UNA fighting for Local Authorities Pension Plan sustainability

Members of Alberta’s Local Authorities Pension Plan are currently being exposed to debate about the sustainability of the plan that is being driven by the provincial government.

Unfortunately, the government’s strategy for attaining LAPP sustainability is to reduce pension benefits.

The government’s biggest targets for reductions are the early retirement option, the 85 factor and cost of living adjustments for retirees, commonly known as the COLA.

The government says the plan’s future funding must be addressed, and the province has directed the LAPP Board, which includes representation from UNA, to make recommendations to control LAPP costs.

The reality is that the LAPP has $20 billion in assets and current forecasts suggest it will need about $24 billion to keep its pension promises. In other words, the LAPP is about 80 per cent funded. This predicted shortfall is the foundation of recent increases in the contribution rates of employees and employers.

So this is a challenge – but it is not a crisis. 

An ad hoc committee of union and employer LAPP stakeholders has been discussing design and cost issues.

Unions have taken the position that LAPP benefits reductions should not be considered without meaningful discussions about the governance of the plan.

In the December 2012 edition of LAPP News, the Board voiced its concern about governance: "... there are flaws in the LAPP Governance Structure that have yet to be addressed. The primary one is that there is no official place at the table for plans sponsors (employers and employees). Sponsors pay the freight and they share the risk, so they should have the authority to make decisions affecting the future of the Plan."

 

History

Unions pushed for the first LAPP sustainability discussions in 1991. At that time, the Crown held the plan’s assets and the LAPP was funded only 78 per cent.

Concerned that the government controlled LAPP funds, unions pressed for a plan that would be jointly governed by employees and employers.

An agreement was reached that employees, employers and the government would pay a combined total of 1.5 per cent higher contributions to cover the shortfall for 40 years, and that once the LAPP was fully funded the government would no longer be accountable for LAPP funding or future shortfalls.

The agreement also included the following provisions:

-       Assets would be invested solely for the benefit of plan members

-       There would be a new Board with equal representation from employers and employees

-       The government would facilitate an independently trusteed plan by December 1996

-       Cost of living increases would be set at 60 per cent of the increase in the Alberta CPI

-       There would be a 3-per-cent reduction factor for early retirements

The unions endorsed this agreement because the government agreed to facilitate the transition of the LAPP from its control to that of employers and employees. A sum of $4.3 billion was transferred in 1993 from the province’s Pension Fund to the LAPP Fund.

 

Importance of Governance

In the 1990s, many public sector pension plans across Canada moved to a system of employee and employer governance models.  

LAPP appeared to be an early leader in pension plan governance models through the deal reached with the finance minister, Dick Johnston. Since then, however, a succession of 11 finance ministers has maintained control of LAPP through their position as the sole trustee of plan.

This means the LAPP Board has significant accountability but little authority. The minister delegates investment and administration responsibilities to Alberta Investment Management Corporation (AIMCO) and Alberta Pension Services (APS). Even though LAPP is the largest customer of both organizations, it has no ability to give either organization direction. Both AIMCO and APS report directly to the minister of finance.

The larger problem with LAPP governance is political interference in plan functioning and design. The current sustainability discussion is a matter that employees and employers in LAPP should be discussing without interference from government.

There are many examples of public sector plans that are governed by employers and employees. 

For example, the B.C. Public Sector Pension Plan became independent of its provincial government in 2001. It currently has 107,000 members and was 98 per cent funded by last year. Its administrative costs were 0.07 per cent of assets, and investment costs were 0.2 per cent of assets. All these figures are available on line.

By contrast, while, LAPP was 111 per cent funded in 2000, it now has 220,000 members and is currently 80 per cent funded. Administration costs are 0.14 per cent of assets and investment costs are 0.3 per cent of assets.   

There is no guarantee of better performance by increasing the control of employer and employees in their pension plan.  What is assured is that the people paying the bill will have more control about how the assets of plan members are invested and spent.

 

Sustainability

Everybody wants their pension plan to be sustainable.

For many members, their relationship with LAPP through work and retirement could easily surpass 50 years.

What shouldn't happen is a manufactured crisis with employers and unions being stampeded into accepting preordained solutions to a “problem” that may not even exist.

Should there be changes to the LAPP? Perhaps. Unions will again present their views on better pension plan governance.

But the fundamental issue is that employees and employers have already paid millions of dollars for the right to have control of the administration and investments of the LAPP.

Until the plan governance issue is substantially resolved, members can expect benefit reduction overtures on an ongoing basis as governments try to reduce costs and obligations . 

The commitment to shared governance that resulted in higher contributions  for 20 years has never been fulfilled by the Alberta government.

The union position remains that a decision on plan design changes may only be made if greater control of the LAPP is given to the people who have already paid for it.

The sustainability issue will continue as long as the Alberta government pursues a cost-cutting agenda. Be prepared to be active to support of your pension!

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