WHEREAS the unfunded liability of the Local Authorities Pension Plan (LAPP) is $4.64 billion; and
WHEREAS approximately 40% of this unfunded liability is due to the very substantial raises given to health care sector workers in 2008 by the Government of Alberta; and
WHEREAS the unfairness of requiring local municipalities to pay increased LAPP premiums to fund a deficit that was largely caused by the Government of Alberta’s actions to increase wages in a sector of the economy unrelated to municipal government is self-evident; and
WHEREAS the Province of Alberta provided the Alberta Teacher’s Pension Plan $2.488 billion in 2008 to fund a portion of their unfunded liability;
THEREFORE BE IT RESOLVED that the Alberta Association of Municipal Districts and Counties calls upon the Government of Alberta to acknowledge that a substantial portion of the LAPP’s unfunded liability is a direct consequence of the Government of Alberta actions; and
FURTHER BE IT RESOLVED that the Alberta Association of Municipal Districts and Counties urges the Government of Alberta to provide financial assistance to LAPP equivalently generous to that which was given to the Alberta Teachers Pension Plan in 2008;
FURTHER BE IT RESOLVED that should in the future the Government of Alberta choose to increase the health care sector wages, an appropriate sum should also be allocated to LAPP to prevent the cost of health care worker pension costs being transferred to Alberta municipalities.
Pension benefits from LAPP are “defined benefit”, and are based upon the best 5 years an employee has within the plan.
Typically, the best 5 years are at the end of a person’s career.
The very substantial (~~12%~~) raises given by the Alberta Government to health care workers in 2008 have now moved through the system, and the “best 5 years” for the typical healthcare worker has consequentially also gone up about 12%.
Since retirement benefits are directly tied to these “best 5 years” the financial obligation to these workers has also gone up an incremental 12%, which has, in part, caused the “unfunded liability” – the difference between LAPP assets and obligations, to grow to about $4.64 billion.
To offset this gap, LAPP has substantially raised its premiums, but this increase in premiums falls not only on the health care system, but also upon municipalities as they share the same pension plan. In effect, this is a transfer of financial burden onto the municipalities to pay for the consequences of a provincial decision to adjust wages in the health care sector.
We do not feel it is fair to have the municipalities pay a portion of the increased pension costs associated with the increase in health care worker salaries. Since 2008, LAPP contribution rates for employers have increased as follows:
Up to CPP maximum: 7.75% => 10.43%
Above CPP max 10.65% => 14.47%
The rate increases have reduced the effective wages of municipal employees, while directly increasing total staff costs for municipalities.
In 2008 the province gave the Teacher’s Pension Plan just under $2.5 billion dollars to bridge an “unfunded liability” and we think it would be appropriate for the province to similarly compensate municipalities for this cost transfer that they have imposed upon us with respect to LAPP.
The AAMDC has no active resolutions directly related to this issue.
Members and employers both make contributions to the Local Authorities Pension Plan (LAPP), with employers paying one per cent of salary more than employees. The LAPP Board of Trustees (Board) adjusts the contribution rates periodically to help ensure there are sufficient assets available to pay all of the benefits promised under the plan. Recently, the Board has been timing the increases to provide stakeholders with more advanced notice of increases and to spread any increases out over a period of time to lessen the impact.
The LAPP pools these contributions, along with investment income, and the demographic experience of a wide range of local authority employers and employees to manage the funding of the plan. Over time, it can be expected that one group or another will experience different payroll growth and/or demographic changes such as new hires or retirements. This pooling of experience and resources can mitigate dramatic changes in these assumptions and is one of the advantages of being in this type of pension plan.
As noted by the Alberta Association of Municipal Districts and Counties (AAMDC), the LAPP has moved from a surplus position with a funded ratio (assets to liabilities) of greater than 100 per cent in the 1990s to a deficit position today, with a funded ratio near 80 per cent. The main reasons this plan, similar to many other pension plans around the world, is in a deficit position today are the two severe downturns in financial markets and historically low interest rates which increase liabilities. This experience over the last 10 years has raised concerns about the sustainability of the plan.
As a result, the Board, which consists of both employee and employer nominees and has representation from the AAMDC, has been consulting with stakeholders as part of their sustainability planning.
Treasury Board and Finance (TBF) advises the AAMDC and all stakeholders to continue to work with the Board and the other stakeholders on solutions to ensure the long-term sustainability of this plan, and await the final report and recommendations from the Board before engaging in other discussions.
TBF has asked the Board to provide the department with its recommendations regarding the long-term sustainability of the plan following its review and stakeholder consultations.
TBF appreciates the AAMDC bringing this matter to its attention, and would be pleased to receive any further information and details in any formal proposal the AAMDC wishes to make to the department on this issue.
The government’s response provides no indication of support for immediate action to address the current unfunded liability of LAPP. The government notes that responsibility lies with the LAPP Board of Trustees and that the government will work with the Board and other stakeholders to find a long term solution. In November 2013, the AAMDC requested member input and provided a formal submission to the Government of Alberta in December 2013.
In February 2014, the Government of Alberta announced changes to the province’s public sector pension plans, including LAPP, and introducted the Public Sector Pensions Plans Amendment Act in Spring 2014. Following pressure from the AAMDC and other stakeholder groups for additional information on the impacts of the proposed changes, the provincial government sent the legislation to committee for further consultation. The provincial government is not expected to reintroduce the legislation in the near future. However, as the government has not committed to providing any specific financial assistance in the new legislation, the AAMDC deems the government’s response to be Unsatisfactory.