Public sector pension changes in Newfoundland and Labrador
On September 2, 2014, the Government of Newfoundland and Labrador announced an agreement with the major unions to reform the Public Service Pension Plan ("PSPP"). Many of the key benefit changes are similar to those seen in other provinces, with an increase in retirement ages, changes to post-retirement indexing, and increased contributions from both PSPP members and Government. The PSPP also will be transitioned to a Jointly Trusteed structure with equal sharing of future surpluses and deficits between PSPP members and Government, coupled with a planned reduction in the level of risk associated with the plan’s investments. Changes were also made to the eligibility criteria for post-retirement health and life insurance coverage provided to PSPP members and former members.
The PSPP is the Province’s largest pension plan, and covers Government employees, health care employees, school board employees, and employees of various Crown corporations. It has some 27,000 active members, 17,000 retirees, and at December 31, 2013 (before these changes) had assets of $4.8 billion compared to liabilities of $7.8 billion.
In announcing these changes, Government stated that its key objectives were to have a sustainable plan, to allow for reasonable retirement benefits for public employees, and to protect the financial future of the Province.
The key benefit changes are as follows:
- Benefit changes are to be effective January 1, 2015.
- Member contributions will increase by 2.15% of pay on earnings up to the Year’s Maximum Pensionable Earnings ("YMPE") and 3.25% of earnings in excess of the YMPE, for total contributions of 10.75% of earnings up to the Year’s Basic Exemption, 8.95% of remaining earnings up to the YMPE, and 11.85% of earnings above the YMPE. Government will continue to match employee contributions.
- Unreduced retirement will now be available at age 58 with 30 years of service, or age 60 with 10 years of service. This compares to the prior criteria of age 55 with 30 years of service, and age 60 with 5 years of service. These provisions will be transitioned in over a 5-year period, and members satisfying the old criteria during the window will be grandfathered. Consistent changes will also be made to the early reduced retirement criteria.
- Post-retirement indexing is currently provided at a rate of 60% of CPI, to a maximum annual increase of 1.2%. This benefit will continue to be provided in respect of service accrued up to January 1, 2015, but indexing will be suspended in respect of service accrued after that date. Current retirees are therefore not impacted.
- The earnings averaging formula will change from a 5-year average to a 6-year average, subject to the condition that the new average will be no less than the frozen 5-year average at the transition date.
- Individuals must now attain 10 years of service and retire from active service to be eligible for post-retirement life and health coverage. Again, a 5-year transition period is applicable to these criteria.
Further, and as mentioned earlier, in conjunction with these benefit changes, the parties have agreed to operate the PSPP on a Jointly Trusteed basis going forward, with all surpluses or deficits equally shared between Government and PSPP members. This will entail the creation of an independent corporation to oversee the PSPP. The details of the framework in which the Joint Trusteeship will operate, as well as a formal Funding Policy are yet to be determined. The parties will continue their discussions on these aspects in the near-term.
On the asset side, Government will issue a promissory note with a present value of $2.685 billion, to be amortized over 30 years. In addition, the PSPP investments are expected to be moved to a less risky asset mix from the current 75% equity target mix to 50%. The additional funding and proposed changes to the asset mix, coupled with the benefit changes and contribution increases noted above, are projected, with a high probability, to fully fund the PSPP over the 30-year period.