ARCHIVED - Expenditure Review of Federal Public Sector - Volume One - The Analytical Report and Recommendation

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7. Comparing Pensions

Pensions and other benefits added at least 39% to the cost of the salaries paid to federal public servants in 2002–03. Within the benefits area, the pension plan–also known as superannuation–is by far the largest component, both in terms of value to employees and cost to the employer.^[107]

There are several pension plans covering federal public sector employees. The Public Service Pension Plan applies to the core public service and most separate employers. There are also the Canadian Forces Pension Plan, the Royal Canadian Mounted Police Pension Plan, and pension plans for federally appointed judges and for Members of Parliament.^[108] While the first three plans are very similar in benefits and financing arrangements, there are important differences. In this section we focus mainly on the Public Service Pension Plan, with references where appropriate to the other plans.

Overview of the Canadian pension environment

To put the federal Public Service Pension Plan and its comparability to other such plans in context, we begin with a thumbnail sketch of the overall pension environment in Canada.^[109] The Canadian retirement income system is generally described as comprising three pillars:

• government pension programs, mainly Old Age Security as well as the Canada and Quebec Pension Plans;
• employer-sponsored pension plans, and
• individual tax-sheltered retirement investments.

The first and third pillars are available to all Canadians.

Old Age Security

Old Age Security is payable to most Canadian residents aged 65 and over who have lived in Canada for at least ten years after reaching age 18. For the period from July to September 2004, benefits amounted to a maximum of $467 per month, with a supplement of up to $555 per month for low-income seniors. Benefits in 2003 were clawed back through the tax system when a recipient's income rose above $57,000, until they were fully repaid at $92,400.

Canada/Quebec Pension Plan

Almost all working Canadians are required to contribute to the Canada or Quebec Pension Plan depending on their province of residence. As of 2003, the first $3,500 of earnings was exempted and employee contributions were 4.95% of pay between $3,500 and $39,900 of income. Employers match the employee's contribution. Benefits are based on past earnings and number of years as a contributor. The maximums in 2004 were $814 per month for retirees, and $993 per month for those who have been determined to be disabled.

Registered Retirement Savings Plan

The main tax-sheltered vehicle for individual retirement savings is the Registered Retirement Savings Plan. According to the Income Tax Act, Canadians could contribute up to $14,500 per year in 2003. The principal and interest are exempt from income tax until benefits are paid out as income.

Employer/Union-sponsored retirement plans

The second pillar, employer- or union-sponsored retirement plans, include registered pension plans (RPPs), group registered retirement savings plans (group RRSPs), and deferred profit-sharing plans (DPSPs). Obviously access to such plans requires employment with an employer or membership in a union that has decided to sponsor such a plan or plans.

At the beginning of 2003, 5.5 million paid workers participated in 14,376 registered pension plans. This was the fifth consecutive year of growth in the number of workers covered, much of it attributable to increasing participation by women in the labour force, especially in the public sector. Overall, the proportion of paid workers in Canada covered by an RPP was about 40% in 2002, down from about 45% in 1992.^[110]

RPPs may involve contributions from both the employer and the employee (known as contributory plans), or from the employer alone (non-contributory). Overall in 2002, about 58% of plans, covering about 73% of members, were contributory. Virtually all the non-contributory plans were in the private sector, where about 49% of RPP members were covered by such plans. This proportion had declined somewhat from around 53% in the early and mid 1990s.

For 2002 as a whole, the total employer and employee contributions for registered retirement plans amounted to $23.5 billion. At about 14% (or nearly $3.1 billion in constant 2002 dollars) more than the previous year, this was the largest total and the largest annual increase since 1991. Employer contributions rose by 18% to $15.6 billion, while employee contributions rose by 5% to $7.9 billion.

Comparing public and private pension plans

As illustrated in Figure 1036, the gap between private and public sector membership has widened in recent years. After a substantial decline in public sector membership in the mid 1990s, the number of RPP members in the public sector grew by 5% between January 1998 and January 2002, to reach 2.5 million members. This was almost equal to the level of late 1994, before major workforce downsizing. On the other hand, after increasing sharply between 1998 and 2001, private sector RPP membership stabilized during 2001 at a level of about 2.9 million workers.

Public sector plans are generally much larger than those in the private sector. Although only 9% of RPPs are in the public sector, in January 2002 these accounted for close to half (46%) of all RPP members.

The most important distinction relating to RPPs is between defined contribution (DC) plans and defined benefit (DB) plans.

The pattern of participation in DB and DC plans differs between the public and the private sectors.

Both types of registered plans declined considerably in number from 1992 to 2002, as illustrated in Figure 1037.

In view of the relatively steady level of overall RPP membership, it is evident that the reduction in the number of active plans affected mainly smaller plans.

Figure 1036
Employee coverage by Registered Pension Plans in the public and private sectors, 1992–2002

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Source: Statistics Canada/Pension Plans in Canada 2002

Figure 1037
Registered Pension Plan numbers and membership in Canada, 1992 to 2002

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Defined benefit RPPs

Defined benefit (DB) plans provide pension benefits according to a formula specified in the plan text. Employer contributions are generally not set in advance, but are calculated on the basis of actuarial valuations. That is, they are a function of the cost of providing the promised benefit, reduced by the amount of employee contributions, if any.

In recent years, defined benefit plans have remained dominant in terms of the number of employees covered.

• 82% of all registered pension plan members participated in DB plans, down from 90% in 1992.
• DB plans decreased from 7,870 in 1992 to 6,777 in 2003.
• DB plan members stood at 4.5 million, down 5% from the 1992 membership of 4.78 million, but higher than the 1999 low point of 4.35 million.

Although plans covering 500 or fewer employees accounted for over 87% of DB plans in 2002, over half of members were in schemes that covered 30,000 or more employees. In effect, as shown in Table 1038, DB membership is dominated by large plans, notably by the federal and provincial governments, teachers' plans and municipal plans.

At the beginning of 2000, 69% of public sector members were covered by one of 13 public sector DB plans with at least 30,000 members.

Automatic adjustment of DB pension benefits to compensate for inflation is prevalent in the public sector but uncommon in the private sector. In 2002, as illustrated below in Figure 1039, just over half of public sector plans, covering nearly 79% of members, benefit from automatic indexing. Over 30% of public sector members were fully compensated for changes in the Consumer Price Index (CPI) and a further 41% were partially compensated. In the private sector, more than 80% had no automatic right to an adjustment relating to change in the CPI. Just over two percent of private sector members enjoyed full CPI indexation.

Figure 1039
Percentage Distribution of Registered Pension Plan members (DB plans only) by Policy on Adjustment of Pension Benefits to Inflation and by Sector, 2002

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Defined contribution RPPs

In the case of contributory DC plans, the employer and the employees are committed to contributing a specific percentage of earnings or a specific amount per hour or per year of service. Pension benefits vary according to the amount of contributions accumulated and the return on the investment of these funds. Profit sharing plans are similarly a type of money-purchase plan, except that the contributions are expressed as a percentage of profits.

• As of January 2003, 83% of DC plan members were working in the private sector.
• DC plans declined by about 16%, from 8,713 to 7,347 during the decade since January 1993.

The number of employees covered by DC plans has grown steadily, from about 469,100 in 1992 to 830,000 in 2002, an increase of 77%.

In 2002, about 60% of DC plan members participated in plans covering fewer than 1,000 members. Over 98% of DC plans covered fewer than 1,000 members as shown in Table 1040.

Table 1040 Number of RPPs and membership by plan size, 2002
Size of establishment (number of employees)	RPPs #	%	Members #	%
0-9	1,814	24.8	8,342	1.0
10 - 49	3,142	43.0	78,112	9.8
50 - 99	995	13.6	68,966	8.7
100 - 499	1,109	15.2	224,266	28.2
500 - 999	139	1.9	96,782	12.2
1,000 - 4,999	103	1.4	209,859	26.4
5,000 - 9,999	2	0.0	11,480	1.4
10,000 - 29,000	6	0.1	98,281	12.3
30,000+	0	0.0	0	0.0
Total	7,310	100.0	796,088	100.0

Public and private sector RPPs

Contribution rates by employees differ significantly between the public and the private sectors. As Table 1041 shows, nearly two thirds of public employees participating in an RPP contribute at least 7% of earnings above the Canada and Quebec Pension Plans' Year's Maximum Pensionable Earnings (YMPE), and fewer than 3% contribute less than 5%. By contrast, in the private sector, more than 40% of employees covered contribute less than 5% of earnings; fewer than 2% contribute more than 7%.^[111]

The public and private sectors both exhibit a tendency toward lower contribution rates in recent years. For the public sector since the mid 1990s, about 10% of members have shifted from contributing more than 7% of earnings to contributing between 5% and 6.9%. In the private sector there has been a movement in the same direction, during the same period, of about 7% of members shifting from contributing between 5% and 6.9% of earnings to contributing below 5%.

Table 1041 Employee contribution rates (above YMPE) in contributory plans by sector, 1992 to 2002
	Public			Private			ALL
	<5%	5,0-6,9%	>7%	<5%	5,0-6,9%	>7%	<5%	5,0-6,9%	>7%
1992	0.8	26.6	72.6	34.4	64.6	1.0	10.3	37.4	52.3
1993	0.9	24.5	74.6	32.8	65.7	1.4	10.1	36.3	53.6
1994	1.4	21.0	77.6	35.3	63.6	1.0	11.0	33.0	56.0
1995	1.5	20.5	78.0	36.2	62.4	1.4	11.2	32.2	56.7
1996	1.6	21.1	77.3	35.3	63.3	1.4	11.3	33.3	55.4
1997	2.6	19.7	77.8	35.9	62.7	1.3	12.3	32.3	55.3
1998	2.1	21.3	76.6	36.7	61.7	1.6	12.3	33.3	54.4
1999	2.2	29.8	68.0	37.4	60.9	1.7	12.9	39.3	47.7
2000	2.3	33.0	64.7	38.7	59.6	1.7	14.0	41.5	44.5
2001	2.5	31.7	65.8	40.8	57.6	1.5	14.9	40.1	45.0
2002	2.7	31.4	65.9	41.8	56.3	1.8	15.2	39.3	45.4

Figure 1042
Percentage distribution of Registered Pension Plan members by benefit formula and sector, January 2002

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Presumably corresponding to the higher employee contribution rates in the public sector compared with the private sector, the benefit rates are generally higher in the public sector, as set out in Figure 1042. Moreover, there is an observable pattern in benefit rates for public sector plans, whereas no such pattern could be determined for the private sector. For example, in the public sector in 2002, over 90% could expect a pension amounting to 2% or more of their eligible earnings per year of service. Conversely, only about 20% of RPP plan members in the private sector could expect benefits at that level. The proportions of private sector members with no fixed benefit, a benefit below 2%, 2% or more, a fixed monthly benefit, or some other formula were each in the range of 10% to 25% of members.

Overall observations on pension plan comparability

This concludes our overview of the Canadian pension environment. The broad points of greatest relevance to our study are summarized below.

Public employees much more likely to have registered pension plans

Only about two in five paid workers in Canada were covered by a registered pension plan in 2003. Within this 40% of the Canadian workforce, about 85% participated in a DB plan in 2002. Nevertheless, the number of workers covered by DC plans has been growing more rapidly.

In the public sector, coverage by registered pension plans was over 90%.

Public sector, large plans/private sector, small plans

Large plans, covering 30,000 or more employees, are predominant in the public sector, whereas smaller plans were more common in the private sector. This reflects the size difference of public and private sector organizations. 

Public sector employees contribute more to registered plans

Two thirds of employees in the public sector contributed at least 7% of their earnings in 2002 to their registered pension plan. By contrast, over 40% of private sector workers covered by such plans contributed less than 5% of earnings.

Public plans have higher benefits, inflation protection

Consistent with higher contribution rates, benefit rates were higher in the public sector. Over 90% in that sector were entitled to pensions worth 2% or more per year of service. Only about 20% of registered pension plan members in the private sector could expect benefits at that level.

Four fifths of plan members in the public sector enjoyed automatic adjustments covering all or part of inflation. The opposite was true in the private sector where 80% had no automatic right to such adjustment.

These findings, derived from surveys conducted by Statistics Canada, offer a context for weighing the relative value of federal public service pensions.^[112] We now address more specifically the Public Service Pension Plan and how it compares with other major public and private sector registered pension plans.

Comparing the federal Public Service Pension Plan to other major public and private plans

As part of the 40% of paid workers in Canada who participate in a registered pension plan, federal public servants are placed more advantageously than those Canadians who must rely only on general government pension plans such as the CPP, QPP and OAS, as well as tax-sheltered savings through such vehicles as RRSPs. On the other hand, pension contributions for the federal public service were relatively large in 2002–03 at 7.5% on earnings above the CPP/QPP Year's Maximum Pensionable Earnings and 4% below that level. This section aims to assemble available information that will allow us to position the federal Public Service Pension Plan more rigorously in comparison with other plans.

There is, unfortunately, no recent definitive study that weighs the relative benefits and costs of various plans according to a widely accepted method. In particular, the universe of plans to be compared varies from study to study, based on the availability of plan details to the agency conducting the analysis. Moreover, the importance we should attach to certain plan features and the best method of assessing their value, are at least partly subjective. There are, however, some studies completed over the past several years that have compared the federal public service plan with provincial plans and major private sector employers' plans. When taken together, these studies do permit us to form a reasonable comparative view, using annual employer contributions and combined employer/employee paid value as overall standards of comparison.

In preparing this section, we have relied mainly on the four studies described below.

Towers Perrin, 1997^[113]

This was undertaken in the context of downsizing the public service pursuant to Program Review. One aspect of this was transferring federal employees to provincial governments. This study looked at comparing estimated cost among the pension plans covering provincial civil servants.

Buck Consultants, 2001^[114]

This study was carried out to compare the federal Public Service Pension Plan with the estimated benefits of DC plans.

Buck Consultants, 2002

The second study by Buck Consultants, a slide presentation prepared for the Public Service Pension Advisory Committee, a union-management committee appointed by the President of the Treasury Board to advise on pension policy, compared the Public Service Pension Plan with eight provincial plans.^[115]

Towers Perrin, 2004^[116]

This study compared federal Public Service Pension Plan benefits to a peer group of other plans included in Towers Perrin's proprietary database.

Our review of the available information will cover:

• the basic pension formula,
• the arrangements for integration with the Canada and Quebec Pension Plans,
• ancillary benefits such as early retirement including bridge benefits,
• the availability and level of survivor benefits, and
• indexation to compensate for inflation.

We will then look at the level of employee contributions, the cost to the employer, and the total value of the pension plan.

Finally, we will present a perspective on the overall comparability of the Public Service Pension Plan with pension plans sponsored by other large employers.

Basic pension benefits

Typically, benefits are calculated as follows:

Annual benefit-accrual rate  x  Years of service  x  Average earnings

For the federal public service, the annual benefit accrual rate is normally 2%.^[117] Such plans are often referred to as 2% integrated plans. According to Statistics Canada, in 2000 over 90% of public sector pensions provided benefits based on at least 2% of eligible average earnings per year of service. The corresponding proportion in the private sector was about 20%.

Current data from Towers Perrin, which reports on the benefit accrual rate for 67 major private and public pension plans in Canada with employee contributions, found that in 75% of the cases, 2% was the benefit-accrual rate on earnings above the Year's Maximum Pensionable Earnings (YMPE) covered by CPP/QPP. The only other substantial level was 1.6% to 1.9%, which applied to 14 cases (21%).^[118]

The other factor determined by employer policy is average earnings. According to the 1997 Towers Perrin study, all provinces but Prince Edward Island and the Quebec Pension Plan for Management used an average of the best five years method to calculate earnings for pension purposes.^[119]

As an overall assessment of the basic pension benefit, the 2002 Buck Consultants study analyzed the position of the Public Service Pension Plan by quartile versus eight provincial plans and 101 final-average plans. They looked at the benefit levels associated with various combinations of age-at-joining and salary. The federal plan ranked at the border of the second and the third quartiles on the benefit value at ages 55 or 60 for the basic pension.

Integration with the Canada/Quebec pension plans

An employer's policy on how to integrate its pension plan with the CPP/QPP is important in determining total pension benefits. Most registered pension plans, including the Public Service plan, use a lower benefit rate per year of service for income below the CPP/QPP's YMPE than they do above that income level.

Starting at age 65, the public service pension is reduced to take account of the retiree's expected CPP/QPP benefits. However, the combined benefit from the public service pension plan and CPP/QPP will not necessarily compensate for that reduction.

In general, the accrual of CPP/QPP benefits can differ significantly from regular registered pension plans. For example, CPP/QPP has been phasing in an increasingly long working period to achieve maximum benefits. Set at 31 years in 2003, it is slated to rise to 40 years by 2012. This compares with the 30-to-35-year period typical of those retiring under the Public Service Pension Plan. Also, CPP/QPP treats leave without pay and overtime differently from the federal pension plan in calculating pension entitlement. Figure 1043 illustrates the combination of the Public Service Pension Plan and the CPP/QPP in determining an employee's total pension benefit.

Figure 1043
Interaction of the Public Service Pension Plan and the CPP/QPP in determining an employee's total pension benefit, before and after age 65

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The Public Service Pension Plan effectively uses a benefit rate of 1.3% per year of service below the YMPE. Beginning in 2008 or earlier, benefits from CPP/QPP, combined with the public service pension, will typically be less than 2% per year of service. To reduce or eliminate such a gap, it would be advantageous to employees for the accrual rate below the YMPE to be greater than 1.3%, thus leaving a smaller space for CPP/QPP to fill.

Table 1044 shows the range of benefit accrual rates below the YMPE in a group of 32 private sector employer plans covering at least 1,000 employees.^[120] In this sample, 18 out of 32 of the plans provide for a benefit rate per year of service above the 1.3% accrual rate used by the Public Service Pension Plan, and 9 plans provide for 1.5% or above.

Early retirement and bridging

Among the most important benefits that are normally described as ancillary to the basic pension is the provision for access to early retirement. The Public Service Pension Plan permits an unreduced pension at age 55 for those with 30 years of service, or at age 60 with at least two years of service. Until age 65, the plan provides a benefit equivalent to 2% per year of service above and below the YMPE. Employees may retire as early as age 50 with an annual allowance, which is a reduced pension based on their age or years of service.

The 2004 Towers Perrin report assesses the Public Service Pension Plan as having

... generous early retirement provisions by virtue of these features: (i) a normal retirement date of age 60 (when age 65 is commonly used), and a bridge benefit before age 65 with no reduction (when many companies do not offer a bridge benefit).

Using the Towers Perrin database^[121] for comparative purposes, an examination of 33 comparable contributory 2% private sector plans covering 1,000 or more employees indicates that there is a wide range of formulas in use among other employers. Twenty‑one percent permit retirement only at age 65 and six percent at age 62, while at least one plan permits retirement at age 55 after 25 years of service.

According to the 2002 Buck Consultants study, the federal Public Service Pension Plan ranks very favourably among large employer plans. It falls into the first or second quartile for early retirement benefits, depending on the scenario analyzed for age at joining and salary.

Survivor benefits

The Public Service Pension Plan provides for survivor benefits for both a surviving spouse and dependent children. A federal plan member's surviving spouse receives a benefit equal to 1% per year of the deceased pensioner's years of service, multiplied by the best five years' average earnings. An important nuance is that the survivor benefit is not reduced to take account of integration with the CPP/QPP.

For dependent children, 20% of the spousal amount is payable for each child to a maximum of 80%. If there is no spouse, the dependent children receive twice as large an amount. For employees who die with no survivors, the Plan provides to the employee's estate whichever is greater–a return of contributions with interest or five years of the benefit the employee would have received if he or she had been eligible to retire.

Data from the current Towers Perrin database confirms what one would expect given a minimum legislative requirement for post-retirement survivor benefits, of 60% of the basic pensioner benefit for all provinces except for Manitoba, which is 66.7%. In a sample of 33 contributory 2% private sector plans covering at least 1,000 employees, 80% of the plans have survivor benefits in the range of 60% to 66.7% of the basic pensioner benefit or better. Several plans maintain the full pensioner benefit for a fixed period of five or ten years–in some cases, even paying this amount into the estate of a surviving spouse who dies during this transition period–with the reduced amount paid for the rest of the surviving spouse's life.

The most common provision is that the estate would receive the regular pension benefit for any portion of a guaranteed benefit period remaining after the pensioner's death, most often set at five or ten years. Where there is no spouse, in six of 33 plans (18%) there is no further benefit to the pensioner's estate.

According to the 2002 Buck Consultants comparison of the Public Service Pension Plan with eight provincial and 101 other final-average^[122] plans, the federal plan falls into the first quartile for the value of the survivor benefit.^[123]

Indexation

The Public Service Pension Plan provides for 100% automatic full indexation of all benefits each year to compensate for inflation as measured by the Consumer Price Index (CPI).

Complete inflation protection of this type is uncommon. In the Towers Perrin current database comparison, only five of 33 (15%) plans provide 100% CPI indexation. The most frequent policies reported in the database were irregular patterns in eight plans (24%), and 40% to 66.7% of CPI in seven plans (21%). In the 2002 Buck Consultants comparison, the federal plan was approximately at the 70% position, that is, right on the line that divides the bottom of the first from the top of the second quartiles in comparison with the eight provincial plans, but solidly into the first quartile when compared with the eight provincial and the other 101 final-value plans.

Employee contributions

For the Public Service Pension Plan, in 2002–03 employees contributed 4% of earnings below the CPP/QPP YMPE, and 7.5% on earnings above that level, for a maximum of 35 years. This pattern is illustrated in Figure 1045.

Figure 1045
Level of employee contributions in 2002–03 to the Public Service Pension Plan and to the CPP/QPP according to the employee's annual earnings

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Among DB contributory plans in Canada generally in 2002, two thirds of public sector plan members contributed 7% or more of earnings, and one third paid between 5% of earnings and 6.9%. In the private sector, over 40% paid less than 5% of earnings and 56% paid between 5% and 6.9%.

Data from the current Towers Perrin database relating to plans like the Public Service Pension Plan that have a 2% accrual rate per year of service, indicate that average contribution rates for various types of private and public sector plans are as set out in Table 1046. This sample shows distinctly lower employee contribution rates on average than in the federal public sector, with 3.8% below the YMPE and 5.4% above.

Table 1046 Employee/employer contribution rates and cost-sharing ratios for major provincial government pension plans in 2003
	Average contribution rate		Numbers of Plans
	Below YMPE	Above YMPE
All sectors	4.2%	5.8%	44
Private Sector Only	3.8%	5.4%	35
Public Sector Only	5.8%	7.3%	9
Private Plans with over 1000 employees	4%	5.5%	28
Private Plans with under 1000 employees	3.2%	4.8%	7
Federal Public Service	4%	7.5%

Public sector plans in the sample are very similar to the federal public service above the YMPE at 7.3% but considerably higher below the YMPE at 5%. Table 1047 gives specific information on employee contributions for major provincial pension plans as of December 2003.^[124] Compared with the federal Public Service Pension Plan, all of these plans require substantially larger employee contributions below the Canada/Quebec Pension Plans' YMPE, and several are higher as well above the YMPE. The larger contributions below the YMPE are especially significant, since about two thirds of the whole federal public service salary mass falls in this area.^[125]

Employer cost and cost-sharing ratios

We now turn to employer cost and the ratio of cost sharing between the employer and employee with various registered pension plans. The most important point about employer contributions in the context of DB pension plans is that the employer must assume responsibility for the difference between what the employees contribute by formula and the actuarial estimate of what is needed to cover the prescribed benefits earned by employees through their service. Accordingly, the cost can fluctuate significantly, particularly in relation to changes in actuarial assumptions arising from forecasted changes in such major economic variables as real interest rates or annual changes in real earnings.

At the Canada-wide level, total employer contributions to registered pension plans in relation to current service amounted to $14.8 billion at the beginning of 2002.^[126] Employees contributed about $7.3 billion. The macro employer-employee pension cost-sharing ratio was then about 51%/49%.

For the public sector alone, the employer current service contribution was about $6.7 billion, and the employee contribution $4.9 billion, for a cost-sharing ratio of 58%/42%.

The federal government's employer pension contribution in 2002–2003 for current service totalled about $2.7 billion, or 18% of the total employer contribution in Canada for registered pension plans. The federal Public Service Pension Plan employer/employee cost-sharing ratio in recent years has been in the order of 72%/28%.

It should be noted that a small part of this amount (approximately $250 million) does not represent actual governmental contributions, but rather is an estimate of the government's share of pension costs recorded in internal government pension accounts. These amounts are referred to as contributions for simplicity of comparisons, although they do not represent actual disbursements.

In the 2002 Buck Consultants study, the Public Service Pension Plan ranks in the first quartile^[127] for employer cost for contributory plans under all of the age-at-entry and salary scenarios examined, in relation to a reference set of eight provincial and 101 other final-value pension plans. The data in Table 1047 shows that most provincial plans are funded on the basis of matching pension costs between the employer and the employees. Only British Columbia, the Alberta management pension plan, New Brunswick, and the Ontario hospital plans have the employer assuming substantially more than half the costs, with no share greater than 58%.

Table 1047 Average employee and employer contribution rates for selected public sector 2% Registered Pension Plans
	Regular employee contribution rate (current service)			Regular employer contribution rate (current service)
	Below YBE◊ %	Between YBE and YMPE◊◊ %	Above YMPE %	Below YMPE %	Above YMPE %
British Columbia	5.50	5.50	7.00	6.50	8.00	55 / 45
Alberta
Employees	6.17	6.17	8.81	Matching		50 / 50
Management	9.50	9.50	9.50	13.10	13.10	58 / 42
Saskatchewan
Public Service*	5.75	5.75	5.75	Matching		50 / 50
Manitoba	6.00	6.00	7.00	As required		47 / 53
Ontario
Public Service**	6.40	6.40	8.00	Matching		50 / 50
Municipal Employees***	7.30	7.30	9.80	Matching		50 / 50
Hospitals	6.90	6.90	9.20	1.26 times employee rate		56 / 44
Quebec
Civil Service	7.25	5.45	7.25	Matching		50 / 50
New Brunswick	5.80	5.80	7.50	7.30	9.49	57 / 43
Nova Scotia	5.40	5.40	7.00	Matching		50 / 50
Prince Edward Island	8.75	6.95	8.75	Matching****		50 / 50
Newfoundland and Labrador	8.60	6.80	8.60	Matching		50 / 50
Federal Public Service	4.00	4.00	7.50			72 / 28
Notes: ◊YBE is the "Year's Basic Exemption" under the Canada/Quebec Pension Plans. Below this level of earnings, ($3,500 in 2003) no contributions are levied in relation to CPP/QPP. ◊◊YMPE is the "Year's Maximum Pensionable Earnings" under the Canada/Quebec Pension Plans. It is the maximum level of earnings ($39,900 in 2003) on which contributions are collected or benefits paid. * 90% covered by a defined contribution plan. ** Effective 2005. *** For retirement at age 60. **** Plus special annual lump sum to 2004.

Total value and overall ranking

The total value of a pension plan is a measure of the overall benefits available to an employee through that plan. As we have seen in looking at the various basic and ancillary benefits of the Public Service Pension Plan, some features are less generous than other major plans, some more valuable, and others are fairly comparable. Total value aims to aggregate the component benefits to permit a summary assessment.

The most recent study specifically on the relative value of the federal public service plan is a 2004 Towers Perrin study, based on that company's proprietary Benefits Data Bank Benval®.This study positioned the Public Service Pension Plan vis-à-vis the pension plans sponsored by 14 major private and public employers in Canada. Overall, the study found:

• The federal Public Service Pension Plan had a total employer cost of 8.0% of the related salary mass. When employee contributions were included the total provided value was 13.1%. This put the plan fourth among 15 major employer plans.
• Employer-provided value was judged to be lower in view of the high employee contribution of 5.1% compared with the study group average of 3.0%.
• Excluding savings plans from consideration and comparing only DB and DC pension plans, the Government of Canada plan ranked third for employer-provided value and second for the total value including employee contributions.
• When comparing against DB plans only, the Government of Canada plan ranked at the 87^th percentile for employer provided value and at the 96^th percentile for the total value including employee contributions.
• In a separate, larger study by Towers Perrin, at 8% of base pay the Government of Canada's employer-provided pension and savings benefits placed the plan at the 73^rd percentile in a 123-company study group for employer-provided value. The federal Plan ranked at the 84^th percentile when employee contributions were included.

A 2002 Buck Consultants study found the total value of the Public Service Pension Plan to be placed well up in the first quartile in comparison with eight provincial^[128] and 101 other final-average pension plans. In comparing the federal plan with eight provincial plans, this study found the federal plan to rank between second and fourth on total value, depending on the age-at-entry and salary scenario considered. Relative to all 110 plans examined in the study, the Public Service Pension Plan ranks between fourth and tenth. In a comparison with both the provincial and the 101 other final-average plans, earlier age at entry (with retirement at age 55) put the federal plan at an even higher ranking.

Estimates of relative pension plan costs

The Treasury Board Secretariat Pensions and Benefits Sector (TBS/PBS) has made its own estimate of the cost of the Public Service Pension Plan as a percentage of the relevant pensionable earnings. Using different demographic and economic assumptions from those in the 2004 Towers Perrin study, TBS/PBS estimated the federal pension plan cost for current service at 17.3% of payroll.^[129] We introduce the different estimate by PBS in order to report on two additional perspectives: the relative cost of the principal federal public sector pension plans, and the relative cost of the key components of the pension plan.

Until now, we have limited our analysis to the main Public Service Pension Plan. Table 1048 compares the estimated cost of the five major federal pension plans and illustrates the point that the other smaller pension plans are more generous in that a larger share of costs is borne by the employer. Presumably these plans, if examined separately, would rank even more favourably in comparison with other major employers' pension plans in Canada.

Amounts recorded as contributions to the PSSA, CFSA and RCMP Funds are paid out of the Consolidated Revenue Fund and invested externally. The Government's contribution approximates the cost of current service recorded for accounting purposes against its annual surplus. Amounts recorded as contributions to the Members of Parliament Retiring Allowances Account and the Members of Parliament Retirement Compensation Arrangement Account also approximate the cost to the government for current services, but although they are referred to as such, they are not contributions in the true sense of the word. As with the pre-2000 service portion of the PSSA, CFSA and RCMPSA recorded in Superannuation Accounts, the MP plan is essentially unfunded since these accounts are maintained internally in the Accounts of Canada. For the Judges Act Plan, no pension account is maintained in the Accounts of Canada and the expenditure is first recorded at the time the benefits are paid out of the Consolidated Revenue Fund. Nonetheless, irrespective of their funding or "notional funding" mechanism, the government records pension costs and liabilities for all these plans on a full accrual basis of accounting.

Table 1048 Comparison of contributions made under the major federal public sector pension plans for 2002–03
Major pensions plans	PSSA*	CFSA*	RCMPSA*	MPRAA**	Judges Act
Estimated Pensionable Payroll ($M)	14,373	3,216	1,151	53	221
Contributions ($M) :
Employee	738	157	64	4	12
Employer	1,868	552	191	20	53
Total	2,607	709	255	24	64
Contributions as a % of Payroll
Employee	5.1%	4.9%	5.6%	7.4%	5.3%
Employer	13.0%	17.2%	16.6%	38.1%	23.8%
Total	18.1%	22.0%	22.1%	45.4%	29.1%
Share of cost
Employee	28.3%	22.2%	25.2%	16.2%	18.2%
Employer	71.7%	77.8%	74.8%	83.8%	81.8%
*  Includes only contributions made to their respective Pension Funds ** None of the plans include RCA except the MPRAA Note:   Several explanatory points must be noted regarding sources for Table 1048. Contributions are from the 2002–2003 Public Accounts, except for the Judges Act amount, which is from the 2001 Office of the Superintendent of Financial Institutions actuarial report on the Pension Plan for Federally Appointed Judges. For the pensionable payroll data, we used the Treasury Board Secretariat's own database for the Public Service Superannuation Plan – excluding Crown Corporations, internal estimates from National Defence and the RCMP for the Canadian Forces Superannuation Plan and for the Royal Canadian Mounted Police Superannuation Plan respectively, and once again the 2001 OSFI actuarial report in regard to the Federally Appointed Judges Pension Plan, and a similar OSFI report for the Members of Parliament Plan.

Also instructive is looking at the relative estimated cost of various components of the Public Service Pension Plan excluding the Retirement Compensation Arrangement Account (RCA). The estimated costs of these various features of the plan were provided by the Office of the Superintendent of Financial Institutions and may be broken out as follows:

Component	Cost as a percentage of pensionable earnings
Normal retirement and withdrawal	7.5%
Indexing of benefits to inflation	5.0%
Early retirement (1.3% per year of service to age 65)	2.3%
Bridging (0.7% per year of service to age 65)	1.2%
Survivor benefits	0.8%
Disability benefits	0.5%
Total	17.3%
Note: This figure is slightly less than the amount appearing in Table 1048 above because of the inclusion of some payments for past service in the other table.

It is evident that the main cost drivers for the federal Public Service Pension Plan–other than the basic benefit–are indexation and early retirement/bridging. We do not have data that would permit comparison of the costs of these plan components with other major plans. However, the 2004 Towers Perrin study identified the federal Pension Plan's early retirement provisions, especially the bridge benefit before age 65, and post-retirement automatic full indexation of benefits as relatively rare with other employers and therefore key factors in the conclusion that "the Government of Canada's defined benefits total provided value is relatively 'generous.'"

Another perspective on comparability was offered by the 2001 Buck Consultants study. This focussed on calculating the value of the Public Service Pension Plan as a multiple of final pay for various scenarios of age at entry and salary. The process was to value first the lifetime pension payable at age 65, and then adding successively the value of:

• unreduced lifetime and bridge pensions from age 60;
• post-retirement indexation at full CPI increases;
• pre-retirement indexation at full CPI increases;
• death and disability benefits; and
• early retirement provisions before age 60.

Figure 1049 gives an example of the Buck Consultants analysis. Similar graphs are presented in the report for other combinations of age at entry, current pay and years of service.

Figure 1049
Public Service Superannuation Act value accumulation based on multiples of final salary at age 25, with 5 years' service and current pay of $38,000

Display full size graphic

Buck Associates summarized their assessment of the results obtained as follows:^[130]

• The total retirement savings are quite significant, exceeding 11 times final salary for long service members with high salaries, and reach their peak at the time of entitlement to an unreduced immediate pension.
• The value of ancillary benefits (subsidized early retirement, bridge pension, indexation, ...) may represent up to four times the value of the lifetime pension payable from age 65, or 80% of the total value.
• The total retirement savings do not vary much by sex, mainly because generous death benefits are provided.
• The age and service profile has ... a major impact. For example, the retirement savings at age 55 for a member with 35 years of pensionable service are about twice those of a member with 25 years of pensionable service.

These findings coincide with those reported earlier on the importance of the ancillary benefits under the Public Service Pension Plan, especially early retirement, including the option of a bridge pension, and indexation. This study does not offer a specific comparison to other pension plans. However, it does include a comparison of the federal DB plan with the DC alternative, under various scenarios. They refer to the PSSA/RCA which stands for Public Service Superannuation Act and Retirement Compensation Arrangements Account. Together these cover the main pension entitlements of federal public servants. Their assessment:

• The DC Plan is able to beat the PSSA/RCA only at lower ages and by small amounts, while the PSSA/RCA has a strong advantage at later ages.
• The DC Plan values are obviously quite sensitive to [changes in the future rate of return assumptions] but, even with high real rate of return assumptions (e.g. 8.25% return vs. 3% inflation), the DC Plan only rarely surpasses the PSSA/RCA.

Concluding remarks on pension comparability

From this section it is evident that the federal Public Service Pension Plan compares favourably to major public and private pension plans in Canada. While employee contributions are generally higher than for employees enrolled in major private sector plans, the federal plan benefits are also better than all but a handful of private plans. This is true especially in regard to such ancillary benefits as early retirement and bridging provisions before age 65, and full indexation to compensate for inflation. In comparison with major public sector plans, the federal Public Service Pension Plan delivers comparable or better benefits, but with lower employee contributions, especially below the income cut-off for coverage by the Canada and Quebec Pension Plans. Overall, the federal Public Service Pension Plan can reasonably be considered to be in the top 10% of all registered pension plans in Canada in terms of its value to employees. It can also reasonably be considered to be in the top 10% in terms of cost to the employer. The current service benefits under the PSSA and the other federal plans are costing TB in real dollars expressed as a percentage of payroll, much more than those earned under the vast majority of other defined benefits plans in the county.

 

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