| Canadian Forces Pension Modernization Project |
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Pension policy is a work in progress. The proposed changes cannot be considered final until they have received Treasury Board's approval.
GLOSSARY
The following is an explanation of the technical pension terms that incorporates the proposed changes to the modernized CFSA.
- Active Service - It is important to understand what constitutes active service. To be considered eligible for either the part-time or the full-time pension plan, on the implementation date, you must be an active member of one of the following:
- AMPE (Average Maximum Pensionable Earnings) - The average of the Year's Maximum Pensionable Earnings for the year in which you cease to be a contributor or a participant and for the four preceding years.
- Annual allowance* - A monthly pension that you may choose to receive, in place of a deferred annuity, starting as early as age 50. This type of pension benefit is based on your normal annuity calculation, but the actual amount payable will be reduced to take into account that you will be drawing the benefit for a longer period. An annual allowance is a lifetime benefit and will be indexed at the same time, under the same conditions and under the same formula as a normal retirement pension.
- Ancillary benefits - These would include access to pension benefits for disability, and survivor benefits payable on death to spouse and eligible dependants.
- Auxiliary benefits - Additional benefits that add value to your basic pension, such as indexing and survivor benefits.
- Average earnings - Pension arrangements to be authorized by CFSA Part IYour total annual pensionable earnings for the five highest-paid consecutive years of pensionable service, divided by five or—if you have contributed for less than five years—the annual average of your pay.
- Bridge benefit - This is a benefit payable under the CFSA Part I.1 Plan.
The benefit is payable to retired participants and provides extra retirement income until CPP benefits can be claimed on an unreduced basis. Accordingly, the bridge benefit is paid from the date of commencement of your annuity or annual allowance and continues until you reach age 65 or becomes entitled to a disability pension under the CPP. The bridge benefit is calculated using a set formula which is as follows:
0.5% X sum of your updated pensionable earnings
(each year’s updated pensionable earnings limited to the AMPE)
- Buy-back arrangements authorized by CFSA Part I - There are provisions that allow you, as a current contributor, to elect to make additional pension contributions to build up your pensionable service by adding previous service:
- Buy-back arrangements authorized by CFSA Part I.1 There will be provisions in the Reserve Force Pension Plan that allow you, as a participant, to elect to make additional pension contributions to increase your pensionable earnings by adding earnings from previous service in the Reserve Force). A buy-back decision does not affect the length of your "paid CF service" but the additional pensionable earnings are counted in calculating your pension. A buy-back decision can be made for previous service in the Reserve Force and service in the Regular Force for which the member received a return of contributions or a Cash Termination Allowance.
- CFSA (Canadian Forces Superannuation Act) - Federal legislation adopted by Parliament that regulates pension arrangements for members of the Canadian Forces and their families.
- CFSA Part I - The provisions in the Act and the associated regulations that together set out the rules for the pension arrangements for Regular Force members. When the modernization changes come into force, these arrangements will also apply to Reserve Force members once they have served on a full-time basis for an extended period of time.
- CFSA Part I.1 - The provisions under the CFSA that allow regulations to be made to establish a Reserve Force Pension Plan and set up all the rules for the operation of the plan and the benefits payable.
- CIF (Coming into Force) - The date on which the pension modernization changes will become effective.
- CPP (Canada Pension Plan) - The national pension plan providing retirement, survivor and disability protection benefits to wage earners and their families, financed by contributions from employees, employers and self-employed persons. The parallel provincial scheme, the Quebec Pension Plan that applies to individuals who work in Quebec, does not apply to service in the Canadian Forces.
- CPP offset -
The reduction applied to your pension when you reach age 65 or begin to receive a CPP disability pension, which is equal to 0.7% of your average earnings or of the AMPE whichever is lower, multiplied by your years of pensionable service. - CRA (Canada Revenue Agency) - The federal government agency responsible for enforcing compliance with Canada's tax legislation and regulations (formerly, Canada Customs and Revenue Agency/Revenue Canada).
- Currently serving members - If you are already enrolled in the CF when the new pension plan is implemented, either full-time or part-time, you would have to meet or exceed a minimum threshold of earnings to determine your eligibility to participate in the plan.
- Child - Your child, including an adopted child or stepchild, born before you reached age 60 or stopped being a member of the plan, whichever happens later, who is:
- Directorate Accounts Processing, Pay and Pensions/Pension Services - The centre in charge of administering Canadian Forces pensions, release and survivor benefits on behalf of the Department of National Defence for serving members, annuitants and their dependants, that is, more specifically, in charge of:
- Deferred annuity - The pension entitlement of a participant or contributor who has two or more years of pensionable service and who on leaving the pension plan is not entitled to an immediate unreduced pension. The benefit is an unreduced annuity that starts to be paid at age sixty, but under specified conditions it can be converted to:
- Defined benefit pension plan - A plan that determines pension benefit entitlements according to a set formula, based on criteria such as years of pensionable service, earnings and age.
- Eligibility Rules for the Full-time Plan - If you are a participant in the part-time plan, and reach the full-time plan threshold (1,674 paid days of full-time Reserve Force service worked out of the preceding 60 months), your pension credits from the part-time plan would be transferred to the full-time plan. Once in the full-time plan, regardless of your future employment status (unless you earn no salary in a 12 month period), you would remain in the full-time plan.
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Eligibility Rules for the Part-time Plan - When your part-time earnings meet or exceed 10% of the YMPE over 24 consecutive months, you would be considered eligible to join the part-time plan.
Your eligibility would be tested on a rolling 24-month period until the threshold is met. The first period starts with the first month for which you are paid. During each of these 24-month periods, you must have earned at least 10% of the YMPE during each of the two consecutive 12-month periods. Note that the test is not done on a month-by-month basis, but over a 12-month period.
Scenario: The following is an example of how things would work if the pension plan was implemented in 2001, and if you enrolled as a member of the Reserve Force for the first time April 1, 2002.
Within this scenario, Table 1 shows your monthly earnings for your first three years after your enrolment:
Table 1 - Monthly Earnings from 2002 to 2004Month 2002 2003 2004 January N/A $ 500 $ 600 Febrauary N/A $ 900 $ 600 March N/A $ 0 $ 600 April $ 300 $ 0 $ 900 May $ 600 $ 0 $ 0 June $ 0 $ 0 $ 0 July $ 800 $ 400 $ 1200 August $ 400 $ 400 $ 1200 September $ 400 $ 400 $ 400 October $ 400 $ 400 $ 400 November $ 400 $ 400 $ 400 December $ 400 $ 0 $ 1200 YMPE for these years:
Monthly amounts used for part-time threshold:
Your eligibility for the part-time plan is tested for the first time 24 months after you enrol - April 1, 2004.
The sum of your earnings for the first 12-month period (April 2002 through March 2003) is $5100. The sum of monthly amounts used for threshold for the same first 12-month period is 9 x $327.50 (April through December 2002) + 3 x $332.50 (January through March 2003) = $3945. So, for this 12-month period, you have met (exceeded, in fact) the threshold.
The sum of your earnings for the second 12-month period (April 2003 to March 2004 inclusive) is $3800. The sum of monthly amounts used for threshold for the same second 12-month period is 9 x $332.50 (April through December 2003) + 3 x $337.50 (January through March 2004) = $4005. So, for this 12-month period, you have not met the threshold.
Because you have not met the threshold for two consecutive 12-month periods, you are not eligible to become a participant in the part-time pension plan on April 1, 2004.
However, testing is done monthly, so on May 1, 2004, your eligibility is again tested.
The sum of your earnings for the first 12-month period (May 2002 through April 2003) is $4800. The sum of monthly amounts used for threshold for the same first 12-month period is 8 x $327.50 (April through December 2002) + 4 x $332.50 (January through April 2003) = $3950. For this 12-month period, you have met (exceeded, in fact) the threshold.
The sum of your earnings for the second 12-month period (May 2003 through April 2004) is $4700. The sum of monthly amounts used for threshold for the same second 12-month period is 8 x $332.50 (May through December 2003) + 4 x $337.50 (January through April 2004) = $4010. For this 12-month period, you have met (exceeded, in fact) the threshold.
With this second testing, you have met the threshold for two consecutive 12-month periods. So, within this scenario, on May 1, 2004, you become eligible to participate in the CF part-time pension plan. Congratulations! End of scenario.
Note : You become a participant of the plan on the first day of the month following the 24-month period for which you meet the threshold. In the scenario, May 1, 2004 is the date you become a participant because the eligibility threshold is met during the two 12-month periods from May 2002 through April 2004.
Once you are determined to be eligible, you would begin making contributions to the part-time plan at a contribution rate that will be set as a percentage of your pensionable earnings. You would be a contributor for another two years before being vested - entitled to a pension benefit other than a return of contributions.
- Full-time Pension Plan - To meet the full-time threshold, you would have to have worked full-time service in the Reserve Force for 1,674 paid days out of a 60-month period between 1 Apr 99 and the implementation date of the new pension plan. Any Reserve Force member meeting this threshold at the time of implementation will become a participant in the full-time pension plan.
- Full-time plan benefits - If you retire as a participant in the full-time plan, your pension benefit would be determined by taking your average annual salary for the best five consecutive years x 2% x your number of years of pensionable service. Table 2 presents figures for a hypothetical CF member who is 60, has 30 years of pensionable service, and is retiring from the full-time plan with the indicated earnings in the most recent five years (determined to be the best five consecutive years):
Table 2 - Example of Average Annual Salary for the Best Five Consecutive YearsYear Earnings 2000 $ 55 500 2001 $ 58 500 2002 $ 60 500 2003 $ 65 000 2004 $ 66 000 Total $ 305 500 Average $ 61 100 With a best-five-consecutive-year average of $61 100, this hypothetical CF member would receive an annual pension benefit - $61 100 x 0.02 x 30 years - of $36 660, paid in a monthly installments of $3055.
- Immediate annuity - An unreduced annuity that is payable to you right after your stop being a contributor under Part 1 or a participant in Part 1.1. The situations in which this can happen are these:
- Immediate unreduced pension - The unreduced annuity becomes payable:
- Indexed/Indexing - A percentage increase applied to your pension benefit each January to compensate for increases in the cost of living. Indexing benefits are calculated from your retirement but not paid until age sixty, or, if you have reached age 55, at the time when the total of your full years of age and pensionable service is 85. Indexing also begins when the pensioner becomes disabled. Allowances to survivors and children are indexed annually with no waiting period.
- Locked-in - The requirement that the vested benefits must remain in a registered pension vehicle to provide retirement income. If the member elects to take a transfer value on leaving the plan, that amount must be transferred to a locked in RRSP or other pension vehicle.
- Paid CF service - Service for which a Regular or Reserve Force member is paid and which underpins entitlement to an immediate pension on release having accrued 25 cumulative years of paid service.*
- Part-time adjustment - for each year of pensionable service, this is the ratio of:
CF paid days of service
Note: the maximum value of the part-time adjustment for any year is one. For a Reserve Force member who works full-time during a full calendar year, the part-time adjustment is one. The average earnings are based on annualized pensionable earnings instead of actual earnings.
over
365 - Part-time plan benefits - If you retire as a participant in the part-time plan, your pension benefit would be based on your 'updated' career earnings. Your yearly earnings from prior years would be inflated by a factor called the wage index to bring all your prior earnings to a common yearly equivalent (year of retirement). These yearly, updated earnings would then be added together and multiplied by 2% to determine your annual pension benefit.
- Part-time Pension Plan - To meet the part-time threshold, you would have to have earned at least 10% of the YMPE for at least 24 consecutive months between 1 Apr 99 and the implementation date of the new pension plan. Any Reserve Force member meeting this threshold at the time of implementation will become a participant in the part-time pension plan.
- PA (Pension Adjustment) - In a defined benefit plan the PA is 9 times the approximate amount of annual pension accrued in the year minus $600 (The offset was $1,000 until the end of 1996). The PA represents the approximate lump sum value of the member's pension in each year, calculated as prescribed by the Income Tax Act, and has a direct impact on the member's RRSP contribution limit in each year.
- PSPA (Past Service Pension Adjustment) - A PSPA occurs when pension benefits for prior years (after 1989) are increased retroactively. A buy-back is an example of a situation that will trigger a PSPA. The PSPA represents the sum of the PA that would have been reported in each year if the service had been in place at the time. It reduces the member's RRSP contribution room.
- Pension benefit formula - Formula under the pension arrangements authorized by CFSA Part 1
The formula used to calculate your basic pension considers average earnings and years of pensionable service. Your annual pension up to age 65, is calculated as:
2% X pensionable service X average earnings
On the first of the month following your 65th birthday, or on becoming entitled to a CPP disability benefit, your annual pension is reduced by the CPP offset, which is calculated as:
0.7% X pensionable service X the lower of the AMPE and your average earnings
Formula under the pension arrangements to be authorized by regulations under CFSA Part I.1*
The set formula used to calculate your basic pension considers your total updated earnings during your period of pensionable service, The earnings are updated by a special formula.
Your annual pension will be calculated as:1.5% X sum of your updated pensionable earnings
Up to age 65 or the commencement of a CPP disability pension, you will
also receive a a bridge benefit (calculated as0.5% X sum of your updated pensionable earnings
(each year’s updated pensionable earnings limited to the AMPE) - Pensionable earnings - Under the pension arrangements authorized by CFSA Part 1
Your annual pay for your rank, and a $30 monthly allowances as authorized by the regulations. - Pensionable earnings - Under the pension arrangements to be authorized by regulations under CFSA Part I.1 *
Your annual pay for your rank, plus any amount paid to you as pay in lieu of leave (PILL). - Pensionable service - The years of service recognized for meeting pension eligibility thresholds, and in the case of the arrangements under Part 1, in calculating pension benefits. Generally speaking, pensionable service includes the years you are an active contributor or participant. You may be able to increase pensionable service by buying back service. Your maximum pensionable service credit is 35 years.
- Plan sponsor - The organization that has the final authority to start or wind up a pension plan and is responsible for the operation of the plan. Pension arrangements for the Canadian Forces are authorized by an Act of Parliament and accompanying Regulations.
- Portable/portability - Provision that allows pension plan members to transfer the value of their pension credits to another registered retirement savings plan (an employer’s registered pension plan, a locked-in RRSP, or a life income fund.)
- Retirement benefit - A payment to which you may be entitled under a Canadian Forces pension arrangement as retirement income. Pensions are payable in monthly instalments paid in arrears. The retirement benefit includes the survivor benefit.
- Return of contributions - with interest with:
less than two years of pensionable service. - Survivor - The person who
- Survivor benefits - Includes the annual allowances or lump sum benefits to which your eligible survivor or child is entitled after your death.
- TOS (Terms of service) - An agreement between you and the CF specifying the duration of your service that meet the needs of the Service and are acceptable to you.
TOS provides the framework for managing personnel flow within the Canadian Forces. - Top-up adjustment - this is the ratio of:
the contributions that have been made under Part I.1 plus the top-up contributions
Note: At the time of their transfer, a contributor may elect to make the full top-up contributions. In this case, the top-up adjustment is one.
over
the contributions that would have been paid under Part I during the years of Reserve Force pensionable service before the member becomes a contributor under Part I. - Transfer value* - The worth of your deferred annuity, including the statistical probability of future survivor or disability benefits, expressed as a lump sum in today’s dollars. In specified circumstances you can choose payment of the transfer value instead of a deferred annuity, if you are under age 50. If you are entitled to an immediate annuity this option is not available.
The transfer value amount is payable to another registered retirement savings plan (an employer’s registered pension plan, a locked-in RRSP, or a life income fund.) - Updated career earnings pension formula - A formula that calculates the plan member’s basic pension amount on the basis of the sum of the updated pensionable earnings earned over their career.
- Updated pensionble earnings - Under the pension arrangements to be authorized by regulations under CFSA Part I.1*
Your pensionable earnings, increased each year while you are a member of the plan, in accordance with increases, if any, in a Canadian Forces wage index described in the CFSA regulations. - Vest/vesting - The right of a plan member to receive a benefit on leaving the plan other than simply a return of contributions plus interest. The benefit may be in the form of an immediate or deferred annuity or the transfer out of the plan of the lump sum value of the accrued benefit.
- YBE (Year’s Basic Exemption) - The minimum annual earnings level ($3500) required to contribute to CPP. Earnings less than $3,500 / yr are not subject to CPP contributions but count towards CPP benefits. Currently Class A pay ( and Class B less than 31 days) is exempt from CPP deductions.
- Yearly maximum pensionable earnings (YMPE) - The YMPE, established by the Canada Pension Plan (CPP), determines the maximum level of earnings on which contributions can be made. As defined in the CPP Act, the YMPE is determined on a calendar-year basis, and reflects the national average industrial wage.
