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Scores of New Brunswick pension funds were rocked by the global 2008 financial crisis, which sent asset values plummeting. Across Canada, the value of corporate and government investment holdings crashed, leaving many without assets to pay existing and future pensions. Careless pension management and a frail economy made matters worse in New Brunswick.

Among the hardest hit New Brunswick pensions was a plan for ten thousand working and retired nurses and health care and community employees. Health care employees enjoy great benefits because of incentives needed to draw workers to an aging, sparsely settled province. New Brunswick nurses earned average salaries of $72,000, while making a modest pension contribution equal to 5.25 per cent of their paycheques – one of the lowest rates in the province. Further weakening the plan, the provincial government, which employs nurses and health care workers, had been allowed to spend the fund's surplus to enhance pension benefits. The practice, unchallenged by union and plan members, left the fund with little cushion to absorb market shocks.

When the 2008 financial crisis struck, the pension fund was mortally wounded. By the end of 2008, the value of assets plunged to $830-million from $1.2-billion, leaving the plan with a deficit in excess of $340-million. It was a brutal blow for a fund facing a huge increase in retirements. In the nurses union, more than 40 per cent of workers are over fifty-five, leaving little time to recoup the losses.

On June 26, 2009, the plan's governing committee met inside the squat, red brick Wu Conference Centre at the University of New Brunswick. Gathering in the Fredericton campus at a large horseshoe table were the unions' senior executives and a handful of provincial officials.

Joining them were two advisers who would become indispensable pension paramedics.

In his mid-forties, Conrad Ferguson is tall and rangy, with a thick crop of grey-flecked black hair. His uncanny ability to forecast the implications of pension modifications would frequently be put to good use as New Brunswick struggled to fix its pension system.

Sue Rowland, an outspoken lawyer in her mid-sixties, had represented governments or workers in some of the country's biggest corporate restructurings, including Algoma Steel and the Canadian arms of Chrysler and General Motors. By the late 2000s, job stress had taken a toll on her health. She selected less demanding cases and devoted time to her octogenarian husband. One 2004 assignment she did accept was advising New Brunswick medical workers. Rowland initially hoped to travel to the province a few times a year, but she and her husband were so attracted to the friendly, no-nonsense Maritimes that they bought a second home near Fredericton.

With no imminent funding help from the province, Ferguson said, the plan had some tough decisions. Employees would have to increase pension contributions by an additional 8.55 per cent of salary or the value of future benefits would be reduced by 66 per cent. Both options put an enormous burden on current workers. Without drastic measures, the actuary warned, the pension plan was no longer sustainable. "It was the holy shit moment," said Rowland. "That's when we knew it was going in the tank. Unsustainable is actuarial code for bankruptcy."

Saving the plan

After Ferguson dispensed grim pension deficit news in 2009, a committee of union and government representatives endorsed a recommendation that benefit cuts be shared by all members, including retirees. The committee dispatched Ferguson and Rowland to find a fair, pragmatic solution. The committee's willingness to swallow harsh medicine was crucial. Few unions cede core benefits such as pensions without a fight. But the nursing and hospital employee union leaders on the committee understood from the beginning that they needed to move quickly to save their damaged plan.

Marilyn Quinn was elected president of the New Brunswick Nurses Union in 2004 after twenty years as a palliative care nurse. "You can't work in palliative care and not have hope," says Quinn of the years she spent helping families reconcile themselves to death. When she heard the pension diagnosis in 2009, she says, "I put on my palliative care glasses. It was time to be honest and tell people what they didn't want to hear."

Her counterpart, Susie Proulx-Daigle at the New Brunswick Union, had a tougher challenge. Her group was a local of Canadian Union of Public Employees, whose national leaders strongly oppose pension cuts. "I told them that we had our own problems in New Brunswick and that we were going to solve them our way. We are more of a social union. We are part of communities that work together to fix our problems."

To prepare members for harsh medicine, the unions made two crucial decisions. The first was trusting membership with bad news. Shortly after meeting with their actuary in June 2009, the unions alerted members in a newsletter that pension benefits could be reduced or changed and contributions increased to fortify the wounded fund. "Transparency was essential; we told them what was happening and they trusted us to do the right thing," said Quinn.

The other decision was to follow Rowland's advice to seek direction from the courts regarding the pension committee's right to change plan benefits and contributions.

After two days of hearings, Mr. Justice William Grant of the Court of Queen's Bench of New Brunswick handed down a decision on July 8, 2011, that would help pave the way to pension reform. Grant made three key findings. Recognizing the serious condition of the pension plan, he ruled that the governing committee of the Nurses and New Brunswick Union had a legal obligation to protect the long-term survival of the pension plan, even if that meant imposing benefit cuts. He ruled that the committee had the power to eliminate cost-of-living allowances (COLA) from the pensions of active workers. COLA increases, Justice Grant ruled, were not a benefit accrued during workers' careers but rather a perk earned on retirement day. The flip side of Grant's ruling was that retirees' COLAS could not be touched. Stripping a benefit that was already being paid to retirees would be a contractual violation. On the issue of asking workers to increase paycheque pension contributions, Grant ruled such hikes were possible, provided the employer, in this case the Government of New Brunswick, similarly increased its contributions to the plan.

Grant's decision marked one of the few times a Canadian court allowed a solvent pension plan to change benefits without a membership vote or collective bargaining process. The struggling pension fund had a green light to suspend a perk it could no longer afford.

Grant's decision also sharpened the legal boundaries of pension rights. If troubled funds needed to scale back payments to retirees or ask employees and employers to save more for pensions, New Brunswick had to change its laws. Premier David Alward was willing, but before he introduced laws to shrink pension benefits, he had to ensure his government was bulletproof. That meant rolling back rich pensions for provincial politicians. MLAs would be the province's first pension beneficiaries, outside of bankruptcy proceedings, to swallow significant benefit reductions. "It was the right thing to do. We needed to be part of the change," Alward said.

For the next ten months the task force and Alward's government worked behind the scenes to draft new legislation and calculate the right mix of pension cuts and funding increases needed to rescue their retirement system. Although reformers were confident they could find financial solutions, they were uncertain of political support. "We were taking a significant risk as a government," Alward said. About 70 per cent of the province's workers did not have pensions. If the government was too generous with troubled funds, which largely covered public sector workers, it could have a taxpayer rebellion.

He had to convince unions and voters that a pension overhaul would save the province from a financial meltdown.

After Justice Grant's decision, Rowland encouraged unions to meet with Alward in late 2011 to pave the way for a new approach. Alward promised union chiefs Quinn and Proulx-Daigle that he would support a collaborative approach. If they worked with the task force to repair broken pension funds, their solution could be a template for other ailing funds.

Over the next weeks and months, the two sides inched toward an agreement. Alward's government agreed to increase contributions to the pension fund, but in exchange the unions had to swallow benefit reductions and other changes to ensure the long-term viability of their pensions. Rowland and Ferguson, played a key role in guiding the unions to the right mix of benefit cuts.

By March 2012, the task force and unions had reached an agreement on general terms of a new pension plan. They also had something else. Thanks to Rowland's shuttle diplomacy with other troubled New Brunswick pension funds, two more unions agreed to consider reforms.

The blueprint for New Brunswick's reforms came from the Netherlands. The Dutch had reformed their pensions in the early 2000s to prepare for the strain of baby boom retirements. The result was a shared-risk model that ranked as one of the world's most admired pension systems.

Like the Dutch model, the province's pension system would be called a shared-risk plan. Employers and employees would increase contributions if needed, and benefits could be scaled back or redesigned to ensure pensions had sufficient surpluses to survive market shocks and demographic changes. Unlike Conrad Ferguson's alarming 2009 prognosis that the plan for the two New Brunswick unions would need to slash benefits by more than 60 per cent to save pension plans, most new reforms would be introduced incrementally. Those pensions that agreed to reforms would also have to adhere to more conservative risk management tactics – practices that would use more modern and conservative mortality and investment forecasts. Overly optimistic forecasts would no longer mask funding issues. Overseeing all these changes would be independent administrators.

The reform's most profound changes affected retirees. Planned new provincial legislation, the country's most sweeping pension reform in decades, would allow shared-risk pension plans to expropriate certain rights of retirees. If a fund was hit with a deficit, retiree benefits could be temporarily altered. For the four unions negotiating with the task force, the change meant both retirees' cost-of-living allowances and other active member benefits would become conditional. If their pension fund had a deficit, the contingent benefits would be suspended until a surplus was restored. This was the benefit cut that Justice Grant had rejected when the two unions asked for his direction in 2011. Now New Brunswick was changing its laws so that all members who joined the new model would shoulder their share of the pension repair bill.

Another major change was the retirement age. It would be pushed to sixty-five from sixty. Addressing the nursing union's concerns, this shift would be introduced gradually over a forty-year period, which meant the bulk of the union's older workers would only delay their retirements by a few months. New employees would take a bigger hit, retiring years later than their predecessors.

Workers would also be asked to increase contributions to the pension fund. Keeping Alward's promise, the province also agreed to increase contributions. The nurses, for example, would see their average pension contributions increased to 7.86 per cent from 5.25 per cent, a jump matched by the province.

Reforms also downsized the formula for calculating pension values. Like most Canadian plans, New Brunswick pensions are typically calculated from a base salary that reflects an average of a worker's highest salary years. Some New Brunswick plans were so generous that workers could supersize their base by adding overtime payments. Under the new model, pension values would be calculated from a lower base, derived from a worker's average career salary, contingently adjusted for inflation.

Overtime pay would no longer be added to the formula.

The Dutch pension system was ranked as one of the soundest pension systems in the world because it had enforced many of the standards and practices that New Brunswick was now adopting. One of Canada's weakest provinces was building the foundations for the country's most secure pension fortresses.

Four union leaders flanked Premier Alward when he strode onto the stage at Fredericton's new conference centre on the morning of May 31, 2012. Walking with him was Marilyn Quinn, Susie Proulx-Daigle, Norma Robinson, and Gary Ritchie, heads of unions who were announcing their participation in the new shared-risk pension model.

Alward began the press conference by talking about the acute condition of the province's pension plans, which he revealed for the first time were no longer sustainable. "It is not fair or realistic to expect New Brunswick taxpayers to backstop" troubled funds, he said. As a result of "unprecedented" collaboration with the unions, workers were sharing the burden, allowing the province to build a stronger system "before crisis struck." Like so many times before in the province's difficult history, he said, New Brunswickers had come together in the face of adversity because "we are driven by both a fiercely independent spirit and deeply rooted sense of community."

Alward asked union leaders and Sue Rowlands, there on behalf of the task force, to walk with him across the street to the ornate Victorian-era legislature building, where he was scheduled to introduce a bill with the new pension reform laws. Expecting to watch the session from the gallery, the five were instead escorted to the carpeted floor of the Assembly Chamber, where they were given seats on a wooden bench facing Alward. After the premier gave a speech explaining the significance of the new shared-risk pension plan, which would also be applied that day to MLA pensions, Alward asked his guests to stand as he thanked them for their co-operation. As they rose, the two-storey chamber was soon filled with thunderous applause. Every attending MLA from the two elected Liberal and Conservative parties stood to give the unions and the labour lawyer a standing ovation. Stunned by the reaction, Rowlands, the hard-nosed labour lawyer, began to cry. "Other than the day I was married it was the happiest day of my life. No one was playing silly buggers with politics. New Brunswick was fixing its pensions."

Excerpted from The Third Rail. Copyright © 2013 Jim Leech and Jacquie McNish. Published by Signal Books, which is a division of Random House of Canada Limited. Reproduced by arrangement with the Publisher. All rights reserved.

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