ARCHIVED - Expenditure Review of Federal Public Sector - Volume Two - Compensation Snapshop and Historical Perspective, 1990 to 2003

• Previous Page
• Table of Contents
• Next Page

This page has been archived.

7. Public Service Pension Plan

The federal public service pension plan is a defined benefit plan administered by the Superannuation, Pension Transition and Client Services Directorate of Public Works and Government Services Canada.

Public service pension plan overview

The Public Service Superannuation Act provides for employees to collect pension benefits starting at age 55, with at least 30 years of service; or at age 60, with at least two years of service. Employees may retire as early as age 50 with benefits reduced according to a formula.

Benefit rate

Absent an early-retirement reduction, the amount of benefits payable is a percentage of the average of the employee's best five consecutive years of salary. That percentage is determined by an accrual rate of 2 % times years of service, to a maximum of 35 years. This yields a pension benefit ranging from 4% to 70% of the calculated average salary.

Contribution rate

In 2002–03, employees contributed to the Public Service Pension Plan (PSPP) 7.5 % of their annual salary above the year's maximum pensionable earnings (YMPE) for the Canada or Quebec Pension Plan. In 2003, the YMPE was $39,900. On their earnings below that amount—or their total salary if it is less than $39,900—employees contributed 4 % to the PSPP.^[71] This takes account of the fact that PSPP benefits are reduced by the approximate amount of the CPP/QPP when individuals turn 65 or receive a CPP/QPP disability benefit. Like all employed Canadians, public service employees contribute  4.95 % of their salary—up to the $39,900 year's maximum pensionable earnings—to the Canada or Quebec Pension Plan. It should be noted that, while CPP/QPP contributions are not payable on the first $3,500 of income, the PSPP does require a 4 % contribution on income below this amount.

Pension reduction at age 65

Before age 65, retired employees receive the full amount of their pension entitlement, which varies according to their years of service and any other variables such as periods of part-time employment for example. After age 65, their PSPP benefits are reduced by an amount calculated as follows:

.007 x years of service x (the average of the previous five years' YMPEs
or their best five consecutive years of salary, whichever is the lower figure)

As an example, a 65-year-old employee retiring in 2003 after a 35-year public service career, with a PSPP benefit of $40,000 per year based on an average salary of about $57,000, would experience a pension-benefit reduction as follows:

.007 x 35 x $38,460 (The five-year average YMPE in 2003)
= $9,422.70, or $785.23 per month reduction.

The resulting reduction of pension benefits is not necessarily equal to the CPP/QPP pension benefits, however, since they are calculated on a different basis. Employees may receive less in total pension benefits once they begin receiving CPP/QPP benefits.

Other elements of the PSPP

Benefits are adjusted annually (on January 1) to match the increase in the Consumer Price Index. The vesting period (that is, the period of employment after which the employee has a right to an eventual pension) is two years.

Surviving spouses are eligible for an indexed benefit equal to 1 % times years of service times the best-five-years' average salary, with no reduction for the receipt of CPP/QPP benefits. Surviving dependent children can also receive an allowance.

Employees may transfer the actuarial value of their pension to other employers (mainly other large public sector employers) who have a pension transfer agreement with the federal government. Former contributors (provided they leave the public service by age 50) may also direct a transfer of the capitalized value of their earned pension benefits into a locked-in retirement savings vehicle.

Deputy ministers (DMs—the three dozen or so who serve ministers directly) benefit from two special pension entitlements. The first, created in 1988 on the advice of the Advisory Group on Executive Compensation, provides an extra year's pension accrual for each year of service as a deputy minister, to a maximum of 10 years. With the accrual rate of 2% times years of service, this means the total accrual would be up to 90% of "average" salary in the case of 35 years' service, with 10 years as a deputy minister. The second allows DMs (Associate Deputy Ministers are also eligible for this) who leave the public service before age 60 to continue contributing to their public service pension up to age 60.

Pension financial arrangements

The pension plan financing is now managed through two mechanisms.

Financing mechanism 1: Retirement "accounts"

The first mechanism is a set of accounts (not cash) that record in the Accounts of Canada the net credits of employees and the government ("notional") contributions, plus interest, to meet the government's pension obligations to its employees.

These accounts mimic a notional portfolio of 20-year bonds but they actually hold no assets. Consequently, this part of the plan is essentially unfunded, which means that it has no funds set aside and invested externally. Nonetheless, this accounting mechanism allows for the recognition of government pension costs and liabilities in the books.

Since 1994, the Retirement Compensation Arrangements Account covers pension benefits above the limits for registered pension plans under the Income Tax Act—effectively pension benefits on income over $99,000 in 2002. This account covers pension benefits on income above this limit and liabilities for the cost of providing unreduced pensions to certain employees declared surplus during the Program Review expenditure reductions of the mid 1990s. Historically, contributions by employees and the employer were credited to the Public Service Superannuation Account.

Financing mechanism 2: Investments in the external market

The second mechanism, in effect since April 2000, is the external investment of the net employee and employer contributions in the market by the Public Sector Pension Investment Board.

Payment of actual benefits

Actual benefits are financed from current-year cash sources (e.g. government tax revenues) in the year they are paid. Pensions relating to service before April 2000, as well as all benefits beyond the Income Tax Act threshold relating to periods both before and after April 2000, are financed from the first mechanism. Public Service Superannuation Act entitlements relating to the period after April 2000 are deducted from the funds forwarded to the Investment Board for investment. Eventually, benefits will be paid by the government from the Board's accumulated funds once the annual benefit payments for post-2000 service become higher than the net contributions.

Pension contributions

As noted earlier, while employees in the core public service contribute, like all Canadians, 4.95% of their earnings up to the year's maximum pensionable earnings for the Canada and Quebec Pension Plans ($39,100 in 2002, and $39,900 in 2003), they then paid, in 2002–03, an additional 4% of that portion of their salary, plus 7.5% for the portion of salary above that level, as contributions to the Public Service Pension Plan.

Figure 2056 illustrates the level of employee contributions to the Public Service Pension Plan and the Canada/Quebec Pension Plans for earnings below and above the year's maximum pensionable earnings.

Figure 2056
Employee contribution levels in 2002–03 for the Public Service Pension Plan and the Canada/Quebec Pension Plans according to annual earnings level

Display full size graphic

In 2002–03 employees in the core public service domain contributed a total of about $455 million, while employer pension contributions amounted to about $1.29 billion. This is the employer's share of the amount required to meet future pension entitlements which are estimated to have been earned during the year. In effect, the employee contribution rate is fixed, and the employer contributes the rest of the amount required. For post-April-2000 service, since the government contributions are no longer notional, the employer's rate is now based on the expected financing needs of the plan and external investments' expected return, and it is set for a few years following the most recent triennial actuarial valuation. It may therefore differ slightly from the cost of entitlements arising from current service that would otherwise be calculated on different bases such as the annual accounting actuarial valuation.

For pension contributions on income within the Income Tax Act limit, the ratio of employer to employee contributions is 72% to 28%. This ratio has been in effect since 2000. The figures in the previous paragraph reflect a ratio of 74% to 26%. This results from inclusion of contributions to the Retirement Compensation Arrangement Account, for which the employer-paid share is larger.

Figure 2057
Schematic overview of public service pension financing, 2002–03*

Display full size graphic

* Several points must be noted about this chart:

• This schematic represents a simplification of the process for illustrative purposes. It does not, for example, depict additional sophisticated processes for dealing with situations such as excesses or deficits in the Account or Fund.
• Pension coverage in relation to that portion of an individual's salary that exceeds the limits in the Income Tax   Act (i.e. for periods of service from December 15, 1994) is recorded in the Retirement Compensation Arrangements (RCA) Account.
• The contributions reported relate only to current service (i.e. in 2002–03), not to past service since we are  looking at costs relating to 2002–03.
• The amounts shown in Figure 2057 differ from the amounts stated in the accompanying text because contribution  amounts in Figure 2057 cover the core public service domain and separate employers. Amounts in the accompanying text relate only to the core public service domain and are therefore lower.

It might be thought that another approach to reporting pension costs in the context of total compensation would be preferable. For example, one could report the benefits paid to pensioners and survivors during the year. For 2002–03, nearly $3.6 billion was paid to beneficiaries who previously worked in the core public service domain, or for the various separate employers. This method is not appropriate, however, since current pension payments relate to service over many years, and not to the cost incurred to provide for the entitlements resulting from service during the year.

Along similar lines, it might be suggested that it would be sensible to include in employer costs the interest credited to the pension accounts over the year. In 2002–03, this totalled about $6.66 billion for the accounts covering the core public service and the separate employer domains. Pension costs are established through complex actuarial valuations that always bring back the cost to its net present value. Excluding the interest component, notional or otherwise, and the return on the external pension assets, provides a better comparison between the cost of both pension schemes. It allows us to compare apples with apples, irrespective of the financial mechanism chosen, which remains a financing decision, as opposed to a compensation policy decision.

Over the past several years, for accounting purposes, the government has been amortizing actuarial gains that built up in the traditional pension accounts because of the recording of past estimations that had been revised downwards. In the late 1990s, the actuarial estimate of the amounts needed to meet future pension obligations was lower than the amounts (including interest) that had been credited to the accounts over the years.^[72] In 2002–03, the net amount amortized in relation to all the government's pension accounts was $2.19 billion.

This amortization served to reduce the effect of net employer pension costs on the overall government bottom line. The process of amortizing the pension actuarial gains and losses to expense is an ongoing practice. Its numbers are revised each year and it has now started to fluctuate between net gains and net losses depending on the results of the annual updates of the actuarial valuations. The amortization of actuarial gains or losses also applies to the estimations recorded for the Public Service Pension Fund. Nevertheless, while this amortization affects the government's annual surplus, it does not affect the amounts of contributions actually paid to the Public Sector Pension Investment Board during a year. In addition, from a funding perspective, the government also remains responsible for funding any future deficit in the Public Service Pension Plan or for "notionally funding" similar "notional deficits" relating to the "traditional" accounts.

Separate employers

The separate employers participate in the same pension plan that applies in the core public service domain. For 2002–03, employer contributions relating to this domain totalled about $470 million. Employee contributions were about $166 million. These payments reflect about the same employer/employee ratio as in the plan overall.

Retrospective—Pensions

In this section it again makes sense to combine our analysis of the core public service and separate employer domains, since most of the programs under review apply to all parts of the two domains.

The federal public service pension regime we now have was recognizably in place 80 years ago. The Public Service Superannuation Act came into force in January 1954. The details of benefits and contributions have been adjusted several times over the past half-century, most recently in 1999.

To put pension policy into context, we have distilled a brief summary of how the plan we know today developed over the past half-century.

1954
The Public Service Superannuation Act confirmed as a matter of law the basic features of the then existing pension regime. The Act expanded coverage to include many temporary workers who had nevertheless been employed for many years. It set male contributor rates at 6%, and female rates at 5% of salary. Authority to enter into reciprocal transfer arrangements with other employers was established. The salary average calculation shifted from last-ten years to best-ten.

1955
The Supplementary Death Benefit was introduced as part of the Superannuation Plan.

1959
A one-time, permanent cost-of-living increase was approved by Parliament.

1960
The salary average used for calculating benefits was reduced from best ten consecutive years to the best six. The contribution rate for male employees was raised from 6% to 6.5%. Reduced pensions became available as early as age 50.

1966
The Plan was integrated with the new Canada Pension Plan (CPP).^[73] Contributions to the public service pension plan were to be reduced by the amount of contributions to the new CPP; conversely, benefits would be reduced at age 65 when CPP benefits became payable, or on becoming entitled to a CPP disability pension.

1970
The Supplementary Retirement Benefits Act provided for automatic indexing of pensions to the cost of living to a maximum of 2% per year, with employees contributing 0.5% of salary for this protection.

1971
An early retirement option was introduced, permitting unreduced pensions for employees aged 55 with at least 30 years of service.

1974
The cap was removed on the indexing of benefits to the cost of living.

1975
The equality of male and female contributors was guaranteed, with equal contribution rates. Female employees became eligible to pass on survivor benefits.

1977
The employee contribution to support the cost of indexing was raised from 0.5% to 1% of salary.

1983–84
During this time of compensation restraint in 1983 and 1984 (known colloquially as the "six-and-five" period) limits were placed on the level of inflation protection for public service pensions.

1986
The legislated cycle of actuarial reviews of federal statutory pension plans was reduced from five years to three years.

1989
Amendments eliminated the suspension of benefits upon the remarriage of a surviving spouse, the reduction in benefits if a surviving spouse was more than 20 years younger than the deceased Plan member, and the requirement that surviving eligible children be unmarried.

1991
The main Superannuation Account and the Supplementary Retirement Benefits Account (which covered the cost of indexing benefits to the cost of living) were merged. The Government was required to match member contributions at a minimum, and to contribute any additional amount required to cover fully the current service cost of the Plan.

1992
PSSA amendments included: extending coverage to employees working at least 12 hours per week, establishing a contributory early retirement program for operational employees of the Correctional Service, and limiting benefits to the levels set in the Income Tax Act. The Special Retirement Arrangements Act gave authority to provide benefits on income over the Income Tax Act limits, and special benefits such as those offered in the Early Retirement Incentive to forgive pension penalties for eligible employees leaving during Program Review. The Pension Benefits Division Act permitted plan members and their spouses to divide pension credits on marriage breakdown.

1996
The vesting period was reduced from five to two years, and authority was introduced to permit the transfer of the capitalized value of a departing employee's (limited to those under age 50) earned pension benefits to a locked-in retirement savings vehicle.

1999
The Public Sector Pension Investment Board Act established an arm's length Public Sector Pension Investment Board with a mandate to invest in the market the amounts contributed after April 2000. The Act also provided for the disposition of current and future actuarial surpluses. Employee contribution rates were de-linked from Canada Pension Plan rates, and authority granted to the Treasury Board to set rates within specified limits. Survivor benefits were extended to same-sex partners.

The Public Service Superannuation Act (PSSA) was amended to reduce the salary-averaging period for calculating benefits from six to five years.

This recital illustrates several themes. First, social change has driven numerous adjustments in order to align pension policy with emerging norms in such areas as the equality of men and women, and evolving views in Canada on marriage. Second, as economic and financial circumstances have altered, for example the emergence of inflation as a threat to pensioner living standards, Parliament has acted to maintain the federal public service pension regime as a cornerstone of human resources policy. Finally, the evident overall trend has been towards improvements in benefits for retiring employees and their dependants.

Employer and employee contribution rates

As noted in the historical summary above, when the Canada and Quebec Pension Plans (CPP/QPP) were introduced in 1966, public service pension contributions were set at 6.5% of salary for men, and 5% for women. Public service pension contribution rates were then reduced by the CPP/QPP rates in relation to salary up to the year's maximum pensionable earnings (which was $5,000 in 1966). Total pension contribution rates rose to 7% for men and 5.5% for women in 1970 to cover indexing. The female contribution rate rose in 1976 to 7% as for males. Then the general rate rose to 7.5% in 1977 to better cover the cost of indexing benefits.

CPP/QPP rates remained unchanged until 1987, when they began to rise 0.1% per year until 1996. Thereafter, in order to secure the financial viability of the CPP/QPP, employee contribution rates increased from 2.8% in 1996 to 4.95% in 2003. Because the employee contributions to the public service pension plan were the amount left within the 7.5% contribution rate (in effect a cap on combined contributions) after the CPP/QPP rate was levied, the employee contribution rate for the public service pension plan itself declined. As a result, the proportion of pension plan costs borne by the employer began to increase. Effective 2000, the two contribution rates were decoupled, and by 2003 the combined employee pension contribution rose to 8.95% for earnings between the CPP/QPP year's basic exemption (YBE, in 2003 set at $3,500) and the year's maximum pensionable earnings (YMPE, in 2003 set at $39,900).

Table 2058 gives the employee contribution rates for both the public service pension plan and the CPP/QPP for the period from 1986^[74] to 2003. As the table shows, between 1986 and 1999, the employee contribution rate for the public service pension declined from 5.7% to 4% for that portion of salary^[75] between the YBE and YMPE, where about two thirds of the whole salary mass falls.

Appendix P provides a full history since 1924–25 of employer and employee contributions to finance the federal government pension plan. This comprehensive data includes contributions in respect of various Crown corporations (most notably Canada Post until October 2000), as well as payments in relation to past service and leave without pay, and other charges (such as deficit payments) to satisfy the financial requirements of the public service plan. While the data is important historically, it is more pertinent to our present analysis of compensation costs to focus exclusively on employer and employee contributions in relation to current service, as these apply to the core public service and the separate employer domains.

Table 2058 Employee contribution rates for the Canada and Quebec Pension Plans and for the Public Service Pension Plan, 1986 to 2003
Year	Below the year's basic exemption		Between the year's basic exemption and the year's maximum pensionable earnings			Above the year's maximum pensionable earnings
	CPP/QPP	PS Pension	CPP/QPP	PS Pension	Total	PS Pension
1986	-	7.5%	1.8%	5.7%	7.5%	7.5%
1987	-	7.5%	1.9%	5.6%	7.5%	7.5%
1988	-	7.5%	2.0%	5.5%	7.5%	7.5%
1989	-	7.5%	2.1%	5.4%	7.5%	7.5%
1990	-	7.5%	2.2%	5.3%	7.5%	7.5%
1991	-	7.5%	2.3%	5.2%	7.5%	7.5%
1992	-	7.5%	2.4%	5.1%	7.5%	7.5%
1993	-	7.5%	2.5%	5.0%	7.5%	7.5%
1994	-	7.5%	2.6%	4.7%	7.5%	7.5%
1995	-	7.5%	2.7%	4.8%	7.5%	7.5%
1996	-	7.5%	2.8%	4.7%	7.5%	7.5%
1997	-	7.5%	3.0%	4.5%	7.5%	7.5%
1998	-	7.5%	3.2%	4.3%	7.5%	7.5%
1999	-	7.5%	3.5%	4.0%	7.5%	7.5%
2000	-	4.0%	3.9%	4.0%	7.9%	7.5%
2001	-	4.0%	4.3%	4.0%	8.3%	7.5%
2002	-	4.0%	4.7%	4.0%	8.7%	7.5%
2003	-	4.0%	4.95%	4.0%	8.95%	7.5%

Table 2059 gives the figures for employer and employee current service contributions relating to service within the year in question from 1991–92 to 2002–03 (excludes Crown Corporations).^[76] Each year, the employee contributions are collected in accordance with the contribution rates set out in Table 2058. The employer contribution is the estimated additional amount that is required to satisfy the expected cost of meeting the pension entitlements accumulated during the year.

It can be seen from Table 2059 that employee contributions in current dollars stayed fairly stable from 1991–92 to 1994–95 in the general range of about $550 million. During the period of Program Review, the figure fell to a low of $453 million in 1997–98. Thereafter, as the salary mass increased, the employees' total contribution rose steadily to reach $644 million in 2002–03.

Employer contributions have increased by more than two times since 1991–92, rising from about $561 million in that year to about $1.8 billion in 2002–03. During this period, the ratio of employer to employee contributions for current service rose from 1.03:1 to 2.8:1. Taking into account the whole history of the public service pension plan, however (refer to Appendix P), including contributions for all purposes^[77] over the years, the cumulative ratio of employer to employee contributions was quite steady, increasing only from 1.71:1 to 1.76:1 between 1991–92 and 2002–03. The portion of current service costs borne by the employer rose from 51% to 74% during the same period. By contrast, the cumulative ratio covering all contributions for whatever purpose (such as the employer's special contributions for indexing past service costs), changed very slightly from 63% to 64% over the 13 years.^[78]

As noted in the historical sketch on pension policy earlier in this section, in 1992 the Special Retirement Arrangements Act provided for a separate account known as the Retirement Compensation Arrangements Account (RCA) to cover pension benefits in relation to that portion of an individual's salary that exceeds the limits in the Income Tax Act ($99,000 in 2002). As Table 2059 shows, the ratio of employer to employee contributions into the RCA Account stood at 94%/6% in 2002–03. Like the main Superannuation Account, the employer picks up costs in excess of the employees' contributions to the RCA Account.

It is essential to note that changing actuarial assumptions drove much of these increases. At the beginning of the 1990s, a combination of unexpectedly low salary increases with relatively high real interest rates, rendered the amount needed to meet the cost of current service low. By the later part of the 1990s, however, we encountered reduced real interest rates as well as increasing expectations of salary growth, which together drove expansion in the total contribution required. Finally, in the early 2000s, we experienced both rising salaries and increased population, partly offset by a higher expectation of long‑term market returns based on the move to investing public service pension contributions in the private market through the Public Sector Pension Investment Board.

For context, the value of benefits paid under the plan for the combined core public service and separate employer domains, and a handful of other small entities covered by the plan, rose from about $1.4 billion in 1990–91 to around $3.6 billion in 2002–03. These payments are not the appropriate measure of current charges, however, since they relate to the cost of service that was rendered in the past.

Since April 2000, net contributions to the Public Service Pension Plan have been paid to the Public Sector Pension Investment Board (PSPIB) to be invested in the market. Total investments since that time are as follows:

Year	Investment ($B)
2000–01	$1.9
2001–02	$2.0
2002–03	$2.4

As noted earlier, the bulk of the plan is essentially unfunded, although its transactions are recorded in pension accounts in the Accounts of Canada: the Public Service Superannuation Account and the Retirement Compensation Arrangements Account. These accounts mimic a "notional" portfolio of government bonds on which interest is credited quarterly. All benefits are paid out of current-year cash sources.

 

• Previous Page
• Table of Contents
• Next Page