It's almost laughable to hear representatives of both the Alberta government and the Alberta Teachers' Association (ATA) talk about their recent agreement on the unfunded liability in the teachers' pension plan as a "long−term solution."

In truth, it is anything but.

The problem with the pension plan is not merely that both the government and teachers under−contributed to the pension fund for decades (which they did), or that the government withdrew money from the fund (which they did) or that teacher retirement benefits were increased without teachers paying more (which was done).
These actions merely heaped trouble on an already problematic pension scheme.

Moreover, whether teachers and taxpayers or taxpayers alone pay off the unfunded liability, it's merely treating the symptoms rather than the disease. (The new agreement says nothing of paying off the unfunded liability, just that the Alberta government will take over the teachers' portion of the payments).

The disease is that this is a defined−benefit pension plan, much like the Canadian Pension Plan (CPP), most government−employee schemes and the ill−fated retirement plan for General Motors workers.

Defined−benefit pension plans (which guarantee a defined level of payout and then work backwards to figure out how much needs to be contributed) have been rejected by the private sector as being too costly and unpredictable.

Private sector pension plans are now almost exclusively defined−contribution, (which like RRSPs define a contribution level, and then work to earn a maximum return for retirement). In fact, 82.5 per cent of all defined−contribution pension plans in Canada are held by private sector employees.

Like all defined−benefit pension plans, the teachers' pension plan and the current level of the pre−1992 unfunded liability (now $6.6−billion −− up $200 million since last year) is calculated based on long−term assumptions for rate of return, life expectancy of teachers, inflation and the population growth rate.

If these assumptions are off even a hair, it can create a new deficit (read: unfunded liability). In fact, if the retirement fund earns a rate of return only 0.5 per cent less than expected (6.75 per cent rather than 7.25 per cent) it will increase the pre−1992 unfunded liability by $330 million, and the post−1992 liability by $430
million.

So, even if the Stelmach government cuts a cheque tomorrow for the full $6.6−billion, it doesn't mean the unfunded liability is dead. Get a couple of assumptions wrong and taxpayers will be back on the hook to pay off a new debt.

If the Stelmach government were serious about finding a real long−term solution to the teachers' pension plan, it should have been figuring out how to move into a new, stable, defined−contribution pension plan. Moreover, a new defined−contribution pension plan would have offered a guarantee to taxpayers and teachers alike that their contributions wouldn't surprisingly increase because of faulty assumptions.

The government could have followed the lead of many companies that have closed their old defined−benefit pension plans to new entry and created a defined−contribution plan for new employees. Or, they could put the full $6.6 billion into the fund, and then converted the pension plan to defined−contribution, by creating individual RRSP−style accounts for each employee.

According to the Center for Retirement Research at Boston College, since 1981 there has been an unquestionable shift in the private sector away from defined defined−contribution pension plans.

The centre also points out that it's not only companies whose pension plans are on the verge of bankruptcy that are converting, but more recently, healthy companies are also pro−actively converting their plans to ensure continued health and to head−off "market risk, longevity risk and regulatory risk."
Blue−chip companies such as IBM, Coca−Cola and Sears have all converted their pension plans to ensure the old pension plan wouldn't cripple their finances and offer up surprise unfunded liabilities in the future.

Even the Saskatchewan government under NDP premier Allan Blakeney converted most of its public sector pension plans from defined−benefit to defined−contribution back in 1977.

This was largely done in response to unpredictable and growing unfunded liabilities.

The Stelmach government should take a cue from the private sector and from the NDP in Saskatchewan, and convert the teachers' defined−benefit pension plan. Until that is done, there is no long−term solution and taxpayers will be feeling the symptoms of this disease for years to come.