A wave of baby boomers is approaching retirement, and these people are relying on their pension income to see them comfortably through old age. Unfortunately, many plans — especially provincial government plans — will not be able to meet these demands. Indeed, provincial pension plans in Canada are groaning under the weight of massive unfunded liabilities.

The largest debt is borne by Quebec, which is grappling with a $52-billion unfunded liability. Other provinces are furiously treading water. In Newfoundland and Labrador, one provincial plan alone is in the red for more than $2 billion, while the four provincial plans in British Columbia collectively have unfunded liabilities of about the same amount. New Brunswick, by comparison, needs only $30.2 million to offset its unfunded pension liability, down from $157 million a year ago.

The impact of this debt affects not only retirees counting on a paycheque now but, even more significant, younger workers. The latter will have to pay dearly to ensure their retired colleagues get what is owed to them. And the youngsters fear that if current trends continue, there may not be enough for their own retirement.

“You’re putting the onus on future generations,” says Niels Veldhuis, a senior economist with the Fraser Institute in Vancouver.

However, he notes, “There has been a move toward fully funding public-sector pension plans.”

Ontario has made the most progress. Its unfunded liability of more than $600 million is “a sizable, although manageable, amount,” wrote Donald Weiss, president & CEO of the Ontario Pension Board, in the OPB’s 2005 annual report. This liability is considered “manageable” when put in context: Ontario’s Public Service Pension Plan has more than $14 billion in as-sets, 33,500 active members, 37,275 pensioners and 4,600 deferred members.

Size is just one reason why $600 million is manageable. The other is that the OPB has taken action to wipe out the unfunded liability. It is making major changes on three fronts: investment, management and education. The investment objectives in place include seeking incremental investment returns; reviewing strategic asset allocation and investment in non-traditional avenues such as real estate, private debt and private equity; and fortifying the risk-management program.

Other provinces are bringing in legislative and administrative changes to fund their pension plans more fully, but it’s slow going. Debbie MacKenzie, director of public affairs with Communications Services Manitoba, notes: “The government has been addressing pension liabilities for seven years.”

Until 2001, no provision had been made to fund current or past obligations of the Manitoba government to the Civil Service Superannuation Fund, which has an unfunded liability of more than $1.7 billion. Until 2001, the reserves in this fund represented only the employees’ obligation toward total pension liability. That has changed.

“One of our first tasks after coming to office in 1999 was to develop a comprehensive plan to address Manitoba’s pension liability, which was allowed to grow unfunded for 40 years,” Greg Selinger, Manitoba’s finance minister, said in his budget speech for the current fiscal year.

Selinger’s plan called for a $110-million payment toward general-purpose debt and pension liabilities last year, bringing Manitoba’s contribution to paying down the unfunded liability to $704 million over the past seven years.

Newfoundland and Labrador also has been paying down its pension plan debt. Last year, it took advantage of a windfall from Ottawa to reduce its unfunded liability.

It used $1.95 billion of the proceeds from offshore oil and gas royalties under the Atlantic Accord agreement to reduce the Teachers’ Pension Plan’s $3.9 billion in unfunded pension liability.

It’s a start, but more has to be done, says John Noseworthy, the province’s auditor general, who highlights the unfunded pension liability in his most recent report. “Although interest costs should decrease with reduction of overall unfunded pension liability,” he says, “addressing the liability should remain a priority.”

Money isn’t the only option. In Nova Scotia, changes were made to solvency requirements under the Pension Benefits Act to help municipalities control the growth of contribution requirements.

“Some plans are very old. A significant portion of their liability is related to pensioners who no longer make contributions,” says Nancy MacNeill Smith, Nova Scotia’s superintendent of pensions.

Previously, solvency deficiencies in these plans had to be fully funded within five years. Under the rule change, the plans will have five years to achieve 85% solvency.

@page_break@Such measures may not be enough. Unless significant changes are made, provincial plans have two ways to meet increased demand, says John Williamson, director of the Canadian Taxpayers Federation in Ottawa: increase contributions or scale back benefits.

That so many provincial plans are in dire straits does not imply mismanagement, says Veldhuis. Rather, “it’s how they were set up.” Most are pay-as-you-go plans, which means benefits are paid from workers’ contributions and taxes. This no longer works with an aging population.

In the 1960s, the workforce was flooded with young workers, pension plans were flush and provinces were in a solid financial position. But the boomers have aged: on Jan. 1 of this year, the oldest turned 60; another boomer will turn 60 every 10 seconds for the next 10 years.

The pay-as-you-go plan was not designed for this kind of weighted contribution. Veldhuis would like the provinces to start individual pension accounts, such as Chile has. Individuals establish and manage their plans with their own money under an advisor and established investment guidelines.

Such a radical departure from the defined-benefit plans in most provinces is improbable any time soon. These plans pay out pensions based on a formula that takes into account salary, years of service and age at retirement. Still, many provinces are exploring their options.

Ontario has taken the biggest step, establishing a commission to “ensure Ontarians can rely on their pensions, and keep the pension system sustainable,” says Ontario Finance Minister Greg Sorbara. IE