Changes to the pension plans for members of the Public Service, the Canadian Forces, and the Royal Canadian Mounted Police

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Information concerning the three major public sector pension plans:

Public Service Pension Plan (PSPP), Canadian Forces Pension Plan (CFPP), and the Royal Canadian Mounted Police Pension Plan (RCMPPP)

As indicated in the Information Notice to Heads of Human Resources, dated July 2005, we would like to inform you of the following:

• the Treasury Board ministers' approval of an increase of plan member contributions under the PSPP, CFPP and the RCMPPP beginning on
  January 1, 2006, and
• a recommendation by the President of the Treasury Board, supported by the Minister of National Defence and the Minister of Public Safety and Emergency Preparedness, to amend the three pension plans which, if enacted by Parliament, will change the formula by which plan benefits are coordinated with the Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP) benefits in plan members' favour.

The following questions and answers are provided as background information.

Plan member contribution rates

1. In 2005, what is the plan member contribution rate under the three major public sector pension plans?

   The three major public sector pension plans (PSPP, CFPP and RCMPPP) are coordinated with the Canada Pension Plan (CPP) and Quebec Pension Plan (QPP).

   Accordingly, plan members contribute to the PSPP, CFPP and the RCMPPP at two rates:

   • 4 per cent on the salary up to the maximum covered by the CPP/QPP; and
   • 7.5 per cent on the salary above the maximum covered by the CPP/QPP.

   In addition, like all Canadians, public service employees contribute to the CPP/QPP (CF and RCMP plan members contribute to CPP only) by paying contributions on their annual earnings between a minimum and a maximum level:

   • the minimum level, known as the Year's Basic Exemption (YBE), is set at $3,500; and
   • the maximum level is set every year by the CPP/QPP and is known as the Year's Maximum Pensionable Earnings (YMPE). In 2005, the earnings on which CPP/QPP contributions are required are those up to $41,100.

   (In 2005, plan members contributed 4.95% on their annual earnings between the minimum and maximum level to the CPP/QPP.)

   The following graph illustrates the contributions plan members make to each plan in 2005.

   

2. How long have the current plan member contribution rates been in effect?

   The current plan member contribution rates (4 per cent of salary below, and 7.5 per cent of salary above the maximum covered by the CPP or QPP) have been in effect since January 2000.

3. What are the pension costs of the three major public sector pension plans and how are these costs shared between plan members and the employer?

   It is a common misconception that the employer and the plan members share the costs of the pension plans 50:50.

   A 60:40 sharing of the costs of the pension plan between the Government, as employer and plan members, with the employer assuming the larger share, is the historical average for the PSPP. At present, plan members are only contributing 28 percent of the pension plan costs while the Government, and through it the Canadian taxpayer, is contributing 72 per cent. This translates into a Government contribution of $2.56 for each $1.00 contributed by plan members.
   
   

4. What is the reason for the change in the historic cost-sharing between the Government and its plan members?

   With the inception of the CPP/QPP in 1966, the maximum that public sector plan members were paying into all plans (PSPP, CFPP and RCMPPP and CPP/QPP) was 6.5 per cent of salary. However, the public sector pension plan contribution rate was reduced by the contribution rate of 1.8 per cent on the band of salary covered by the CPP/QPP (CF and RCMP plan members contribute to CPP only). In 1977, the combined total amount that plan members contribute to their public sector pension plans and the CPP/QPP was increased to 7.5 per cent.

   This arrangement worked well for many years, however, beginning in 1987, there were a number of increases in the contribution rates under the CPP/QPP. This meant that with a 7.5 per cent maximum on total pension contributions, there was an equivalent decline in the plan member contribution rates for the PSPP, CFPP and RCMPPP. In effect, plan member contributions to the PSPP, CFPP and RCMPPP on salary up to the CPP/QPP maximum decreased from 5.7 per cent in 1986 to 4 per cent in 1999. In other words, plan members to these three public sector pension plans were in effect sheltered from CPP/QPP contribution rate increases.

   However, the Government as employer, by law, was obliged to make up the shortfalls caused by the declining plan member contributions to the three major public sector pension plans.

5. What has been done since 1999 to stop the decline of contribution rates to the public sector pension plans?

   The 1999 amendments to the three pension laws allowed the plan member contributions for the three public sector pension plans to be set independently from the CPP/QPP. This meant that plan members would no longer have a 7.5 per cent cap on their total pension contributions.

6. Why is it now necessary to increase plan member contribution rates?

   Since 2000, plan member contribution rates for the three public sector pension plans have not increased; they have been frozen at the 2000 levels.

   When the rates were frozen in 2000, it was also discussed that, following the last scheduled increase in CPP/QPP contributions in 2003, increases in the plan member contribution rates under the three public sector pension plans would then be considered in order to move more closely towards a more balanced cost-sharing ratio between plan members and the Government.

   The proposed phased-in increases to the contribution rates beginning in 2006 will ensure that plan members, and the Government, as employer, contribute to the three pension plans in a more balanced way.

   As previously discussed, members of the PSPP now contribute 28 per cent to the PSPP, while the Government contributes 72 per cent. (Members of the Canadian Forces currently contribute 22 per cent and members of the RCMP contribute 25 per cent.) This means that plan members are not paying a balanced share of the pension plan costs.

7. Who sets plan member contributions rates?

   In 1999, the Public Service Superannuation Act, the Canadian Forces Superannuation Act and the RCMP Superannuation Act which govern the PS, the CF and the RCMP pension plans were amended to provide that Treasury Board ministers would set the plan member contribution rates for 2004 and subsequent years.

   Under the PS pension plan, the Treasury Board decision is based on the recommendation of the President. For the CF and the RCMP pension plans, their respective ministers and the President of the Treasury Board are responsible to make a joint recommendation to the TB ministers.

8. Are there any limits on Treasury Board's authority to set contribution rates?

   The 1999 legislative amendments to the PSPP also limited Treasury Board's authority by specifying that:

   • no single rate increase will exceed 0.4 per cent (i.e., four-tenths of one per cent) of salary; and
   • rates will not increase past the point where plan members are paying 40 per cent of the current service costs of their pension plan. (A 40 per cent share of costs is the historical average for public service plan members under the PSPP.)

   The amendment to the CF and RCMP pension plans contained the same limitation that no single rate increase would exceed 0.4 per cent of salary. In addition, the CF and RCMP pension plans specified that plan member contributions would not exceed the PS pension plan contribution rates.

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