Explainer: Brett House breaks down pension plan reforms

CBC Daybreak spoke to economist, scholar andMcGillUniversity professor Brett House about what the proposed pension plan reform really means for both the municipal workers and the province.

Here is an excerpt of the interview on Daybreak. Listen to the whole thing here:

AM: In general, what do you think about municipal pension plans in Quebec?

BH: The municipal pension plans in Quebec remain relatively generous by any comparison across North America. Compared to a lot of jurisdictions, youve had a move from what are called defined benefits plans which is what we have here in Quebec at the municipal level to defined contribution plans. So what does that distinction mean?

A defined benefit plan guarantees a worker a certain payout when they retire. A defined contribution plan defines how much they pay up front. And then what they get later on really depends on how well that pension plan is managed. So right now, municipalities are taking all of the risk on the payouts and employees are taking relatively none of the risk. That has shifted elsewhere to put the balance of the risk onto employees rather than employers.

Back in the late90sunder thePQgovernment of LucienBouchard, and then Bernard Landry, you had surpluses in most of these plans and in response, the provincial government forced municipalities to either reduce the payments that employees made or reduce the payments on the pension plans to retirees.- Brett House, economist

AM: Some workers contribute 30 per cent to their pension and the municipality kicks in the other 70. Notably thats the case with some here in Montreal. Moving to a 50/50 split, what do you think of that plan specifically?

BH: The problem is, weve got about $4 billion in deficits on the pension plans and that comes out of a couple factors.

First off, back in 1995 there was a decision against the Singer Sewing Machine Corporation and they were found to have invested too aggressively and brought losses into their pension plan that the courts deemed inappropriate for the profile of their employees that was skewed to the older side. So since then, youve had a bit of a chill on pension fund managers who have tried to invest as conservatively as possible with that judgment in mind. Thats limited the returns that theyve accrued.

On the other side as well, back in the late 90s under the PQ government of Lucien Bouchard, and then Bernard Landry, you had surpluses in most of these plans and in response, the provincial government forced municipalities to either reduce the payments that employees made or reduce the payments on the pension plans to retirees. So all the pension plans were shifted to a much richer stance than they had been previously, and so in many ways what we are doing now is going from incredibly generous plans back to something more reasonable not cutting from something more or less similar to the rest of North America to something that is worse.

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AM: So was that just a lack of prudence or foresight in using up that surplus at the time? We wouldnt necessarily be in this position if we had that surplus.

BH: Completely. Youve got it, Ainslie. By any historical measure, those were exceptional surpluses that should have been saved rather than disbursed.

AM: Youre comparing these public pensions to what we see in the rest of Canada, to plans in the United States. Is that 50/50 split the norm?

BH: There are a lot of parts of pension plans where you can either increase contributions, decrease payouts, or invest more aggressively. So you can get inputs and outputs from a lot of different sides. Fifty-fifty, though,is pretty reasonable.

AM: On one side the municipal workers are saying that theyve traded salary increases for getting these concessions on the pension. That theyre contributing less to their pension because they gave up salary at the time, so essentially this is compensation for not taking those at the time. We spoke to DDO resident Randie Weil. Her husband Guy Leprince has been a firefighter for 25 years:

"My husband has been contributing to his pension plan since he started. And he planned on retiring next fall. He was given estimates for his retirement so we have a number in mind to secure our future. And now we don't know what's going to really happen. [...]

"Thats really deferred salary. People need to think of it as not just this gross number that we get and we go and we take it. It was deferred salaries, they participated in building up those funds and in my opinion they shouldnt be penalized."

AM: Is it really fair at this point to go and retroactively set a 50/50 mark?

BH: First off, its retroactive only to the beginning of this year, so its not going way back into the past. And secondly, I do think its important to keep in mind how much those pension benefits were improved in the late 90s.

AM: Is this something that the province should be looking to set in stone and force that 50/50 mark for some of the municipalities. Some of the municipalities are saying, "You know, were negotiating this, were getting our deficits under control, were coming to an agreement."Is it right to step in and impose this?

BH: Ultimately the province is on the hook for the municipalities, so the province is responsible. I think this does show leadership. That said, they could have consulted a bit more on this from the outset.