On 20 November 2013, New Brunswick’s (NB) highly debated pension reform bill reached second reading and the shared-risk pension model, if legislated, will be the first of its kind. The proposal is not only gaining attention from those affected, but also from other governments, provincially and internationally.
NB is not the only jurisdiction facing the reality that defined-benefit pensions are unsustainable in today’s context. Market uncertainty, resulting in low investment returns, and increased life expectancy leaves too large a gap between contributions and present demands. As a result, these factors have influenced various pension reforms around the world in areas with deepening pension fund deficits.
Saskatchewan, for instance, shifted from a defined-benefit pension system to a defined-contribution fund and Nova Scotia (NS) has set an indexing rate of 1.25% until 2016, after which, it will be set for the next five year cycle depending on the funding available at the end of 2014.
NB’s current model, known as the Public Service Superannuation Act (PSSA), is unable to deliver on its promise to public sector retirees without further incurring deficits. Current contributions, combined with low interest rates, are insufficient for providing the guaranteed base pension and cost-of-living adjustments to all retirees. Furthermore, allowing the debt to accumulate creates the risk of government default and pension collapse.
The government and taxpayers, therefore, bear the weight of a pension fund that has not yet been adapted to changing circumstances.
NB’s shared-risk pension model, which the government has been developing since 2010, spreads the risk, responsibility, and reward of pension investments between employers, employees, and the government. In addition, the government intends to administer pensions for current retirees and avoid any increases in premiums paid, while also stabilizing provincial finances.
To meet these goals, the province is increasing contributions, extending the retirement age, and conditioning inflation adjustment against the level of available funding. Essentially, the shared-risk pension model is an attempt to merge defined-benefit and defined-contribution pension models to provide greater financial security in the face of economic uncertainty.
The New Brunswick Pension Coalition (NBPC), with support from provincial unions, continues to criticize several aspects of the proposed pension reform bill. Furthermore, the proposal is sparking deliberation outside of the province. As a result, implementing a long-term solution could bolster the province’s reputation and serve as a model for other governments interested in reform.
Moving to a shared-risk pension model is a responsible step for governments that are currently facing pension deficits. Unlike previous pension amendments, the design of the shared-risk pension model adapts the province’s fund to economic realities. NB is, therefore, in a position to influence a succession of reforms across Canada. In addition, the proposed reforms–whatever their outcome–provides a far-reaching lesson for other governments. The province’s proposal to ditch an outdated model and adapt to a changing economic landscape demonstrates the type of innovation necessary for being a leader in long-term pension reform.
Rachel Lowe is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute