Audit at a Glance—Chapter 1—Public Sector Pension Plans

Audit at a Glance

Chapter 1—Public Sector Pension Plans

What we examined (see Focus of the audit)

The audit focused on the three main public sector pension plans (public service, Canadian Forces, and RCMP plans). The audit examined whether the Treasury Board of Canada Secretariat, the RCMP, National Defence, and the Department of Finance Canada, in keeping with their respective responsibilities, considered the relevant information, analyses, and scenarios that could affect the plans’ costs and thereby impact their sustainability. It also examined whether these entities carried out selected key aspects of their governance and management responsibilities with regard to the pension plans.

What we found

The Secretariat, the RCMP, and National Defence have carried out their responsibilities (see paragraphs 1.16-1.24)

This finding is important because according to the Public Service Superannuation Act, the Canadian Forces Superannuation Act, and the Royal Canadian Mounted Police Superannuation Act, the President of the Treasury Board, the Minister of National Defence, and the Minister of Public Safety are responsible for the overall management of the three pension plans the audit focused on.

Risks to the financial position of the government could be significant (see paragraphs 1.25-1.34)

This observation is important because over the last three years, pension funds experienced funding deficits totalling $6.5 billion. Special payments were required to cover the gap. For 2013, special payments totalled $741 million. Over the last two years, these payments totalled approximately $1 billion. This disbursement does not affect the government’s financial results. Factors such as prolonged low interest rates, lower than expected returns on assets, and increasing longevity could have a significant impact on pension liabilities and on the financial position of the government.

The legislative framework disperses responsibilities among a number of entities (see paragraphs 1.35-1.39)

This finding is important because sound governance practices would require that the sponsor, in collaboration with the plan administrators, clearly describe and document the roles, responsibilities, and accountability of participants in the pension plan governance process. This is even more important given the shared responsibilities among various organizations and the plan sponsor.

The current governance framework has not assigned responsibilities for assessing the sustainability of the plans (see paragraphs 1.40-1.46)

This finding is important because the government has a statutory obligation to pay pensioners and is fully responsible for any funding deficit. In this context, it would be reasonable to expect that the plans be designed to ensure that they are sustainable and affordable.

Recommendation. To support the plan sponsor—represented by the President of the Treasury Board—the Treasury Board of Canada Secretariat, with the collaboration of the RCMP and National Defence, should assess periodically the pension plans’ sustainability. If deemed appropriate, the entities should recommend changes to plan designs so that they are up to date, affordable, and fair to current and future generations.

The governance framework does not include a funding policy (see paragraphs 1.47-1.54)

This finding is important because a funding policy defines the funding objectives and guidelines of a pension plan. The Public Sector Investment Board has assumed that the funding risks required to meet the rate of return on assets set by the actuary are acceptable to the pension plans’ sponsor. Funding decisions related to the public sector pension plans could have an impact on the government’s budgetary framework and on the employers, employees, other beneficiaries, and taxpayers.

Recommendation. To support the plan sponsor—represented by the President of the Treasury Board—the Treasury Board of Canada Secretariat, with the collaboration of the RCMP and National Defence as well as other supporting entities, should finalize on a timely basis a funding policy for all three plans. The entities should implement the policy to better manage the financial risks and to strengthen the governance framework of the public sector pension plans.

The Department of Finance Canada monitors the budgetary impact of the pension plans (see paragraphs 1.55-1.56)

This finding is important because information and analysis provided by the Department was used to guide policy choices.

Information on public sector pension plan liabilities is not user-friendly (see paragraphs 1.57-1.65)

This finding is important because clear and complete information on the pension plans and good reporting on the budgetary impact of government liabilities is essential to allow for better transparency and accountability.

Recommendation. The Treasury Board of Canada Secretariat, with the collaboration of the RCMP and National Defence, should prepare a proposal for a consolidated report with clear and understandable information on the public sector pension plans for consideration by the President of the Treasury Board for public and periodic reporting. This report should include the total size of assets and liabilities, a description of the methodology and assumptions used in actuarial valuations, information on the sustainability of the plans, as well as the potential impact on public finances.

The plan sponsor’s governance framework does not adhere to good practices (see paragraphs 1.66-1.72)

This finding is important because without strengthened governance practices that better address plan management, there is a risk that not all aspects related to the appropriateness of the design and funding are adequately considered in various decisions. Inadequate governance could translate into excessive costs and risks for current and future taxpayers.

Recommendation. To support the plan sponsor—represented by the President of the Treasury Board—the Treasury Board of Canada Secretariat, with the collaboration of the RCMP and National Defence, should review governance practices so that they are aligned with current and future circumstances. Recommendations regarding good governance principles should be presented to the plan sponsor for consideration. The Secretariat should also assume a stewardship role that is more proactive in managing the pension plans.

The Department of Finance Canada has not concluded on the merit of funding the pre-2000 pension obligations (see paragraphs 1.73-1.81)

This finding is important because funding the pre-2000 pension obligations could result in a number of significant benefits. However, the government needs to carefully assess the associated risks, such as determining the appropriate size of the amount to be funded and the potential impact of lower return on assets relative to borrowing costs.

Recommendation. The Department of Finance Canada, in consultation with the Treasury Board of Canada Secretariat, should conclude its assessment on the costs and benefits of funding the pre-2000 pension obligations and present its recommendations to the plan sponsor for consideration.

Response

The audited entities agreed with our recommendations, and have responded (see List of recommendations).

Why this audit is important

Public sector plans have a large impact on the government’s financial position, in particular on the public debt. In addition to the employer contributions, taxpayers contribute to the plans when there is a funding deficit. Because the plans are also financed from investment earnings, low investment returns can lead to unforeseen charges that can also have a negative impact on the budgetary balance. It is important that the pension plans be designed in a way that protects employees and taxpayers, and that is fair to current and future generations.

Details of the audit

For more information, please click here.