Questions and Answers Regarding the ASPR Lawsuit

Introduction
The Labour Coalition on Pensions is an alliance of unions representing members covered by the Local Authorities Pension Plan. In the summer of 2005, the coalition was approached by representatives of the Alberta Society for Pension Reform (ASPR). The Society asked the unions for support in a lawsuit regarding the LAPP.

After careful consideration, the unions decided that they could not support the lawsuit. The following is an attempt to explain what the issues are, and why the unions believe they cannot support the Society in its legal action.

Question: What is the lawsuit about?

Answer: The core of the legal action is the Society’s belief that the “pension promise” contained in the LAPP has been broken. The Society argues that this happened when the Canada Pension Plan was introduced in 1966, and the LAPP was “integrated” with the CPP. It also alleges a number of different problems with the plans, including the absence of a “bridge” benefit, improper management of the pension fund back in the 1970s, and so on.
In fact, the suit takes a bit of a scattergun approach. The Society is suing literally hundreds of defendants (including over 400 Local Authorities Pension Plan employers, the Government of Alberta, and others).

Question: What is this pension promise and has it been broken?

Answer: When the LAPP was established in 1962, it promised to pay a benefit of 2% times a retiree’s highest five years’ average salary times the retiree’s years of service (up to 35 years). Contribution levels were set at a level sufficient to fund this benefit (employees paid 5% of their salaries as their share of contributions).

The introduction of the Canada Pension Plan in 1966 posed a new problem for participants in the LAPP: many of them didn’t want to pay CPP contributions on top of their LAPP payments. To meet these objections, the two pension plans were “integrated”. The CPP provided benefits (about 0.6% of earnings per year of service) for wages up to a certain maximum (called the Years’ Maximum Pensionable Earnings, or YMPE).

Integration meant that LAPP benefits were reduced for this portion of earnings (up to the YMPE) from 2% per year of service to 1.4%. At the same time, the contribution rate for employees in the LAPP was reduced from 5% to 3.5% of salary (for salary up to the YMPE).

The changes to LAPP were made properly and legally, and people contributing to the plan were properly notified. In other words, the LAPP pension promise wasn’t broken – it was changed. Ever since the 1960s, LAPP participants have paid at a lower contribution rate for this integrated benefit. With the lower contribution rate comes a lower benefit. We may not like that – but we can’t get a benefit that hasn’t been paid for.

Question: Wouldn’t a 2% plan be a good thing?

Answer: Absolutely! An ideal pension plan aims at providing retiring workers with approximately 70% of their pre-retirement income. Someone contributing to a 2% plan through a 35-year career would have paid for that benefit and would receive it.

The LAPP costs less than a 2% plan, and delivers a lower benefit. If a participant works for 35 years and retires at age 65 with a LAPP benefit plus CPP, they should achieve the 70% target. If they retire before 65, however, they won’t hit that 70% until CPP kicks in.

That’s why many unions would like to achieve an improved Local Authorities Pension Plan. We want our members to have better retirement benefits, but we recognize that those benefits will have to be paid for.

Question: The Alberta Society for Pension Reform says there is a “flaw” in the pension plan that can erode benefits. What about that?

Answer: The “flaw” in the LAPP is that it isn’t a top-of-the-line model – it’s a middle-of-the-line plan. It is easy to point out ways it could be improved. LAPP could index benefits to 100 per cent of inflation (rather than the current 60 per cent) for example. It could raise the basic benefit level to 2 per cent per year of service and not have to worry about blending with the Canada Pension Plan. That would eliminate one of the Society's basic concerns. Unfortunately changes like these can be very expensive.

Employers and employees alike may be reluctant to accept large increases in pension contribution rates.

Question: Aren’t some people paying for a 2% benefit that they won’t receive?

Answer: It’s not that simple. In a defined pension benefit pension plan like the LAPP, you don’t buy a specific benefit with each dollar you put in. Member employees and employers contribute to a fund that has to be maintained at a level sufficient to deliver on the pension promise. It’s true that if our wages don’t keep up with inflation (the YMPE), that our pension benefit may suffer, but that’s because our pension is based on our wages, not because we’re being denied benefits that we have “bought”.

The pension promise to LAPP members is based on their highest five-year average earnings. If wage growth is sluggish, or if the government rolls back wages, pension benefits will be affected – that’s just a reality. The “flaw” that the Society thinks it has identified, is nothing more than the way this reality is reflected in the LAPP.

Question: Does this mean that some plan participants are subsidizing others?

Answer: There are all kinds of cross-subsidies in the pension system. For example:

a) A retiree who lives to age 90 takes a lot more money out of the plan than one who dies shortly after retirement.

b) People who retire early under the LAPP pay a penalty of 3 per cent for each year they are short of the 85 factor. From a strict actuarial point of view, this penalty should probably be closer to 6 per cent per year. So the plan subsidizes early retirement.

c) The LAPP is designed to blend with the Canada Pension Plan. Retirees who are receiving CPP are being subsidized by all those currently paying the very high CPP premium rates.
The point is that our pension plans are like our benefit plans – they are like a form of insurance. We pool our contributions and share the financial risk in order to be able to guarantee a retirement income for all. It’s this sharing of contributions and of financial risk that allows the plans to guarantee our pensions, regardless of what happens in financial markets.

Question: Why aren’t unions supporting the ASPR lawsuit?

Answer: It’s not a decision that the Coalition took lightly. The unions involved took a careful look at the issues and facts. We consulted with our own in-house pension experts, and sought legal advice from a law firm well known for its expertise in pension issues. We read the documentation provided by the ASPR, and any other information we could get our hands on. In the end, we concluded that we couldn’t, in good conscience, commit our unions to supporting this legal action.

While we think that there are problems with the LAPP, we don’t agree that they are the problems the ASPR has articulated, and we don’t think that the lawsuit is the answer. Quite aside from this disagreement, we see a lot of legal obstacles to the suit, including the long period of time that has passed between the integration of the plans and the filing of the legal action.

Time limits for filing, the possibility of government immunity and the question of which members of LAPP would be part of the suit present formidable, if not insurmountable obstacles.

Question: Is the Alberta Society for Pension Reforms wrong to ask questions and criticize the LAPP?

Answer: No! It's legitimate to ask questions about our pension plans, and the unions in the Labour Coalition on Pensions encourage their members to push for improvements to the LAPP. We believe the Society took a wrong turn when it focused its attention on the alleged “flaw” in the pension plan, and we don’t believe that a court challenge to the plan rules is the way to go. But it’s perfectly fair for the Society to raise questions and push for improvements to the plans.

Question: What if the Society’s lawsuit is successful, after all?

Answer: We think that’s unlikely, but if the lawsuit succeeds it’s not entirely clear who will be “on the hook” for damages. The Society believes that it is the Government that will have to pay, but it is possible that a judge may rule that this is a debt owed by the pension plan. If this happens, the $1.25 billion that the Society is asking for will be added to the already existing unfunded liability of the LAPP, and contribution rates for current employees and employers will rise even further.

Conclusion

The unions in the Labour Coalition on Pensions are working together constantly to try to defend the benefits that currently exist, and to improve those benefits in the future. This is a difficult task, because by law the Government of Alberta retains final authority over the pension plan.

The coalition is committed to continuing its quest to take the Local Authorities Pension Plan “out of statute” and making it an independent, jointly trusteed pension plan. This is no easy task, and we have been stymied at every turn by the Alberta Government. Getting some measure of control over our pensions is the first step toward improving them, understanding at all times that benefits must be paid for.