The government has announced that, effective January 1, 2006, contribution rates will increase for Public Service employees, members of the Canadian Forces (CF) and members of the Royal Canadian Mounted Police (RCMP). In addition, amendments to the three major federal public sector pension plans will be sought to change the formula by which plan benefits are coordinated with the Canada Pension Plan (CPP) benefits, in plan members’ favour.

Member Contribution Rate Changes

Q1. Who do the contribution rate increases apply to?

These changes affect only those members of the CF who are or will be participants under Part I of the Canadian Forces Superannuation Act (Regular Force members and some members of the Reserve Force). Separate pension arrangements for other members of the Reserve Force will be implemented later this year.

Q2. Who sets member contribution rates?

In 1999, the Canadian Forces Superannuation Act, the Public Service Superannuation Act, and the Royal Canadian Mounted Police Superannuation Act were all amended to require that the Treasury Board Ministers set the member contribution rates for 2004 and subsequent years. In the case of the Canadian Forces, an increase requires the joint recommendation of the President of the Treasury Board and the Minister of National Defence.

Q3. How long have the current member contribution rates been in effect?

The current member rates (4% of salary below and 7.5%% of salary above the maximum covered by CPP) have been in effect since January 2000.

Q4. Why are my contributions going up?

In 1999 the government introduced measures to improve the long-term financial management of the three large federal public sector pension plans, affecting the CF, the RCMP and employees of the Public Service. These measures were designed to ensure that the costs of the pension plans were shared in a more balanced way between plan members and the Canadian public, whose tax dollars support these programs. Part of this long-term plan was to increase member contributions to the plans.

Q5. You mention a more balanced sharing of pension plan costs between plan members and the taxpayers. What do you mean?

It is a common misconception that the costs of the pension plan are shared 50/50 between members and the government. In fact, right now, the government is paying about 78% of current service costs under the CF plan, and CF members about 22%. What this means is that for every dollar a member contributes, the government contributes over three. Once the phase-in of the change in rates is complete, Public Service employees will be paying about 40% of the current service costs of their plan; CF members will be paying about 34% of the costs of the CF plan.

Q6. What will the increases be?

In 2006 an employee earning $50,000 will have to pay and 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 in additional pension contributions for 2006.

Q8. Are only CF rates going up?

No. There will be identical increases under the other two large public sector plans for the RCMP and Public Service employees. Members of all three plans contribute at the same rates and will continue to do so.

Q9. I don’t think it’s fair that I pay the same amount as public service employees. Life in the military is a lot different than life as a public servant.

While the CF plan and public service plan are alike in a great many ways, and both are generous plans, the CF plan has many important differences to recognize the greater demands that are placed on CF members. For example, CF members can be entitled to immediate annuities at a much earlier age than can public service employees. While it is true that CF members contribute at the same rate as public service employees, these more generous features in the CF plan mean that, in fact, the government, and in turn the taxpayer, pay a higher portion of the costs of the CF plan than they do for the public service plan. This will continue to be true. In fact, by 2013, public servants will pay about 40% of plan costs while CF members will pay about 34% of the cost of a pension plan that has more generous features.

Q10. Does this increase mean that there isn’t enough money in the pension fund to provide my pension?

Not at all. Members’ benefits are completely secure. The CF pension plan is a defined benefit plan. This means that the benefit a member receives is established by a formula that is specified in the pension legislation. If there is a deficit, the government is responsible for the shortfall. The purpose of the increase in the contribution rates is to ensure that there is a more balanced cost-sharing ratio between the government and plan members.

Q11. The government has taken huge amounts of pension surplus out of the pension plans the last few years. Why didn’t they use some of the surplus to make up the shortage of contributions instead of asking us to pay more?

The issue of the management of the pension plan surplus is now before the courts and it would be inappropriate, pending a final decision, to comment.

Canada Pension Plan Reduction Formula

Q12. How are the Canada Pension Plan and the CF plan connected?

When the CPP was introduced in 1966, the federal government decided to “integrate” the new plan with the pension plans that it sponsored for its workforce, rather than requiring contributors to pay additional contributions for their CPP coverage. As a result, the benefits of the CPP became available to the participants under the CF plan without any increase in their monthly pension contributions. While the contribution amount remained the same, a portion went to the CPP and the remaining served to pay for modified coverage under the CF plan. With the reduction in contributions to the CF Account, it was necessary to have a corresponding adjustment to benefits payable under the CF plan, to recognize those lower contributions and the fact that there will be a CPP benefit payable.

Q13. What does this integration mean as far as my contributions are concerned?

It means that the contribution rate is two-tiered. CF members contribute to the CPP 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 contributions are required are those up to $41,100.

(In 2005, employees contribute to the CPP at a rate of 4.95%).

In addition, a member of the CF, contributes to the CF Pension Fund as follows:

• 4% of earnings below the YMPE; and
• 7.5% of earnings above the YMPE.

Q14. When is the reduction factor applied to CF pensions?

CF pensions are reduced by a formula specified in the pension legislation:

• When a retired CF plan member reaches age 65, which is the normal age of eligibility for a CPP benefit, or
• When a retired CF plan member becomes entitled to a CPP disability benefit.

The CPP benefit may be more or less than the reduction of the CF pension since the provisions and the benefit calculation formula of the CPP are different from those of the CF pension plan.

Q15. How is the reduction factor calculated?

When the CPP was introduced in 1966, it was decided to coordinate the CF pension plan with it. When a CF plan member retired and reached the age of 65 or began to receive a CPP disability benefit, the CF pension would be reduced to take into consideration the payment of a CPP benefit.

However, when the existing reduction factor was adopted in 1966, it was recognized that at some point in the future, the reduction factor in the three major pension plans would have to be revisited as they and the CPP evolved.