OTTAWA – Treasury Board President Anita Anand is poised to table a report revealing a multi-billion-dollar surplus in the public-service pension plan at a time when the government is struggling to meet its deficit target and is facing financial pressure on all fronts.
The chief actuary’s report on the pension plan landed on Anand’s desk on Sept. 27. She has 30 sitting days to table it in Parliament, which could align with the timing of the yet-to-be-announced fall economic statement, when public service job cuts could be announced.
The country’s largest pension plan has been running a surplus for years, but sources say it has now reached a “non-permitted” size that requires the federal government to take a contribution holiday under the law.
The holiday could save the government $3.1 billion per year and give it several options in the hunt for spending cuts or revenue boosts as it tries to tame an expected $47-billion budget deficit for 2023-24, as reported by parliamentary budget officer Yves Giroux. The deficit for this fiscal year is expected to be slightly lower than last year’s but still above the Liberal’s $40-billion target.
“A (pension) surplus could be a significant, non-negligible, positive development for the deficit in the near term,” said Giroux.
Surplus soars beyond permitted levels
The public service has two pension plans, but the surplus at issue is in the post-2000 plan, which is invested in the markets. Like other defined-benefit plans, it built up a surplus thanks to strong market performance and rising interest rates. Under the Income Tax Act, surpluses are not allowed to exceed 25 per cent of liabilities.
And that’s where the government is today.
As of March 2023, the plan had a $35-billion surplus, with $1.5 billion considered “non-permitted” under these rules. Sources say union projections suggest this non-permitted surplus could now be 10 times larger.
Under the plan’s funding policy, the government is only obligated to chip away at the non-permitted part of the surplus, most likely through a contribution holiday. The rest of the surplus is supposed to remain in the plan as a cushion. Anand, however, does have the authority to override this policy.
The need to address the surplus comes as federal unions were told in early November that spending cuts could go beyond attrition and lead to layoffs after a decade-long hiring spree. Until then, the Liberals pledged to reduce staff without resorting to layoffs.
What to do with the public-service pension surplus that’s piling up?
The federal government plans to expand the “25-and-out” pension
The public service has faced intense scrutiny for unchecked growth and lagging productivity, with critics arguing that it has become too large for the quality of service it provides.
That’s led to much speculation about how the government could use its pension holiday and surplus. The government has several options, some more likely than others.
Reduce the deficit
One option is to leave the extra cash in government coffers to reduce the deficit.
The government paved the way for that move with an amendment passed in the budget bill, which now allows the Public Sector Pension Investment Board to transfer funds into the Consolidated Revenue Fund — the government’s central bank account for managing income and expenditures.
It seems this may also have been the preferred option of the management members on the advisory committee.
But it would not go without a fight as unions were already seeking to improve pension plans before the size of the surplus was known.
Sweeten departures
With job cuts coming, some speculate the government could hasten retirements and early departures with incentives.
“The unions may not want it, but you’ve got the pension surplus potentially available to waive pension penalties for early retirement. I think a lot of public servants would like it,” said Sahir Khan, the executive vice-president of the Institute of Fiscal Studies and Democracy at University of Ottawa.
“It doesn’t help in that there will be up-front costs for the package, but when you can shrink the size of the government, there will be ongoing fiscal benefits of having a lower payroll.”
Early-retirement incentives were a key feature of the Chrétien government’s deficit-cutting strategy in the 1990s. It spent about $3 billion on buyouts and early retirement packages, which helped eliminate 55,000 jobs during the historic downsizing. This significant reduction highlights how effectively $3 billion can be leveraged to reshape the public service.
“From a political perspective, it looks like a painless way to reduce the size of the public service, which most Canadians really think needs to happen,” said one senior financial bureaucrat.
Such incentives could appeal to public servants near retirement, perhaps unhappy with the return-to-office order or the prospect of a possible change in government. They are typically at peak-career salaries. Their departures would allow departments to bring in younger, tech-savvy recruits with lower salary expectations.
However, they also carry a risk of losing valuable and experienced employees. Also, employees who might otherwise leave could stay in hopes of securing a package, which would undermine efforts that rely on natural attrition to reduce headcounts.
Such incentives might not sit well with the broader public service, either, as all employees contribute equally to the plan.
Others argue the government would gain more political mileage from using the extra money to reduce the deficit, which could resonate more with the public than offering pension enrichment to a select group of public servants.
Improve pensions
Anand is under intense pressure from unions to share the surplus and improve pensions. Unions argue that since workers make half of the contributions, the surplus is deferred wages and should be partially shared with them.
The big ask, led by the Public Service Alliance of Canada, is for the government to reverse Harper-era pension reforms, which created a two-tier system for public servants: those who joined before 2013 can retire at 55 with 30 years of service, while those hired after 2013 must wait until age 60.
PSAC wants to go back to a single-tier pension with employees able to retire at age 55. It’s unclear how much that would cost, but it would need legislation, which wouldn’t get far with the gridlock bogging down Parliament these days.
Improving pensions could be a hard sell to Canadians who already believe public servants have better benefits than they do.
Similarly, Parliament’s dysfunction is delaying the legislative changes the government promised border services officers and hundreds of other public safety workers allowing them to retire with penalty-free pensions after 25 years of service.
In June, Anand promised the changes, known as “25 and out,” would be introduced in the fall. Her office is now saying it will be before Christmas.
The changes require amendments to the Public Service Superannuation Act and the Income Tax Act, as well as changes to regulations.
PSAC led the charge for “25 and out” for border officers, arguing the reform was affordable partly due to a mounting surplus in the public-service pension plan.
A contribution holiday for employees, too
Instead of sweetening pension or departure incentives, some public servants may prefer a contribution holiday for employees, which would amount to a boost to their paychecks.
The government, as employer, and public servants together contribute $6.2 billion annually to fund the pension plan. If the government stops making its half of the contributions, it could also give employees a break to the tune of $3.1 billion a year.
A contribution holiday would effectively amount to a 10-per-cent pay raise.
Anand’s many options will be informed by a pension-plan advisory committee with labour and management members who advise the minister on managing the plan. Anand has received its confidential report but is not obligated to accept recommendations.
But the debate over how to use the surplus is fraught, given the fiscal challenges, the looming election, and the expectation of a Conservative victory. Conservatives have long argued public-servant pensions are too generous and should be reined in. Public opinion adds another layer considering public servants have more generous benefits than most Canadians.
This article was produced with support from the Accenture Fellowship on the Future of the Public Service. Read more of Kathryn’s articles.
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