Changes to Federal Government Pensions
On Thursday, October 18, 2012, the federal government introduced an omnibus budget legislation known as Bill C-45. While Bill C-45 will continue through the House of Commons, its clauses that contain changes to pensions for members of Parliament will move forward as a new Bill C-46 (entitled the Pension Reform Act).
Changes to Federal Public Service Pensions
Proposed measures will change federal public service pensions under the Public Service Superannuation Act. For 2013 and later, an active member will be required to contribute to the Public Service Pension Fund at the contribution rates determined by the Treasury Board on the recommendation of the Minister. The new contribution rules will apply to existing members and new hires.
The intent to have federal public service workers pay half the cost of their pensions was clearly set out in the federal budget earlier this year. It is not clear from the legislation how this will be accomplished since the amendments seem to state that contributors will pay not more than 50%, suggesting they could pay less. Currently, the participants pay about 37% of the current service cost, which, while far short of 50%, is up from the 33% they were paying four years ago. Even if member contributions are raised to 50% of the current service cost, the federal public service employees will still be considerably better off than the participants in the Ontario Teachers’ Plan or the OMERs plan who must also pay for half of any deficits in addition to half the current service cost. In addition, the government’s share of the cost of the federal public service plan is open-ended, whereas a growing number of large public sector plans in other jurisdictions are capping the employer portion at a fixed percentage of pay. If there is a trend toward turning public sector pension plans into target benefit plans, it would seem the federal government has decided not to follow it at this time.
The normal retirement age for new contributors after January 1, 2013, will increase from 60 to 65 and the special unreduced early retirement age will increase from 55 & 30 to 60 & 30.
This change is significant since the average retirement age in the public sector has been consistently two to three years earlier than in the private sector. In 1998, the average retirement age had dipped below 58 briefly but has been rising modestly since then. Along with the change in the pensionable age for OAS benefits, the change to the retirement age provisions may be meant to consider that the diminishing worker‑to-retiree ratio in Canada will be a problem in 10 to 20 years and that Canadians will have to retire later in general. However, the new provision will take a very long time to phase in since existing federal public service pension members will not be affected by the change. This means it will not have much impact in the 20‑year timeframe when the worker shortage is expected to be most acute.
Changes to Members of Parliament Pensions
The normal retirement age for MPs who cease to be members after December 31, 2015, becomes 65 instead of the current 55. The change is less draconian than it seems since members who are between 55 and 65 can still retire immediately and incur an early retirement reduction penalty of only 1% for each year that their pension starts earlier than 65. By comparison, the early retirement reduction under the Canada Pension Plan is 6% per year between 60 and 65. No payment can be made before age 55 and the requirement that the MP must have contributed or elected to contribute as a member for at least six years will remain. The annual pension accrual rate of 3% of pensionable earnings also remains.
This accrual rate is 50% richer than the Income Tax Act allows in the case of any other pension plan. The Bill provides that, in fixing contribution rates, the Chief Actuary’s objective is to ensure that by not later than January 1, 2017, the total amount of contributions to be paid by members under Parts I (Retirement Allowances) and II (Retirement Compensation Arrangements) of the Members of Parliament Retiring Allowances Act will meet 50% of the current service cost. Member contributions will rise in steps between 2013 and 2017.