Why is it proposed to move to flat accrual and single contribution rates?
The proposed changes have been guided by the plan partners’ approach to plan redesign. The key principles have been to:
- improve equity for members,
- align benefits with how the majority of members use them,
- set a strong foundation for the long-term sustainability of the plan, and
- staying within the current cost envelope.
Moving to flat accrual and single contribution rates will improve equity in the plan for all general members (Group 1). There would be one contribution rate for all general members, regardless of their income, and a proportional benefit will be accrued based on a flat rate for all general members.
How would the accrual rate change?
Currently, general members (Group 1) earn a lifetime pension equal to 1.3% of their five-year highest average salary (HAS) up to year’s maximum pensionable earnings (YMPE) and 2.0% of HAS above YMPE, for every year of service. YMPE in 2020 is $58,700. With the proposed plan design changes, pension benefits on future years of service (after the proposed effective date of January 1, 2022) would have the flat lifetime benefit accrual rate of 1.9% of HAS. This improves equity amongst members, regardless of their income.
With the proposed change of moving to a flat lifetime benefit accrual rate (of 1.9% of HAS), the vast majority of G1 members would receive a higher lifetime pension than under the existing accrual rate structure. Only the very high-income earning members will have a reduced benefit, but they will also see a reduced contribution rate.
For G1 members retiring with service before and after the proposed effective date, their benefit will be calculated on a prorated basis where the 1.3%/2% benefit accrual will apply on all service up to January 1, 2022 and the 1.9% benefit accrual will apply on all service after that date.
How would the contribution rate change?
Currently there are two different contribution rates, above and below the year’s maximum pensionable earnings (YMPE – the maximum salary amount set by the Government of Canada on which you contribute to the Canada Pension Plan). Over time, an unintended consequence developed and members with salaries below YMPE have not been earning the same proportional benefit as those with salaries above the YMPE (for 2020, YMPE is $58,700). The proposed changes correct this by doing away with a two-tiered system. To improve equity, the proposed contribution rate is 8.61% of all salary.
How would the change in contribution rate affect me as a member?
Individual members may see an increase or decrease in their contributions. If a member’s salary is below the YMPE, they may have a marginal increase in their contribution rate from 8.5% to 8.61%. For example, for a member earning $50,000 a year, the current contribution is about $163 per bi-weekly paycheque. Under the proposed change, the contribution would be about $2 more per bi-weekly paycheque. With this relatively small increase, comes an improved lifetime pension.
In contrast, members with higher earnings may experience decreased contributions, as the current contribution rate of 10% on salary above YMPE exceeds the proposed flat contribution rate of 8.61%. Using the 2020 YMPE of $58,700, for instance, members earning more than $63,345 will pay less contributions under the proposed formula (8.61%) compared to the current rate (8.5% below YMPE and 10% above YMPE). With a decrease in contribution rates, members can expect to see lower deductions on their take-home pay.