Amendments to the Public Service Pension Plan - Information Notice

DATE:  DEC. 21, 1999

TO:  Heads of Human Resources

SUBJECT:  Amendments to the public service pension plan

This is to ask you to distribute the attached notice to employees concerning the recent amendments to the public service pension plan.

This notice provides an update on the amendments of June 17 and September 14, 1999 to the Public Service Superannuation Act and affects all plan members. Among topics of interest to plan members, it contains details about benefit improvements, the investment of employee and employer contributions in the financial markets and the changes to employee contributions.

Please note that this notice and additional information on pensions will be posted on the TBS website. In the coming weeks, the electronic version of the booklet "Your Pension Plan" which is also posted on the website will be updated to reflect the 1999 amendments to the pension plan.

In addition, in December, staff of the Pensions Division will brief the Compensation Managers on these changes to prepare them to answer any question they may receive from staff.

Further information will be provided when the Advisory Committee and the Pension Investment Board have been appointed.

Thank you for your cooperation in ensuring that this notice is distributed to your employees.

Original signed by
M. NOUVET


Marcel Nouvet
Chief Human Resources Officer

Enclosure

PUBLIC SERVICE PENSION AMENDMENTS 1999:

How will they affect your benefits and contributions?

Amendments to Your Pension Plan Have Come into Effect

Amendments to the Public Service Superannuation Act (PSSA) came into effect on June 17 and September 14, 1999. These amendments were made through the Budget Implementation Act and the Public Sector Pension Investment Board Act. This notice summarizes how these changes to your pension plan will affect your retirement benefits and your contributions, and when each will come into effect.

Benefit Improvements

1.  Pension Calculation Improvement

• Effective June 17, 1999, pensions are calculated on the average salary of the five years of highest earnings, rather than the former six-year average. Averaging over the shorter period will usually result in higher pension benefits.

2.  Supplementary Death Benefit Improvements

• As of October 1, 1999, there have been improvements to the term-life insurance plan provided under the PSSA. This insurance is known as the Supplementary Death Benefit (SDB) plan.
• Employee contributions to SDB plan have been reduced by 25%, from $0.20 to $0.15 per $ 1000 of coverage.
• The annual reduction in coverage has been pushed back from age 61 to age 66, thus extending both the period of unreduced coverage by five years and the total period of coverage to age 75.
• The paid-up Supplementary Death Benefit has been doubled from $ 5000 to $ 10000. This premium-free coverage begins at age 65.

3.  Lower Pension Reduction at Age 65

• As of June 17, 1999, public service pensioners will see a smaller reduction in their superannuation benefits when they reach age 65 (the average age at which a CPP/QPP retirement pension becomes payable).
• The smaller reduction is a result of basing the calculation on a five-year average salary instead of the three-year average salary that formerly applied.

4.  Survivor Benefits Extended

• Survivor benefits may now be paid to the same-sex partner of a plan member who dies on or after September 14, 1999.

Contribution Changes

1.  Market Investment of Employee and Employer Contributions

• Beginning on April 1, 2000, new contributions made to the PSSA pension plan both by public service employees and by the government as the employer will be deposited in a newly created Pension Fund.
• From there, these contributions will be invested in financial markets by a Pension Investment Board (PIB), soon to be established.
• The PIB will operate independently of the government and plan members but is required by the Public Sector Pension Investment Board Act to invest contributions prudently, in the best interests of plan members. It will also be required to report the results of its investments to Parliament and to the ministers responsible for the three major public sector pension plans.
• Members of the PIB will be appointed by the Governor in Council on the recommendation of a Nominating Committee. The Nominating Committee will be composed of members recommended by the three advisory committees established under the Public Service Superannuation Act, the Canadian Forces Superannuation Act and the Royal Canadian Mounted Police Superannuation Act.

2.  PSSA Employee Contribution Rates Frozen from 2000 to 2004

• For the next four years, employee contribution rates for the PSSA pension plan will be frozen at 1999 levels. In other words, employees will continue to contribute to their PSSA plan at the two rates that currently apply: (1) a rate of 4% on pensionable earnings up to the maximum covered by the Canada or Quebec Pension Plan (CPP or QPP) and (2) a rate of 7.5% on pensionable earnings above that maximum. (In the year 2000, the maximum salary covered by CPP or QPP will be $37 600.)
• The amended PSSA provides that, after 2003, the Treasury Board may set contribution rates as necessary. This authority will be subject to two limitations: (1) no single rate increase will exceed 0.4% of salary in any given year; and (2) rates will not increase past the point where employees are paying 40% of the current service costs of their pension plan.

3.  CPP/QPP Rate Increases Take Effect

• Further CPP/QPP rate increases, applying to all Canadians, are scheduled over the next four years. Previously, the PSSA imposed a cap of 7.5% on its plan members' total pension contributions. As CPP/QPP contribution rates increased, PSSA employee contribution rates declined by equivalent amounts.
• The amended PSSA has removed the cap on plan members' total pension contributions. Although the PSSA employee contribution rate will remain stable for the next four years, public service employees will henceforth experience the same effects of scheduled CPP/QPP rate increases as all other Canadians.
• The following table shows the contribution rates for both the PSSA and the CPP/QPP for this period.

• By 2003, as a result of CPP/QPP rate increases, a public service employee earning $30,000 a year will be paying about $265 a year more than his or her total pension contributions in 1999. For an employee earning about $40,000 or more, the increase in total contributions will amount to $425 a year by 2003.

4.  Employer Contribution Rate to be Set

• Currently, the government is paying more than 2.4 times or slightly more than 70% of the current service costs of the PSSA pension plan. Consequently, plan members are paying less than 30% of those costs. The employer is expected to continue to pay approximately 70% of the pension costs until 2004 when the contribution rates come up for review.
• A 60/40 cost split between the employer and the employees, respectively, is the historical average for the plan.

Other Information

1.  Advisory Committee Mandate Expanded

• The amended legislation requires that an Advisory Committee be appointed and that half its members represent PSSA plan members. The legislation gives the committee a broader mandate to review matters respecting the administration, design and funding of the benefits provided under the PSSA and to make recommendations to the Minister on these matters.
• The government is expected to announce appointments to the Advisory Committee soon, on recommendations from representatives of plan members and pensioners and the President of the Treasury Board.

2.  Update on Transfer Agreements

• Transfer agreements between the Government of Canada and another employer enable employees who have participated in the pension plans of both employers to transfer their pension credits from one employer to the other, under certain conditions.
• There have been two new transfer agreements negotiated under new rules which came into effect on October 15, 1997. These new agreements are with the Public Service Alliance of Canada and with Ville de St-Hubert.
• Other agreements are being negotiated.
• Please consult your compensation advisor to determine whether these agreements apply to you.

3.  Dental Services Plan

• A Pensioners' Dental Services Plan (PDSP) is expected to be introduced in the summer of 2000. The proposed plan is expected to apply to most current and future pensioners under the Public Service Superannuation Act, the Canadian Forces Superannuation Act, the Royal Canadian Mounted Police Superannuation Act and certain other Acts.
• The proposed PDSP would be voluntary and would provide coverage similar to the current dental plan for employees. The cost of the proposed PDSP would be shared between the Government of Canada and plan members.

Need Further Information?

• For further information, see your compensation advisor or visit the TBS Web site at
  http://publiservice.tbs-sct.gc.ca
  http//www.tbs-sct.gc.ca

FACTSHEET ON CHANGES TO THE PUBLIC SERVICE
PENSION PLAN

(For information on concurrent changes to the pension plans for the Canadian Forces and the
Royal Canadian Mounted Police, check the websites for National Defence and Solicitor General, respectively.)

Improvements to Employee Benefits

As the employer of the public service, the federal government has recently amended the employee pension plan it sponsors under the Public Service Superannuation Act (PSSA). Among the amendments are several improvements to the employee benefits package.

Change in the Basic Benefit Formula

Background

• The PSSA plan is a defined-benefits pension plan. This means that members can use a formula set out in the terms of the plan to calculate what benefits they will receive on retirement. Under the former legislation, the following formula was used to calculate retirement benefits:

(2%) X (number of years of pensionable service) X (average salary for
six consecutive years of highest-paid service).

• Most other major public sector pension plans use five as the number of consecutive highest-salary years on which average salary is based. In most cases, a lower number of years used in the average yields higher benefits for the plan member.

Summary of Amendments

• The PSSA pension plan will henceforth use the following formula for calculating retirement benefits:

(2%) X (number of years of pensionable service) X (average salary for
five consecutive years of highest paid service).

• This amendment came into effect on passage of the budget legislation, June 17, 1999.

Change in the CPP/QPP Integration Formula

Background

• The PSSA pension plan is integrated with the Canada/Quebec Pension Plan (CPP/QPP) in respect of both contributions and benefits.
• Under integration, benefits of the PSSA plan are reduced by a set formula when plan members begin to draw CPP/QPP at age 65 (earlier if the plan member becomes entitled to CPP/QPP disability benefits).
• A 1998 amendment to the CPP/QPP replaced a three-year average with a five-year average in the formula for calculating CPP benefits. As long as the corresponding average for the PSSA pension plan remained at three years, the integrated benefits were slightly lower than before.

Summary of Amendments

• The formula for calculating the reduction in PSSA pension plan benefits at age 65 will henceforth be based on a five-year instead of a three-year average.
• This adjustment will result in a slightly smaller reduction of benefits for public service employees at age 65. It will also bring the PSSA pension plan in line with CPP/QPP reform.
• This amendment came into force on passage of the budget legislation, June 17, 1999.

Extension of Survivor Benefits to Same-Sex Partners

Background

• The federal government wishes to fulfil its obligation, as an employer, to ensure that its pension package for employees is fair, equitable, and in keeping with opinions of the courts.
•  
• Government precedents: The move to revise survivor benefit provisions parallels similar decisions by the governments of Nova Scotia, British Columbia, Ontario, Quebec, New Brunswick, and Saskatchewan respecting public sector pension plans.
•  
• Court precedents: The federal government's move also follows several recent court decisions favouring benefits for same-sex partners. Notably, the Ontario Court of Appeal ruled in April 1998 that the Income Tax Act (ITA) treated same-sex partners unfairly by limiting the registration of pension plans, and by implication the attendant tax advantages, to plans providing survivor benefits only for opposite-sex partners. Since then, pension plans offering survivor benefits to same-sex survivors may be registered under the ITA. More recently, the Supreme Court of Canada confirmed that excluding same-sex partners from rights or benefits provided to opposite-sex couples living in common-law relationships violates the Charter of Rights and Freedoms.

Summary of Amendments

• The amended PSSA permits payment of survivor benefits to a same-sex partner by the same criteria as applicable to an opposite-sex partner in a common-law relationship.
• Certain technical amendments have modernized the administration of survivor benefit provisions by removing Treasury Board's discretionary powers and setting out criteria for establishing benefit eligibility.
• These provisions came into effect on September 14, 1999. Survivor benefits may thus be extended to the same-sex partner of a plan member who has died on or after that date.

Changes to PSSA Supplementary Death Benefits

Background

• The Supplementary Death Benefit (SDB) plan under the PSSA pension plan is an employer-sponsored group life insurance program. The SDB plan is self-funded and self-administered. Premiums are paid into and benefits are paid out of the SDB Account. Most contributors to the PSSA pension plan automatically receive SDB coverage and in most cases retain coverage on retirement. Full coverage is two times annual salary.
•  
• Formerly under the SDB plan: the premium rate was $0.20 per month for each $1000 of coverage; coverage diminished by 10% beginning at age 61; and a $5000 premium-free ("paid-up") lifetime benefit was available to most participants at age 65.
• The SDB Account currently holds a surplus of more than $1 billion. The amendments respond to the recognized need for reducing the SDB surplus to a reasonable level in the long term.

Summary of Amendments

• Increase in paid-up benefit: The paid-up benefit available to participants at age 65 has increased from $5000 to $10,000.
•  
• Extension of paid-up benefit: The paid-up benefit has been extended to elective participants who retired on or after April 1, 1995, with an entitlement to an annual allowance within 30 days of ceasing to be employed.
•  
• Delay of coverage reduction: The 10% annual coverage reduction that formerly began at age 61 has been delayed until age 66.
•  
• Premium rate reduction: The premium rate for participants has been reduced by 25% from $0.20 to $0.15 per month for each $1000 of coverage.
• These amendments came into effect on October 1, 1999.

Dental Services Plan for Public Service Pensioners

Background

The proposed new Pensioners' Dental Services Plan (PDSP) was not part of the recent amendments to the pension legislation. Rather, it will be introduced under the authority of the Treasury Board in the summer of the year 2000. For details, check this website for the recent "Notice to Employees" on the PDSP.

FACTSHEET ON CHANGES TO THE PUBLIC
SERVICE PENSION PLAN

(For information on concurrent changes to the pension plans for the Canadian Forces and the Royal Canadian
Mounted Police, check the websites for National Defence and Solicitor General, respectively.)

Changes to Employee Contribution Rates

As the employer of the public service, the federal government recently amended the employee pension plan it sponsors for its employees under the Public Service Superannuation Act (PSSA). Among the amendments are provisions for changing the method of setting employee contribution rates.

Background

• The PSSA pension plan is integrated with the Canada and Quebec Pension Plans (CPP/QPP) in respect of both benefits and contributions. Formerly, under integration, the maximum a public service employee was obliged to contribute to both plans in total was 7.5% of salary.
• CPP/QPP contribution rates have been increasing in recent years, and these increases apply in principle to all Canadians. In effect, however, the 7.5% cap on total pension contributions sheltered public service employees from these increases. As the CPP/QPP rate rose, there was an equivalent decline in the employee rates for the PSSA plan. Moreover, the government, as the employer, was obliged to make up all shortfalls caused by declining employee contributions to the PSSA plan.
• As a result, the ratio by which the employer and the employees shared the costs of the PSSA pension plan changed. A 60/40 sharing of costs between the employer and the employees, with the employer assuming the larger share, is the historical average for the PSSA pension plan. Currently, however, employees pay less than 30% of the costs of their own pension plan, while the government pays more than 70%. This translates into a government contribution of $2.40 for every dollar contributed by employees.
• Further increases in CPP/QPP contribution rates are scheduled for the next four years. If the 7.5% contribution cap for federal employees had remained in place, the employee share of public service pension costs would have grown even smaller.

Summary of Amendments

• Under the amended PSSA, employee contribution rates for the public service pension plans will henceforth set independently from those for CPP/QPP. This means that public service employees will no longer have a cap on their total pension contributions. Beginning in the year 2000, employees will no longer see their contribution rates for their PSSA plan decrease as their required contributions to the CPP or QPP increase.
• From the year 2000 through 2003, employee contribution rates for the PSSA pension plan will not increase, but rather will be frozen at 1999 levels. In other words, for the next four years, employees will continue to contribute to their PSSA plan at the two rates that currently apply: (1) a rate of 4% on pensionable earnings below the maximum salary covered by CPP/QPP and (2) a rate of 7.5% on pensionable earnings above that maximum. In the year 2000, the maximum salary covered by CPP/QPP will be $37,600.
• Beginning in 2004, the Treasury Board will have authority to set employee rates for the PSSA pension plan, but that authority will be subject to two limitations. First, no rate increase can be more than an additional 0.4% per year. Second, the employee share of current service costs cannot increase past 40%.
• It is expected that the employer will continue to pay approximately 70% of the PSSA pension plan costs until 2004 when the contribution rates come up for review.
• Although employee contribution rates for the PSSA plan will not increase from 2000 through 2003, it is important for public service employees to understand that they will nevertheless be subject to the same CPP/QPP rate increases as apply to other Canadians during that time. However, CPP/QPP rates are currently scheduled to remain constant after 2003.
• The following table shows the contribution rates for both the PSSA and the CPP/QPP for the period 2000 through 2003.

• By 2003, as a result of CPP/QPP rate increases, a public service employee earning $30,000 a year will be paying about $265 a year more than his or her total pension contributions in 1999. For an employee earning about $40,000 or more, the increase in total contributions will amount to $425 a year by 2003.

FACTSHEET ON CHANGES TO THE PUBLIC
SERVICE PENSION PLAN

(For information on concurrent changes to the pension plans for the Canadian Forces and the Royal Canadian Mounted Police, check the websites for National Defence and Solicitor General, respectively.)

Changes to Plan Management

As the employer of the public service, the federal government recently amended the employee pension plan it sponsors under the Public Service Superannuation Act (PSSA). Among the amendments are several provisions respecting the management of the PSSA pension plan and its superannuation account.

Market Investment and the Public Sector
Pension Investment Board

Background

• To date, employer and employee contributions to the PSSA pension plan have been held in an account forming part of the Public Accounts of Canada. Since 1969, the entire balance of the superannuation account has been credited with interest as if it had been invested in Government of Canada bonds. No amounts have ever been invested in other vehicles available in financial markets (e.g., stocks).
• Experience shows that investing pension contributions in diverse financial markets would generate higher investment returns over the long term. Higher returns would mean lower costs to be covered by employer and employee contributions.

Summary of Amendments

• Beginning on April 1, 2000, employer and employee contributions to the PSSA pension plan will no longer be credited to the Public Accounts of Canada. Rather, they will be deposited in a newly created pension fund to be invested in financial markets.
• For investment purposes, the amended legislation includes a new act to establish the Public Sector Pension Investment Board (PIB). The PIB will operate independently of the government and plan members.
•  
• PIB Responsibilities: The PIB will be responsible for investing employer and employee contributions in financial markets with a view to achieving maximum rates of return without undue risk. The PIB will carry out this responsibility in the best interests of plan beneficiaries and with due regard to the funding policies and requirements of the pension plan. Among other duties, the PIB will:
• set investment policies, standards, and procedures;
• establish investment and audit committees and appoint an auditor;
• establish conflict-of-interest rules for directors and a code of conduct for employees; and
• comply with legislated investment parameters.
•  
• PIB Composition: The PIB will be composed of 12 qualified directors, appointed by the Governor in Council on the recommendation of a nominating committee. The Governor in Council will select one of the directors to be the Chair.
•  
• PIB Nominating Committee: An eight-member nominating committee will be formed on recommendation of the advisory committees for the three major employee pension plans (i.e., the Public Service Superannuation Act (PSSA), the Canadian Forces Superannuation Act (CFSA), and the Royal Canadian Mountain Police Superannuation Act (RCMPSA)). The Nominating Committee will comprise representatives of the employer and of members of the three plans, a representative of pensioners as well as an independent Chair. In creating the list of nominees to the PIB, members of the Nominating Committee will be required to consider proven financial ability and relevant work experience of candidates.
•  
• Protections for Stakeholders: Two types of protection will apply. First, various measures, such as a code of conduct and conflict-of-interest rules, will be put in place to ensure that the PIB makes good investment decisions. Second, to ensure that the PIB is accountable to stakeholders for the results of its decisions, the new act will require the PIB to
• issue quarterly financial statements to the ministers responsible;
• provide the ministers with an annual report on operations, to be tabled before Parliament and made available to plan members;
• meet annually with the advisory committees for each of the three main pension plans; and
• make copies of its by-laws available to anyone on request.

Background

• The former legislation permitted, but did not require, the government to establish an advisory committee for each of the employee pension plans it sponsors. Such advisory committees though not previously mandatory, have in fact been established for some time.
• The former mandate for the pension advisory committees was general. The legislation stated simply that the committees were to advise the minister responsible on matters concerning the administration of the pension plans.
• Traditionally, in the case of the PSSA plan, about half of the advisory committee consisted of representative of employees and pensioners. However, the former legislation did not so stipulate. Nor did it give employees and pensioners the right to nominate their own representatives.

Summary of Amendments

The amended legislation has strengthened the pension advisory committees by stipulating that:

• an advisory committee must exist for each of the three federal employee pension plans;
• for the PSSA Advisory Committee, employees and pensioners will make up at least half of the Committee, and employees and pensioners have the right to nominate their representatives; and
• each committee has a clear mandate to
• review matters concerning the design, funding, and administration of its respective pension plan and make recommendations to the minister responsible;
• recommend to the responsible minister candidates for appointment to the PIB Nominating Committee; and
• review any other pension-related issue referred to it by the minister responsible.

Management of Pension Account Surpluses

Background

• The former pension legislation contained no provision for dealing with any surplus in the PSSA superannuation account. Whenever projections showed the account to be holding more than necessary to meet future obligations, both the employer and the employees were nevertheless required by law to continue contributing to the account as before.
• Since 1991, a surplus totalling some $15 billion has accumulated in the public service superannuation account. Without a legislative change, the government would have continued to credit ever-growing employer contributions to a pension plan that was increasingly generating a surplus far in excess of what the Income Tax Act allows for pension plans in the private sector.

Summary of Amendments

•  
• Current surplus: The amended legislation gives the government the authority to debit the current surplus from the PSSA superannuation account in instalments over a period of up to 15 years.
•  
• Future surpluses: The amended legislation gives the Treasury Board the authority to deal with any surpluses in the new PSSA superannuation fund as they occur, either by reducing employee and/or employer contributions or by withdrawing amounts from the fund. The Treasury Board has also received the authority to maintain a reserve level similar to that allowable under the Income Tax Act.
•  
• Future deficits: The employer will continue to assume sole responsibility for deficits in the PSSA superannuation account. In other words, as in the past, the government alone will be obliged to make any extra contributions which may be required in the future to cover eventual deficits.

A New Canada Post Pension Plan

Background

• Some 48,000 employees of Canada Post Corporation (CPC) are currently members of the PSSA pension plan.
• After reviewing the implications of an imposed increase in the employer contribution rate, CPC decided to withdraw from the PSSA and establish its own pension plan. This decision will enable CPC to assume full responsibility for this important aspect of its employee relations. The government, as shareholder, supports this decision.

Summary of Amendments

The amended legislation provides that

• CPC must establish at least one pension plan providing benefits equal to, and at the same employee costs as, those under the PSSA plan;
• the value of benefits already earned under the PSSA plan will be transferred to the new plan, and benefits under the new plan will be equal to those payable under PSSA;
• the new plan must provide opportunities for having past service other than transferred service recognized;
• CPC will determine the disposition of any future pension plan surplus;
• provisions other than those dealing with benefits transferred from the PSSA will become subject to collective bargaining after October 1, 2001; and
• CPC will establish a life insurance program similar to the PSSA Supplementary Death Benefit plan.

FACTSHEET ON CHANGES TO THE PUBLIC SERVICE
PENSION PLAN

(For information on concurrent changes to the pension plans for the Canadian Forces and the Royal Canadian Mounted Police,
check the websites for National Defence and Solicitor General, respectively.)

Update on Pension Transfer Agreements

Background

• The Government of Canada enters into pension transfer agreements with other employers to enable persons moving to or from government employ to transfer previous pension credits to the new employer's pension plan, under certain conditions.
• The authority to enter into pension transfer agreements and the related legislative requirements are contained in the Public Service Superannuation Act and its regulations.
• The general rules, applying to pension transfer agreements are outlined in the booklet Your Pension Plan.
• New rules for these transfer agreements have been in effect since October 15, 1997.
• Since the new rules came into effect, the following changes have been made:

Update

• The first two new transfer agreements, which came into effect in the past summer, have been negotiated under the new rules. These are the agreements with the Public Service Alliance of Canada and with Ville de St-Hubert.
• Discussions are under way toward further new agreements with other current agreement partners.
• The Annex below will be updated to list new agreements as they are signed.

Information Sources

• The Public Service Superannuation Act and its regulations may be found on the Internet at the following address:

http://laws.justice.gc.ca/en/P-36/index.html

• The booklet Your Pension Plan may be found on the Internet at the following address:

http://www.tbs-sct.gc.ca/pubs_pol/hrpubs/Pensions/YPP_e.asp
http://www.tbs-sct.gc.ca/pubs_pol/hrpubs/Pensions/YPP_e.asp

• For further information, please see your compensation advisor.

ANNEX

(List of pension transfer agreements signed after October 15, 1997)