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
Questions and Answers
Plan member contribution rates
Coordination with the Canada Pension Plan and the Quebec Pension Plan
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
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.
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.
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.
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.
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.
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.
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.
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.
What happens if the cost-sharing ratio is reached either before or after the projected dates of 2008 (for above the YMPE) and 2013 (for up to the YMPE)?
As previously stated, legislative changes in 1999 to the PS pension plan stated that the plan member share of the costs of the pension plan cannot increase past 40%. (Plan member contribution rates under the CF and RCMP pension plans could never exceed those of public service employees.)
This means that, should the cost-sharing ratio be reached before or after the projected dates of 2008 and 2013, plan member contribution rates will have to be revisited by the ministers of the Treasury Board.
Are contribution rates affected by the growing number of PS, CF and RCMP pensioners?
The Office of the Chief Actuary regularly carries out an actuarial valuation on the three public sector pension plans and the upcoming retirements have been anticipated. This valuation takes into account all demographic changes that may be experienced by the plans and would therefore take into account the growing number of pensioners. Plan members can rest assured that they will receive their benefits, since they are fully guaranteed by the Government of Canada.
Why is the Government increasing plan member contribution rates when there was a surplus in the three public sector superannuation accounts in 1999?
Lawsuits were initiated to challenge the September 1999 legislated provisions for managing surpluses in the three public sector pension plans. As a result, pending a final decision by the courts, it would be inappropriate to comment on this issue.
However, the Government of Canada must continue to manage the public sector pension plans to ensure the long-term sustainability of the pension plans and must be accountable to Canadian taxpayers.
What is the impact to employees as a result of the increase in contribution rates beginning in 2006?
In 2006, an employee earning $50,000 will have to pay an additional $150 in contributions. This increase will be mitigated by the fact that it is tax-deductible at the employee's applicable marginal tax rate. For example, an employee, living in Ontario and earning $50,000, will pay after tax (federal and Ontario combined tax rate of 31.15%) an amount of $103.28 for 2006.
How do the three pension plans contribution rates compare to other pension plans?
The current PS, CF and RCMP contribution rates are among the lowest when compared to other major public sector pension plans. The following table provides a sample comparison with other Canadian public sector pension plans:
Pension Plan Sponsor
Plan Member Contributions
Value of Contribution based on
Up to the YMPE
Above the YMPE
PS, CF and
RCMP pension plans
Quebec Teachers Pension Plan
Ontario Teachers Pension Plan
Ontario Public Service and Ontario Public Service Employees Union
Ontario Municipal Employees Retirement System
Alberta Public Service
Coordination with the Canada Pension Plan and the Quebec Pension Plan
Why are pension benefits under the three pension plans reduced at age 65?
When the CPP/QPP was introduced in 1966, the Government of Canada decided to co-ordinate the new plan with the pension plans that it sponsored for its personnel, rather than requiring contributors to pay additional contributions for their CPP/QPP coverage. As a result, the benefits of the CPP/QPP became available to plan members without any increase in their monthly pension contributions. While the contribution amount remained the same, a portion went to the CPP/QPP and the remaining served to pay for modified coverage under the three plans.Since contributions to the three pension accounts were reduced, it was necessary to have a corresponding adjustment to payable benefits, to recognize those lower contributions and the fact that there will be a CPP/QPP benefit payable.
This co-ordination means that plan members contribute to the CPP/QPP by paying contributions on their annual earnings between a minimum and maximum level. The minimum level, known as the Year's Basic Exemption, is set at $3500 for 2005. The maximum level is set every year 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, employees contribute to the CPP/QPP at a rate of 4.95%. Plan members of the three public sector pension plans contribute as follows:
- 4% of their earnings up to the YMPE; and
- 7.5% of their earnings above the YMPE.
When is the reduction factor applied to the PS, CF and RCMP pension?
PS, CF and RCMP pension benefits are reduced automatically by a standard formula:
- when a plan member retires and reaches age 65 (which is the normal age of eligibility for CPP/QPP); or
- if a plan member is entitled to draw CPP/QPP disability benefits.
What is the current formula to reduce a PS, CF and RCMP pension?
The reduction of a PS, CF and RCMP pension to account for the coordination with CPP/QPP is determined by the following formula:
the number of years of pensionable service under the PSPP, CFPP and RCMPPP
the lesser of:
the 1 for the year of
your average salary for the
five consecutive years of
your highest-paid service
1 The AMPE is the average of the YMPE (Year's Maximum Pensionable Earnings) for the year of your retirement and the four preceding years. The YMPE and the AMPE are determined in accordance with the provisions of the CPP/QPP. If you ceased to be employed in the Public Service in 2005, the AMPE would be $39,780.
Why is the change in the reduction factor necessary at this time?
When the CPP/QPP was introduced in 1966, it was decided to coordinate the three major pension plans with the CPP/QPP (CF and RCMP plan members contribute to CPP only). Since contributions to the three pension plan accounts were reduced, it was necessary to have a corresponding adjustment to payable benefits, to recognize those lower contributions and the fact that there will be a CPP benefit payable. When a PS, CF and RCMP plan member retired and reached the age of 65, the pension would be reduced to take into consideration the payment of a CPP/QPP benefit.
However, when the existing reduction factor was adopted in 1966, it was recognized that it would not produce the desired result for all time. At some point in the future, the reduction factor in the three major pension plans would have to be revisited as the public sector pension plans and the CPP/QPP evolved. For example, differences in contributory periods under the public sector pension plans and the CPP/QPP would affect the current coordination feature.
Will this amendment affect all active employees and pensioners?
No, the amendment, if enacted by Parliament, will affect only employees and pensioners who turn 65 in 2008 or later. The existing reduction factor will continue to apply to individuals who turn 65 prior to 2008.
What is the financial impact on plan members benefits?
The financial implications of the change to the reduction factor will vary depending upon a plan members' career and earning patterns. By lowering the reduction factor beginning in 2008, the pension reduction for individuals reaching age 65 in 2008 and later would be smaller than if the existing reduction factor was applied. For example, an individual who earns more than the CPP/QPP maximum throughout his/her career and who turns age 65 in the year 2013 will see a smaller reduction to his/her annual public sector pension of approximately $29.00 per year of service. For an individual with 30 years of service that would represent approximately $870.00 annually.
Do other pension plans bring similar amendments to their plans?
Co-ordination with the CPP/QPP is a common feature found in many Canadian pension plans in both the public and private sector. In recent years, a number of other plans have made changes to their pension formula.
- Date modified: