The federal government is understating the liability for its employee pension plans by $80-billion because it does not use "real world" investment returns in its calculation, a new report says.
A C.D. Howe Institute study has concluded that the federal liability for pension plans now totals $227-billion, which is $80-billion more than the government reports in its Public Accounts.
"Ottawa's calculations do not reflect investment returns available in the real world," says co-author William Robson, chief executive officer of the C.D. Howe Institute.
The report, which updates a similar analysis released last year, argues that Ottawa uses unrealistic assumptions in its accounting that could not be used by private-sector companies.
One of the figures Ottawa uses to determine its pension liability is a moving average of past "nominal" yields on 20-year federal bonds, while the other is an assumed return on investments of 4.2 per cent based on averages earned since 2000.
The C.D. Howe report says the "made-up" numbers are not realistic in today's world of low interest rates and low investment returns.
"Both these interest rates are well above anything currently available on any asset that matches the plans' obligations," Mr. Robson said in a news release Tuesday.
A spokesman for Treasury Board President Tony Clement said Ottawa uses standard, generally accepted accounting rules for valuing government pension liabilities, and the accounting treatment is accepted by the Auditor General.
"The government's financial statements have received unqualified audit opinions for the past 12 years," said Sean Osmar.
Mr. Osmar said the government accounting treatment is the most appropriate for valuing long-term liabilities such as pensions.
The report Tuesday raised the ire of federal employee representatives, who say it misrepresents their pension costs.
The Public Service Alliance of Canada, a union representing federal workers, says the pension accounting used by the federal government is appropriate, is also used by provincial governments, and is accepted by the government's chief actuary.
PSAC executive vice-president Larry Rousseau said the C.D. Howe study "compares apples to oranges" because the federal government doesn't need to account for pension liabilities on a "solvency" basis – measuring how much the pension would cost to fund if the entity were to go out of business immediately. That's because it cannot cease to exist like a private-sector company.
"Why would you calculate a public-sector pension plan according to private-sector rules?" he said.
The Canadian Labour Congress said the government's accounting treatment for the Public Service Pension Plan has been building in lower assumptions for returns and interest rates.
The C.D. Howe report notes the pension liability is part of the federal government's accumulated debt, so changing the calculation would increase national debt levels as well as raise financing obligations. In fiscal 2011, ended March 31, the federal deficit would have been $47-billion instead of $31-billion if the pension plan liabilities had been calculated differently, the report says.
A similar report last year concluded that the pension plan obligation was $65-billion higher than reported at that time, or $208-billion.
This year's report notes that the liability for the federal plans – which cover public service employees as well as members of the Canadian Forces and RCMP – is growing at 40 per cent of pay annually, using "fair value" accounting required in the private sector.
Fair value rules require companies to value their pension assets and liabilities using current market prices and interest rates, which is a key reason why many private sector pension plans are now facing large deficits.
The authors recommend three types of reforms to address the problem, including revamping and reducing the benefits provided by federal pension plans, increasing tax-deferred savings room available to other Canadians so they can save for retirement at the same level as federal employees, and ensuring the federal plans are being funded to match the pay-out promises.