I recently attended an AUPE union meeting, with a friend of mine who is an AUPE member. In case you didn’t know, the AUPE is the Alberta Union of Public Employees, the largest union in Alberta and it represents 80,000** workers, mostly public employees (as the name would suggest).
At this union meeting, the union leaders talked about how the government is making changes that affect the ability of employees to strike, which is quite abhorrent, but I haven’t read the bill so I’ll get to that in a later post. What really set everyone off, though, was that the provincial government is planning to limit the amount it contributes to an employee’s pension. The pension contribution is currently a percentage of the person’s salary and is split between the employee and the employer (in this case, the provincial government). What this would do would limit the ability of the union to improve the health of the pension plan by increasing this percentage.
A lot of those who have retired were angry regarding the perception that their pensions might be in jeopardy and asked for solidarity. The union leaders tried to persuade us that the pension was in good fiscal shape and was sustainable and they had a video to prove it. I was all ears…
… Well, this video just showed a guy (who was actually at the meeting) talking about how the pension is sustainable. No facts, no figures. I decided to investigate for myself.
My friend’s pension plan is Public Service Pension Plan (PSPP). I jumped over there and started to investigate.
The pension was performing well before the market nose dived in 2008. See the following charts.
For much of the 21st century, assets have remained higher than obligations, but there is an extremely large deficit to overcome now. Meanwhile, the growth in assets minus the growth in obligations has only recently turned positive and there is no clear trend that it will continue to remain that way. You would at least want the red line (growth in assets minus growth in obligations) to average around zero, meaning your assets are growing as fast as your obligations. Since 2000, it has averaged -$181.9 million, a worrying trend.
Using the year 2000 as a base line, it is clear that obligations have grown much faster than assets, and continue to do so on a yearly basis. (see chart below)
PSPP has historically achieved 73%* of its funding from investment returns. It seems to me that those in the past have under-contributed to their pensions and are expecting those working to make up for the deficit. The old eat the young. If solidarity is desired, then it makes sense that those retired would see their pensions reduced (when their investments take a hit) as well as current employees seeing their contributions increase. After all, we are all in this together.
The PSPP needs 6.3%* in investment gains yearly to achieve their goal, which its master’s have achieved over the last 4 years but not over the last 8. I think they will be hard pressed to meet that target. This all assumes that their assessment of life expectancy and age of retirement is correct as well.
Historically there were 4:1 employees to every pensioner in this plan. Now the ratio is 1:1 That doesn’t sound very sustainable to me.
What are my friend’s options?
a) listen to the AUPE leaders and increase pension contributions and hope that a pension exists when he/she retires
b) quit and pull their money out which endangers the pension even more
c) save and invest and don’t rely on this pension
I am not advocating that defined benefit pensions should be abolished. I think that employers should honor the commitments made to their employees. However, it is clear to me that the AUPE is not being forthcoming and honest with its current working members, those who it purports to represent. Rather it appears that they are somewhat deluded by trying to save their own skin, which is not what people are giving them union dues for.
** AUPE website
***All data taken from PSPP 2012 annual report