrawing from "excess interest" earnings which were generated from contributions made by both the employer and employees.

It is also important to note that as both employer and legislator, the federal government occupies a rather unique position in having to deal with any "risks" associated with the Superannuation Account. For example, in 1982 Bill C-133 (Supplementary Retirement Benefits Act) was introduced into Parliament and received Royal Assent in early 1983. This legislation put a cap on the indexation increases on superannuation benefits of 6.5 percent for the year 1983 and 5.5 percent for 1984. Given the inflation rates at the time, this unilateral action of the federal government resulted in a 7 percent loss in total benefits to superannuation recipients. In other words, the government is able to shift the risk through legislation. Nothing prevents the federal government from introducing similar measures in the future and therefore the notion of any "risk" associated with the operations of the Superannuation Account is misleading.

What is the official position of the PSAC on the surplus entitlement issue?

The position of the PSAC, and the labour movement in general for that matter, is that employer and employee contributions to a pension plan constitute part of an employee’s overall compensation package. Often in the collective bargaining process there is some element of trade-off between what portion of employee compensation will consist of immediate salary and what portion will be "deferred wages" (i.e. employer/employee contributions required to provide for future retirement income). A union negotiating team may modify demands for immediate wage increases in order to provide for increased contributions to a pension plan. This position was even recognised by Treasury Board in a public document entitled "Basic Facts About Pensions in the Public Service of Canada" which stated,

From this perspective, the PSAC is confident a realistic argument could be presented that the existing actuarial surplus in the superannuation account belongs entirely to employees. However, in the context of pursuing joint management of the public service superannuation plan and in recognition of the increasing contribution share assumed by the employer as a result of C/QPP integration, the PSAC’s position is that a negotiated settlement with a proportionate sharing of the actuarial surplus is the only equitable solution to this situation. This was the position advocated by the PSAC, as well as other federal public service bargaining agents, throughout the consultation process in 1998 and continues to be the union’s position today.

What impact does Bill C-78 have on the current actuarial surpluses in the various superannuation accounts?

With respect to the existing actuarial surpluses in each of the superannuation accounts, Bill C-78 contains specific provisions that these amounts are to be reduced over a period of 15 years. In other words, these amounts will be returned to the general revenue fund of the federal government.

Actuarial surpluses which may arise in the future in the new Public Service Pension Fund will be handled in a similar manner. The legislation also contains a new feature which will permit employer/employee contribution reductions should the actuarial surplus exceed certain amounts. However, it is important to understand that any decision with respect to how the employer/employee contribution reductions are to be applied will be at the complete discretion of the federal government - the employer.

What is the current status of Bill C-78?

On June 17, 1999, the Senate of Canada approved a motion to delay third and final reading of Bill C-78. This rather unprecedented action was in response to a report prepared by the Standing Senate Committee on Banking, Trade and Commerce which raised several major concerns with respect to the legislation. The Senate motion of deferral also instructed the Senate Banking Committee to oversee further consultations between the government and the union involved in the various federal superannuation plans and to report back to the Senate no later than September 7^th, 1999. Unfortunately, despite the efforts of the PSAC, there have been no meetings held or scheduled to be held between the government and the affected unions.

How is PSAC dealing with this issue now and after September 7^th?

Immediately following the Senate vote to delay passage of Bill C-78, PSAC National President Daryl Bean wrote to then Treasury Board President Marcel Massé requesting that the Consultative Committee on Public Service Pension Reform be reconvened in order to address all outstanding issues between the parties. Similar correspondence was sent to Lucienne Robillard on August 3^rd, 1999, the day the Prime Minister announced Ms. Robillard would be replacing Marcel Massé as President of the Treasury Board. As mentioned previously, there have been no further developments to date and no meetings are scheduled for the immediate future.

In the interim, the PSAC, in conjunction with other federal public service bargaining agents and retiree organisations, has launched an intensive lobbying campaign on members of the Senate of Canada over the issue of Bill C-78. All PSAC members are encouraged to contact the Senators representing their province or territory and express their concerns about the pension reform legislation. Particular emphasis should be placed on the federal government’s intention to unilaterally confiscate the $30 billion actuarial surplus in the superannuation accounts.

If Bill C-78 does receive Royal Assent without the surplus issue being resolved fairly, the PSAC with other federal public service bargaining agents and retiree groups may pursue a Court challenge. In fact, the PSAC is consulting with a law firm now with a view to a possible Court challenge on the issue of the surplus entitlement. This firm has been involved in similar pension surplus disputes including the successful representation of employees of Dominion Stores against owner Conrad Black in the 1980’s and more recently with a number of retired NHL players against Alan Eagleson and former NHL team owners.

Early indications are that there are legal precedents which require some sharing of the existing actuarial surplus with plan participants. This opinion is further reinforced by the past and current practices of major public and private sector employers to provide for an appropriate division of pension surpluses amongst all plan stakeholders. The most recent example of this is Central Mortgage and Housing Corporation, a federal Crown Corporation, where an agreement was reached to share an estimated $200 million pension surplus to the mutual satisfaction of all parties to the pension plan.

Finally, the PSAC has identified pensions as one of the four priority issues which will be pursued during the forthcoming round of collective bargaining with Treasury Board. 

Produced by the Public Service Alliance of Canada 08/99