April 2, 2026    |   Sign up or read past editions here.    |    Unsubscribe  

Hi all,

The big issues for public servants right now? Return-to-office and job cuts. They even dwarf pay raises as unions dig in for another round of bargaining.

Federal pensions? Not even on the radar. But that could change.

Federal bureaucrats have gold-plated defined benefit pensions – their most valuable asset, and one they have zero control over. The government knows this.

That’s the quiet logic behind the finally approved Early Retirement Incentive, which goes something like this: shrink the workforce, reduce layoffs, pay the exits straight from the pension surplus and move costs off departmental books.

The more who take ERI, the fewer the layoffs and buyouts, and the less must be spent on severance and retraining, the kind of costs that departments must fund themselves. 

Governments have been playing this kind of hand for years, and unions have been watching. Thirty years ago, when the government took $28 billion in surplus, unions sued over it, and lost. They haven’t forgotten.

Let’s dig in.

Today:

The burn: The deeper sting of ERI for unions.

The loss: The lawsuit that determined ownership.  

Not negotiable: But pensions were supposed to be revisited.

The Morneau effect: Suddenly, pensions became a “problem.”

"This is theft": The unions weigh their options.

SURPLUS CASH

The familiar reach for $1.8 billion

ERI has never sat well with unions. About 68,000 employees are eligible to apply for the incentive, which targets employees over age 50. Applications are coming in, but so far not a “deluge” said one senior official.

Unions immediately filed a labour complaint over it because they see it as a blatant sidestepping of the workforce adjustment directive. The WFA is union territory. They negotiated it, winning hard-fought gains over the years, codified in collective agreements with incentives to make downsizing as fair and predictable as possible for employees losing their jobs.

But that was only the first rub. The deeper one: ERI is being funded from the pension plan’s surplus – $1.8 billion. That is the latest estimate of what’s needed cover pension penalties for eligible over-50s willing to volunteer out.

The much larger fight is over what to do with those surpluses. They get big.

$2.8 billion in two years. A few years ago, billions had piled up in the federal plan, with the surplus hitting non-permissible levels spelled out by law.

A quick note on the surplus. At last count, the plan sits on $44 billion, but the government is using only the non-permitted surplus. Tax laws caps surpluses at 25 per cent of liabilities. Anything above that has to go. That’s what is at issue here: the overflow, not the whole pot.

In 2024, Anita Anand, then Treasury Board president, moved $1.9 billion to government coffers. Her successor Shafqat Ali transferred another $900 million in 2025. Then the government turned around and proposed using the remaining surplus to fund ERI. That’s $2.8 billion moved out of the fund and $1.8-billion to fund the ERI exits.

Unions had their own ideas for that money.

They scored one win: the government agreed to fund enhanced retirement benefits for high-risk frontline workers – like border officers, and firefighters – allowing them to retire after 25 years.

But other was a no-go: PSAC wanted the surplus to be used to dismantle the two-tier pension plan the Harper government introduced in 2013, which shifted more costs onto workers.

So there’s the standoff. Unions see the surplus as deferred wages that employees are entitled to, and yet they have no say over how it is used. To understand why that burns, you have to go back at least 40 years.

THE LOST LAWSUIT
Who owned the surplus? Well...

It starts in the 1990s. The auditor general at the time, Kenneth Dye, flagged pension-account borrowing and surpluses in the public accounts. He warned about their impact on the public debt and urged the government to review how it financed the plan.

The government decided to use the surplus to cut the deficit. It amortized the surplus, spreading it over 15 to 20 years as it “reduced pension expenses.” No cash was touched. It was a bookkeeping move, largely invisible to employees.

Until a retired bureaucrat who had once run Treasury Board pensions noticed.

By 1999, surpluses were topping $30 billion in the public-service pension accounts. Unions seized the moment.

After years of government amortizing surpluses against the deficits, the Chrétien government passed Bill C-78, authorizing the move of $28 billion straight into government coffers. The bill also launched a new pension fund for post-2000 hires, independently managed by Public Sector Pension Investments for market-style investing.

Now, this wasn’t a slam dunk decision.

From Feb. 28, 1995: then-prime minister Jean Chrétien watches his finance minister Paul Martin defend his budget to oppositions questions during Question Period in the House of Commons. (CP PHOTO, Tom Hanson)

These were the years when the Chrétien government was fixated with eliminating the deficit. Spending was slashed, 55,000 jobs cut. (The government used the pension surplus then to fund a similar ERI for over 50s but also offered cash payments of up to 15 weeks’ salary. Just fyi.)

Behind the scenes, Finance and Treasury Board were at odds over reforming the pension plan. Finance insisted the full surplus was government’s. TB countered that ownership wasn’t clear, with employees entitled to a share.

Bill C-78 was the trigger.

The public-service plan is one of the world’s largest, along with that of the Canadian military and RCMP. The lawsuit that followed was one of the longest and costliest the unions had ever undertaken.

The Supreme Court unanimously dismissed the unions’ claims. The $28 billion was not a real fund, it said. It was just a ledger account – no cash, no assets, no property. Not a trust. No fiduciary responsibility.

The court was clear: the government holds the surplus, it bears the risk of any deficit and owes employees exactly one thing: the pension they were promised. Nothing more.

The government owns the surplus. That was the result. And you can’t lose what you never owned.

LEFT FOR LATER
The doors that never opened

Bill C-78 didn’t just move the surplus. It remade the plan entirely. The new Public Sector Pension Investment Board would independently manage and invest the contributions for service accumulated after 2000.

It was a more modern structure. The old superannuation account – that ledger discussed earlier – would wind down as the last workers who joined before 2000 finished their careers.

In the discussions over these reforms, unions were offered joint management – a real seat at the table, a say in how surpluses were handled. They ended up with seats on a pension-advisory committee. Final say ultimately remained with the Treasury Board president.

Pensions have never been negotiable. When the public service unionized in the 1960s, pensions were left out – legislated separately, the assumption being that bargaining rights might be revisited later. They never were.

Another door that never opened.

The Supreme Court ruling landed just as the Harper government was downsizing under its deficit-reduction plan. It introduced pension reforms to reduce costs. New employees hired after 2013 would pay half of contributions and retire at 60 rather than 55 – a two-tier system, grandfathering existing workers while changing the deal for everyone behind them.

The Conservatives were also floating target-benefit plans for Crown corporations and federally regulated industries – which set off alarm bells. If Crown corporations converted, public servants, military and RCMP could be next.

THEN CAME MORNEAU

And his pointed question about DB plans 

The Trudeau Liberals arrived in 2015 promising to restore respect for public servants and put evidence back at the centre of government. After a decade of Harper, unions were cautiously hopeful.

Then the finance minister was announced.

Morneau (left) at his swearing-in with then-prime minister Justin Trudeau on Nov. 4, 2015, at Rideau Hall in Ottawa. THE CANADIAN PRESS/Sean Kilpatrick

Union leaders quickly began passing around a speech Bill Morneau had given a couple of years earlier when he was leading Morneau Shepell, the human-resources and pension consultancy.

In the speech, he took aim at defined-benefit plans, which were heading toward extinction in the private sector. Morneau called them a “public sector problem.”

The government had two choices, he argued: keep funding defined-benefit plans and accept the labour strife and generational discord that would follow. Or: move toward target-benefit plans – sharing the risk of poor returns or unexpected longevity with employees.

The question he posed in that speech landed very differently for public servants when he became finance minister:

“Who believes that the average Canadian, without a defined-benefit plan … will, over the long term, agree to fund public-sector pensions at a level that they can only dream about attaining themselves?"

The Liberals never moved on pensions. But Morneau crystallized an awareness of the real and growing drift toward target-benefit and defined-contribution models across the private sector and even parts of the public sector. The federal public service plan remains one of the most generous defined-benefit plans in the country.

Morneau’s question still hangs in the air.

Which brings us back to now. And why the government’s decision to fund ERI from the (non-permitted) pension surplus feels to unions like the same hand being played again.

The plan still isn't jointly managed. Public servants still have zero investment risk – their pensions are guaranteed by statute regardless of how the fund performs. The government is still on the hook for any deficit, and still claims that entitles it to the surplus.

A pension advisory committee includes union, retiree and government representatives – but final say rests with the Treasury Board president. Under the plan’s funding policy, the surplus is supposed to remain in the plan as a cushion. 

So, what now? What can unions do? An ad-hoc public service pension committee of the National Joint Council is exploring it all, I am told.

A joint sponsorship seems like an obvious one. But it could be divisive. That means workers, not just government, are on the hook when a plan runs a deficit. Eighteen unions, retiree groups, different memberships, different priorities.

Other options could include:

• Bargainable pensions – finally, after 60 years. Make pensions part of collective bargaining.
• Legislation that navigates a way back to the 60/40 contribution split.
• A roll-back of the two-tier system.
• Court challenges to limit government’s options.

CAPE president Nathan Prier supports any changes that give workers more control over the governance, design and future decisions about the plan. He says other public-service plans are jointly administered and the federal plan is an outlier. ”It’s time to consider that option."

He says: "There should be no use of workers’ retirement savings without full and meaningful discussions with the unions who represent them."  

Others aren't focused on who sits on what board and who manages the investments. Leave that to the experts. In the past, PSAC led the charge on having a say in how surpluses are used and getting a better deal on plan design. More benefits. No two tiers. Less of the overflow going straight to government.  

It’s early days. Who knows? For the first time in a long time, unions are counting their cards.

-:-:-:-

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A bit about me. I write The Functionary as part of my work covering and analyzing the federal public service for Policy Options, where I am the Accenture Fellow on the Future of the Public Service. I've been reporting on the public service for more than two decades, covering parliamentary affairs and politics for the Ottawa Citizen and iPolitics. My work has been recognized with a National Newspaper Award and a Canadian Online Publishing Award. 

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