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BC’s Municipal Pension Plan
So today we have a special episode for our friends out in BC. I was asked by a fellow listener to cover the proposed changes to BC’s Municipal Pension Plan. This is a special pension that covers munipical workers in BC and is one of the largest pension plans in Canada with over 35,000 members.
While we’re focusing on this one pension today, this change is part of a larger trend where we see pension plans changing how they operate and most importantly, how much their members can receive. These changes are done for many different reasons and it wouldn’t surprise me if other provincial pensions see similar changes.
So this pension plan is classified as a defined benefits plan – meaning that the amount received is based on a calculation that includes years of service, average earnings, and more. This is in contract to a defined contribution plan or group plan where your payout is based on contributions made and their performance.
So this municipal pension plan has been fairly unchanged since 1966 and now is likely going to go through some serious changes that is impacting members.
There are three major proposed changes to the municipal pension plan that are scheduled to go in effect on January 1st, 2022. A key detail for all these changes is that any service earned before this date will still have the old rules applied and service gained afterwards will fall under the new rules. Behind the scenes, these plans will essentially be turned into a mathematical monster of Frankenstein.
Increased Lifetime Pension & Elimination of Early Retirement Benefits
So the first big change is increasing the lifetime pension which is the amount that is paid to members when they retire and eliminating early retirement benefits. This proposal essentially shifts the funds from early retirement benefits to the lifetime pension payments.
The reasoning provided behind this change is that a fraction of pension members benefit from the early retirement benefits but all members pay for them. Unfortunately, these changes also alienate employees that have been working with the expectation of early retirement, made career choices based on these expectations, and already have retirement plans in place.
The early retirement benefits that are being eliminated are bridging benefits and an early retirement subsidy. Bridging benefits are an amount paid to retired pension members until they turn 65 so they don’t need to take out from their Canadian Pension Plan at a reduced rate. The early retirement subsidy is an additional payment that is made to those that retire early. These are benefits are actually fairly common in government employee pension plans.
Those that have service before the January 1, 2022 cut off date will still be able to access the early retirement benefits based on service before the deadline but will not accrue any other of these benefits after the date. So this means that there will be some of these early retirement benefits available to existing members, but the amount will be less than what they would have received if the changes didn’t occur – which can lead to an inadequate stream of income.
To help offset this drop in income, those that choose to retire early can purchase a temporary annuity that will help provide additional income until they receive their CPP or another end date. The downside with this option is that the annuity is paid for by a member’s pension and will reduce their lifelong pension amount. This reduction in the lifelong pension amount can lead to retirement cashflow concerns and possibly not being able to support emergencies or dependents.
Eliminating the “Rule of 90”
This proposal will also change the rules when an individual can retire early and qualify for their full pension.
This is being done by eliminating a common rule in pensions that allows early retirement when one has collected enough years of service and reaches a specific age. For this pension, it’s called the rule of 90 and what this means is that you can retire early if your age plus years of service equal 90. So for example, one could retire at 55 if they have 35 years of service as that equals to 90.
Alas, this rule is expected to be no more and will be replaced with a reduction of 6.2% for each year that one retires before the age of 60.
Yet again, those with service before the deadline will fall under the old and new rules with what I can assume will be a complicated equation.
Pension Calculation Changes
The next big proposed change is to how much has to contributed every year to the pension and how the pension payout is calculated. The current way that contributions work is that plan holders contribute 8.5% of their earnings below the YMPE amount – which is currently sitting $58,700 and 10% on all income above that.
The new proposed change will streamline this to one static contribution amount of 8.61% making it easier to determine contributions. Those that earn above the YMPE will also see a small bump in pay as less is being taken to fund the pension and those earning below will see a slight reduction of take home pay.
The way that you receive the pension is also changing. The base salary used in the calculation is the highest average annual earnings over a 5-year period. Like contributions, there were two tiers with 1.3% received on base salary below the YMPE and 2% above. These would then be multiplied by years of service to determine how much of a pension was paid to the employee.
The proposed change will change this to one static amount of 1.9%. This means that the portion of the salary below the YMPE will receive a large bump up and earning above the YMPE have a slight decrease.
Like all other changes, all years of service earned before the deadline will fall under the old rules while earnings after will fall under the new rules.
So that’s all of the major changes, but what we see is that these changes streamline how the pensions are calculated and in theory increase the lifetime pension that most members receive.
Not All Benefit
However, there are some segments of plan members that will be negatively impacted by these changes. Long-term municipal workers that started their careers at a younger age will have a much harder time funding an early retirement and may be forced to work longer than they planned. Many of these employees made crucial career choices around the pension and have intricate retirement plans that have now been dashed. Many of these employees feel like they are being treated unfairly – especially after dedicating so much of their working life to a career.
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