Defined benefit (DB) pension plans are facing funding challenges on both a solvency and going-concern basis. The New Brunswick government looked for ways to address not only this issue, but also larger challenges inherent in DB plans, namely financial stability, intergenerational equity, and benefit transparency.

Challenge

The government appointed an expert task force to engage with both public and private sector employers as well as union representatives to discuss and come up with a comprehensive solution. They conducted an exhaustive review involving numerous benefit costings and a variety of stochastic analyses, while receiving a range of expert input on the many options that were explored.

Solution

Historically, DB pension plan funding has been determined by actuarial assumptions. The fact that actual experience differs from these assumptions results in gains or losses in the plan. The traditional approach to addressing pension funding deficits (and surpluses) has been to implement a specific rebalancing of costs/contributions, based on the belief that the past is the past and no changes are allowed. As a result, many plan sponsors are living with a plan that is barely solvent. Certain "quick fixes" have been put in place in many Canadian jurisdictions (funding moratoriums, letters of credit, etc.). However, they do not address the long-term sustainability of DB plans. More innovative measures are needed if these plans are going to endure.

A team from Morneau Shepell worked with the government-appointed expert task force and collaborating unions on the Shared Risk Pension Plan (SRPP) design for the Province of New Brunswick. As actuary on this project, Morneau Shepell consulted on the development of the new plan design and provided in-depth analysis. In particular, its integrated asset/liability model was used to measure the effects of various asset mixes on the ability of the pension plan to meet plan sponsor benefit security objectives, given the pension plans’ level of maturity.

The resulting SRPP does not rely on fixed estimates of what future financial experiences will be. Instead, its design enables it to respond to actual investment returns and other factors by allowing for variability in the benefit level, starting from a conservatively priced base benefit but aiming to provide a higher inflation-protected target. Contributions are constrained within a relatively narrow range from the initially agreed level, and the benefit distributions then vary depending on the plan’s financial performance.

SRPP legislation allows inclusion of benefits for past service as part of the plan but imposes strict standards on contributions and risk management. As a result, there is a very high probability that base benefits will be secure. In addition, meaningful cost-of-living increases would be expected in all but the very worst of economic scenarios. In these same economic scenarios, traditional DB plans would be under significant strain and require much more drastic action in order to continue providing benefits. The SRPP is designed to better align with economic and demographic reality.

Results

According to the Government of New Brunswick’s 2013 report, Rebuilding New Brunswick: The Case for Pension Reform, "[The SRPP] has garnered considerable attention and interest for its capacity to make pensions in New Brunswick more secure, transparent, sustainable, reliable, affordable, and predictable. This model represents a significant shift in how pensions are funded and managed. It has a strict focus on risk management. It provides realistic pension benefits to plan members and enhances protection in all but the worst of economic circumstances. The model also provides stable and predictable funding requirements, thereby not exposing taxpayers, sponsors and/or employees to unpredictable and potentially unmanageable risks."

Morneau Shepell is now working with a number of other pension plans in New Brunswick that have converted to the SRPP model as well as organizations that are considering the change. Morneau Shepell has also worked with the Province of Prince Edward Island on its public sector pension plan changes, where much of the work was very similar to Morneau Shepell’s role in New Brunswick.

"The New Brunswick Model and the collaborative approach taken to develop and test it is a critical example for other pension plans in other jurisdictions and sectors to begin the process of reforming their own pension systems."
Government of New Brunswick
Rebuilding New Brunswick: The Case for Pension Reform
February 2013

Case Study: Government of New Brunswick (PDF)