Tuesday, November 19, 2013

Changes to PSSA Pension Plan

November 20, 2013

Dear Member,

Earlier this year the provincial government told employees it intended to make changes to the Public Service Superannuation Act (PSSA).

NBU, IBEW Local 37 and NBNU announced today that in conjunction with the Task Force on Public Pensions, they have achieved a solution to problems with the PSSA Pension plan. This solution places your PSSA plan on a new path that is sustainable, affordable and secures the retirement benefits for current and retired members of the plan. This plan covers over 16,000 civil servants and public servants working in Part I of the public service and many government agencies, NB Power and other crown corporations as well as some employees working for regional health authorities.

All public service unions participated in a consultation with the Task Force on Public Pensions and the provincial government in a collaborative fashion over many months to provide a resolution to this difficult situation.

As we have outlined to members earlier, and as you have been told by the provincial government, the PSSA plan is no longer sustainable.

In recent years, the assumptions about lower returns on investment and higher mortality rates (how long people live) have increased the liabilities in this plan enormously. The Task Force actuaries tell us this liability is now over $1 billion. This has increased the risk that PSSA could fail and could not be able to pay the promised pensions out of the pension fund and a cash-strapped provincial government might not be able to find a shortfall.

The PSSA plan, like most defined benefit plans in New Brunswick, is in trouble and is not sustainable into the future. Although the funding ratio of the PSSA is not as bad as the plans were in the healthcare sector, the truth is that the provincial government currently puts in $2.50 into that plan for every $1.00 of employee contributions through additional payments.

The challenges of the redesign were that:

  • The plan has a large unfunded deficit as a result of several factors. While the employer has always made the contributions required under the plan, the combined contributions are no longer sufficient to meet the liabilities;

Because of future economic uncertainty and current low interest rates, the assumption about future investment returns on the fund had to be lowered. A lower investment return in the future means more contributions are required to pay the same pension;

  • People are living longer meaning pensions have to be paid over a longer period and are more expensive than previously thought; and
  • The risks inherent in the old plan meant that a new plan design was needed to reduce that risk. We needed to find a solution that improved the security of pensions over the long term for current and future members of the plan and retirees.

The goals the task force and public sector unions set for ourselves to fix the PSSA plan were:

  • To insure the pension plan will be there and able to pay benefits for members today and for those retiring in the future.
  • No one should be disadvantaged by deciding to retire before or after the changes to the plan. Pension amounts earned up to this point will not change and any changes will only be incremental and on a go forward basis.
  • The plan must respect intergenerational equity and be good for those in early, mid and late career as well as retirees and must cover part-time as well as full-time employees.

The new plan, based on the Shared Risk Plan (SRP) model developed in New Brunswick, will meet these goals.

Key features of this plan include:

  • The plan will now be administered as a Joint Trusteeship with a board of trustees made up of representatives from both the employer and the public sector unions.
  • The purpose of the new plan is to provide secure pension benefits through a risk management approach delivering a high degree of certainty that a base of benefits can be met, and that cost of living increases on top of the base benefit can be afforded and delivered as needed.
  • A required funding and investment policy, and a rigorous risk management framework will require contributions from employees and employers such that there is a reasonable expectation (but not a guarantee) that benefits will be protected from inflation.
  • All pension amounts earned up to this point will not change upon conversion to the new plan. New rules on contributions and benefits will be only on a go forward basis effective January 1, 2014. This means that changes in the plan will be gradual and incremental for active members.
  • Part-time employees will now be included in this plan. This new plan will provide a more secure pension for part-time employees than under their current defined contribution plan. This also means that employees moving from full-time to part-time positions will no longer be disadvantaged.

The plan is designed to protect the fund against the costs of having to pay pension for a longer period. Employees entering the plan today are expected to live into their 90’s and

  • without change would likely collect a pension for as many years after work as the number of years they worked. This is expensive. In order to align the plan to anticipated improved life spans in the future, unreduced pensions will be based on a retirement age of 65. A new reduction rate of 5% will apply to early retirement between ages 55 and 65. These new rules will be on a go forward basis only. Service already earned will be based on the old plan formula of unreduced pension at age 60.

What does incremental change mean for early retirement rules?

Example: Mary is 56 with 30 years’ service in the plan as of December 31, 2013.

If she retires on December 31, 2013 under the old rules (which gave her an unreduced pension at 60 with a reduction rate of 3% for each year below age 60) Mary would have her pension reduced by 12%. This is unaffected by the new plan.

If she intends to retire at age 59 and works three more years, under the old rules Mary would have her pension reduced by 3% (1 year early) for all 33 years of service. Going forward, under the new rules Mary will have to take a 5% reduction for the years between 59 and 65 but only on the next 3 future years of service.

This means that to calculate the overall reduction you apply the old rule to pension amounts earned on service already credited and the new rule on pension amounts earned on future service only which for Mary are the next three years.

The change in early retirement penalty for Mary is on a go forward basis and will be gradual.

  • The rate at which your pension will accrue in the future has been improved. Prior to the change you were receiving a pension for each year of service of 1.3% of your salary up to the CPP maximum earnings and 2% of the excess. The 1.3% has been increased to 1.4%. This new rule also applies on a go forward basis only.
  • Contributions for both employees and employers will increase from a current average of about 6.2 % to an average 8.25% for full-time employees and from 4.5% to 8.25% for part-time employees. This average reflects that as under the current plan, contributions will vary according to earnings below and above the YMPE ($52,500 for 2014) of 7.5% and 10.7%
  • Retirees’ current pension benefits are unchanged from current levels at the conversion to the new plan. On a go forward basis, cost of living increases will be provided on a contingent basis up to the full extent of inflation should the plan funding levels allow.

Members asked why the unions participated in this process.

As you are aware unions and our members did not have any role in the administration of the old PSSA plan. The government needed to reform the pension plan and so we wanted to be at the table when that occurred in order to get the best deal possible for our members.

We are confident that our participation meant that the plan design is the best possible for all our members. Going forward, we will have a real role in decisions affecting retirement security for our members. The plan will now be administered as a Joint Trusteeship with a board of trustees made up of representatives from both the employer and the public sector unions.

In the coming weeks there will be opportunities to learn more about how these changes affect your own individual situations. Information about these changes will be on the websites of NBNU, NBU and IBEW Local 37. New individual pension estimates will however take some months for the government pension branch to prepare.

The next steps in the process will be to:

  • implement new pension legislation, to convert the PSSA to a SRP model,
  • complete the preparation of new plan texts, and
  • put all the new rules in place.

We appreciate your patience in this transition period.

 

Susie Proulx-Daigle

President

New Brunswick Union

 

Questions and Answers - Conversion to the Shared Risk Pension Model

Section 1 – Understanding why change is needed

1. Why do we continue to hear that pension plans are not sustainable?
 

There are two main reasons why defined benefit pension plans (the PSSA is a defined benefit pension plan) around the world are struggling with the issue of long-term sustainability:

  • People are living longer which means that they are collecting a pension longer than previously expected (an increased number of pension payments means less money in the pension fund); and
  • Interest rates are at all-time lows which reduces expected investment returns (investment returns along with contributions pay for pensions).

2. Isn’t this just an issue for private sector plans (e.g., AV Nackawic) and not public sector pension plans like the PSSA?

  • Public sector pension plans around the world are struggling with the same issues. A number of public sector pension plans within Canada have seen contribution increases and benefit changes.
  • Saskatchewan adopted a defined contribution model for its public service many years ago; the Government of Canada is increasing employee contributions to match the employers’ contribution and increasing the retirement age.
  • Nova Scotia recently removed full indexing for retirees and replaced it with conditional indexing without funding the indexing.
  • Prince Edward Island and Alberta are currently in the process of implementing reforms for their public sector pension plans.
  • Another example is the Ontario Teachers’ Pension Plan (considered one of the best performing pension plans in the world) which has had to increase contributions and reduce benefits to deal with the rising costs of paying pensions.

3. What are the challenges facing the PSSA?

  • The PSSA is struggling with the same issues as other pension plans: members living longer and a low interest rate environment.
  • Even though investment returns are meeting their long-term objectives, the PSSA currently has a $1 billion deficit.

4. Why can’t the Province simply increase its contributions to the PSSA?

  • The Province currently contributes approximately $2.50 for every $1.00 that an employee contributes to the PSSA.
  • The Province is currently struggling with a $478 million deficit as outlined in the recent budget.

5. Is part of the problem that the Province took a contribution “holiday” and did not properly fund the PSSA?

  • The Province has not taken a "holiday" from making contributions to the PSSA since 1975. The plan was fully funded in 2000-2001 meaning that the plan had no deficit at that time. In addition to member contributions, the Province funds the plan with regular contributions and special payments when there is a deficit.
  • Since 1989, the Province has contributed $1.80 for every $1.00 of member contributions.

Section 2 – The Pension Reform Process

6. Why didn’t the government simply look at contribution increases or a small change in benefits to address the challenges with the PSSA?

  • The Province was not looking for an “easy to implement band-aid solution” that would simply “kick the can down the road”.
  • The Province wanted an option that had a strong chance of working in the long term and that was secure, sustainable and affordable.
  • The problems with the current plan are such that making it sustainable in the long-term would require a very large increase in contributions from the active and future workers and the government – more than it is realistic to expect employees or taxpayers to pay for.
  • In addition, trying to resolve the issue solely with increased contributions would require present workers to make increased contributions to sustain the benefits of present pensioners rather than build their own pension fund for when they retire. That would not be fair to current employees.

7. How was the Shared Risk Pension Model developed?

  • The Province appointed an independent Task Force that had expertise with pension plans.
  • The Task Force worked with unions and management for over a year in developing a solution that would best address the challenges.

8. Was the Task Force provided guidelines in coming up with a solution?

The Task Force was provided with the following guiding principles:

  • Ensure a high degree of security for members (low risk) with stable contributions for employees and employers;
  • Ensure that all aspects of the new pension plan are transparent and that members fully understand what the risks and rewards are; and
  • Ensure that all member groups (active members, retirees) share in the risks and rewards.

9. Were options other than the Shared Risk Pension Model considered for the PSSA?

  • The Task Force researched pension models from around the globe.
  • The review also looked at remaining with the status quo, modifying the status quo, and moving to a defined contribution pension plan.
  • All possible solutions were measured against the guiding principles that the Task Force was following.

Section 3 – The Shared Risk Pension Model

10. What is the Shared Risk Pension Model?

  • The Shared Risk Pension Model has characteristics of both a defined benefit pension plan and a defined contribution pension plan.
  • Employee and employer contributions under the Shared Risk Pension Model are for the most part fixed.
  • Base benefits under the shared risk model are not guaranteed, however:
    - Base benefits earned by members up to the conversion date have been guaranteed by the Province to never be reduced.
    - Base benefits earned after the conversion date have a very high probability of never being reduced (higher than a 97.5% probability).
  • The likelihood of receiving other benefits such as annual cost of living adjustments (ancillary benefits) is also very high (a minimum of a 75% probability) but is subject to the pension plan’s financial ability to provide these benefits.

11. What is meant by “robust risk management” as it relates to the Shared Risk Pension Model?

  • The pension fund is invested in more secure assets (more fixed income and less equity) which make investment returns less volatile.
  • Employee and employer contributions exceed what is required to pay for basic pension benefits. This means that there are extra contributions available to pay for annual cost of living increases.
  • Stringent risk management testing is performed on an annual basis to ensure that benefits remain secure under a variety of economic scenarios.

Section 4 – Converting the PSSA to the Shared Risk Pension Model

12. When will the PSSA be converting to the Shared Risk Pension Model?

  • The PSSA will be converting to the Shared Risk Pension Model on January 1, 2014, however, administrative changes relating to such things as contribution rates and eligibility for plan participation will be phased in. Section 5 provides additional details.

13. Should I retire before the PSSA converts to the Shared Risk Pension Model?

  • There is no benefit to retiring before the PSSA converts to the Shared Risk Pension Model and there is no disadvantage to retiring after the conversion.
  • The rules for calculating your pension will not change for service up to the conversion date.
  • For service after the conversion date, there will be a change to how your pension will be calculated, but this will only apply to service earned after the conversion date.
  • Any service earned after the conversion date will continue to increase the amount of your monthly pension at retirement.

14. What is meant by “conversion date”?

  • The conversion date for the PSSA is January 1, 2014 and it is the date that the PSSA becomes a shared risk pension plan.
  • The pension that you have earned up to the conversion date will be calculated based on the current PSSA rules (with the exception of automatic indexing).
  • The pension earned after the conversion date will be calculated based on the new rules under the shared risk pension model.

Section 5 – Anticipated Changes – PSSA Under the Shared Risk Pension Model

 

Item

Current

New

Employee Contributions

5.8% of salary up to YMPE*
7.5% of salary in excess of YMPE

*Year’s Maximum Pensionable Earnings ($52,500 in 2014)

7.5% of salary up to YMPE*
10.7% of salary in excess of YMPE

*Year’s Maximum Pensionable Earnings ($52,500 in 2014)

Contribution rate changes will become effective on April 1, 2014

Part-time Employees

Only eligible if moving from full-time to part-time

All employees earning more than 35% of the YMPE in the previous two calendar years will participate in the shared risk pension plan

Eligibility changes will become effective on April 1, 2014

Pension Benefit
(from retirement to age 65)

(The PSSA is integrated with the Canada Pension Plan at age 65)

2.0% of salary

(Use best 5-year average salary up to date of retirement)

Pre-conversion service:
2.0% of salary

(Use best 5-year average salary up to the conversion date)

Benefit is then conditionally indexed from conversion date to the date of retirement

Post-conversion service:
2.0% of salary

(Benefit is calculated each year based on the salary for that year)

Benefit is then conditionally indexed from conversion date to the date of retirement

Pension Benefit
(after age 65)

(The PSSA is integrated with the Canada Pension Plan at age 65)

1.3% of salary up to YMPE*
2.0% of salary in excess of YMPE

(Use best 5-year average salary and 3-year average YMPE up to date of retirement)


*Year’s Maximum Pensionable Earnings

Pre-conversion service:
1.3% of salary up to YMPE
2% of salary in excess of YMPE

(Use best 5-year average salary and 3-year average YMPE up to conversion date)

Benefit is then conditionally indexed from conversion date to the date of retirement
Post-conversion service:
1.4% of salary up to the YMPE
2% of salary in excess of YMPE

(Benefit is calculated each year based on the salary for that year)

Benefit is then conditionally indexed from conversion date to the date of retirement

Requirements for a pension (vesting)

5 years of pensionable service

Earlier of 5 years of continuous employment or 2 years of plan membership

Early Retirement Reduction Factors

3% per year early
prior to age 60

Pre-conversion service:
3% per year early
prior to age 60

Post-conversion service:
5% per year early
prior to age 65

Cost of Living Adjustments

Automatic after retirement to a maximum of 5% (In January 2013, the current plan paid 2.4% indexing)

Conditional both before and after retirement up to full CPI (no maximum) if the funding level of the pension plan allows for it

Survivor Benefits

50% of the pension
payable at age 65

50%, 60% or 100% of the pension
payable at age 65
Life Pension with a 5 Year or 10 Year Guarantee

 

15. What do you mean by “Conditional Cost of Living Adjustment”?

  • After the conversion date, for active contributors to the PSSA shared risk plan, both pre-reform benefits and post-reform benefits will be increased by a cost of living adjustment up to the increase in the Consumer Price Index (CPI) if the funding level of the PSSA shared risk plan allows for it. The increase can be to the full increase in CPI (no longer capped at 5%).
  • For retirees (including current retirees), the pension benefit will be adjusted each year by a cost of living adjustment up to the increase in the CPI if the funding level of the PSSA shared risk plan allows for it. The increase can be to the full increase in CPI (no longer capped at the 5% or 6%).
  • If the funding level of the PSSA shared risk plan does not allow for full or partial cost of living adjustment increases to be granted in a given year, the increases are carried forward to future years and will be paid when the funding level of the PSSA shared risk plan allows.

16. What does it mean when you say “cost of living adjustments will be provided if the funding level allows for it”?

  • The new model is structured so that cost of living adjustment increases can be provided the majority of the time. It is expected that at least 75% of CPI will be provided under the Shared Risk Pension Model.
  • These annual increases would be up to the full extent of inflation and not capped at 5% as under the current PSSA.

17. Will the Province still have overall responsibility for the PSSA under the Shared Risk Pension Model?

  • Currently the Minister of Finance is governor and Cabinet has authority over plan operations.
  • Under the Shared Risk Pension Model, an independent Board of Trustees (with representation from members and the Province) will be responsible for the PSSA shared risk plan.

18. What about changes to rules on purchases of service, transferring service, etc?

  • Any changes regarding rules pertaining to purchase of service, reciprocal transfer agreements, etc. will be determined by the independent Board of Trustees following the PSSA’s adoption of the Shared Risk Pension Model.
  • It is expected that purchase of service will still be allowed following the conversion to the Shared Risk Pension Model, however, the cost to purchase certain periods of service may change.

19. At the end of the day, what does all this mean for me as an active employee?

  • Your pension benefits will be more secure into the future than they are in the current PSSA.
  • Your contributions will increase but they will be stable.
  • You will likely have to retire later to earn the same pension income.
  • If you are close to retirement the impact will be small.
  • The further that you are away from retirement, the longer you will have to work to earn the same pension income.
  • Cost of living adjustments before and after retirement will be conditional (currently automatic after retirement)
  • Employees and retirees treated in a consistent manner.

20. How do I get more information on how these changes will impact me?

  • As additional details are known, further communication will be sent to all employees outlining the changes.
  • In addition, information sessions are being planned and all employees will be given an opportunity to participate in these sessions.
  • The online pension estimate calculator has been updated which will allow employees the opportunity to prepare their own pension estimates and determine the impact of the changes.

21. Who can I contact if I have questions?

  • If you have additional questions, please contact a Benefits Counselor with the Pensions and Employee Benefits Division toll free at 1-800-561-4012 or (506) 453-2296.