• New Two-Step Pension Contribution Formula Starts in January 2005
• Member Contribution Rate Change for December 2004
• Actuarial Valuation Update: Contributions to Stay at Normal Rate
• Contribution Discrepancies During Changes of Employment

Printer Friendly Version: PDF

New Two-Step Pension Contribution Formula Starts in January

A new two-step formula for calculating members’ and employers’ OPSEU Pension Plan contributions is set to take effect starting in January 2005.

The launch of the new formula coincides with the return of member contributions to the Plan’s normal rate of 8%, following five years of reduced rates for members. Employer contributions will continue at the normal 8% rate.

The new two-step formula simplifies the way OPTrust contributions are “integrated” with the Canada Pension Plan (CPP). Under CPP integration, both members and employers pay lower contributions to the OPSEU Pension Plan on part of the members’ earnings, to reflect the fact contributions are also paid to CPP.

For the remainder of 2004, contributions will continue based on the Plan’s current 3-step contribution formula. Please see “Member Contribution Rate Change” below for more details.

While the move to a two-step contribution formula will streamline the way contributions are calculated and administered, the change is essentially revenue-neutral to the Plan.

New Contribution Formula
Under the new formula, both member and employer contributions will be calculated in 2-steps, based on the member’s earnings:

• For annual earnings up to CPP’s Year’s Maximum Pensionable Earnings (YMPE), contributions will equal 6.4% of pensionable salary.
• For earnings above the YMPE, OPTrust contributions will equal the full 8.0% of salary%.

OPTrust’s new 2-step contribution formula takes effect for members and employers starting with the pay period that includes January 1, 2005.

• Member and employer contributions for individuals who earn less than $32,000 per year will be slightly less than under the old formula. For an employee who earns $25,000 per year, for example, member and employer contributions will be approximately $13 less per year.
• For an employee who earns more than $32,000, contributions will be slightly higher. The maximum difference will apply for any member earning more than the YMPE. Based on the 2004 YMPE, the difference would equal about $18 more per year.

Return to top of page

Member Contribution Rate Change for December 2004

During the rest of 2004, the Plan’s current three-step formula will remain in effect.

For employers, contributions will continue at the Plan’s normal 8% rate. As a result, employer contributions equal:

• 8% of earnings up to the Year’s Basic Exemption (YBE; $3,500)
• 6.2% of earnings between the YBE and the YMPE
• 8% of earnings above the YMPE

• 6% of earnings up to the Year’s Basic Exemption (YBE)
• 4.2% of earnings between the YBE and the YMPE
• 6% of earnings above the YMPE

• 7% of earnings up to the Year’s Basic Exemption (YBE)
• 5.2% of earnings between the YBE and the YMPE
• 7% of earnings above the YMPE

Return to top of page

Actuarial Valuation Update: Contributions to Stay at Normal Rate

Member and employer contributions are expected to remain stable at the Plan’s normal rate of 8% of earnings until at least 2007, based on the results of OPTrust’s most recent actuarial funding valuation.

The funding valuation identified a loss – or unfunded liability – of $255 million for 2002 and 2003. This loss reflects the Plan’s negative investment returns for 2001 and 2002. Like most other major investors, OPTrust was affected by a general market downturn during this period.

At the same time, the projected cost of members’ pensions continued to increase in 2002 and 2003. These two factors combined to produce the $255 million funding loss, despite the Plan’s strong 17.3% investment return for 2003.

Stabilizing Contributions
Normally, this funding loss would mean an immediate contribution increase of about 1% of salary above the Plan’s normal rate, for both members and employers.

Fortunately, OPSEU and the Government of Ontario have each set aside a portion of the Plan’s funding gains from 1999-2001 in separate funds to stabilize member and employer contributions in the event of a funding loss. The sponsors have agreed to use the stabilization funds to cover the annual unfunded liability payments, starting this year. As a result, member and employer contributions will not rise above the normal rate before the Plan’s next funding valuation, expected in 2007.

For more information on the Plan’s funding valuation and strategy for managing its unfunded liability, please see the Fall 2004 issue of OPTions, available online.

Return to top of page

Contribution Discrepancies During Changes of Employment

The integration of OPTrust pension contributions with the Canada Pension Plan (CPP) means that the bi-weekly pension contributions paid by members and employers may vary over the year. This happens because OPTrust’s contribution rate is lower for earnings below the YMPE than it is for earnings above the YMPE.

This can result in a contribution discrepancy when an OPTrust member changes employment from one participating employer to another.

Changes from OPS to Non-OPS Employers
Contribution discrepancies typically arise when the old and new employers use separate payroll systems. Examples include when an OPTrust member moves:

• from an OPS employer that is part of the CORPAY system to a non-OPS agency, board or commission,
• from a non-OPS employer to an a position that is part of the OPS
• from one non-OPS employer to another.

Contribution Shortfalls
Such contribution discrepancies result when the new employer does not have access to information about the member’s current year earnings and pension contributions prior to the change of employment. If this information is not provided, the new employer may mistakenly apply the contribution rate for earnings below the YMPE, even though the member’s actual pensionable earnings for the year (from both employers) exceed the YMPE.

This scenario may occur whenever:

• a member’s change in employment involves a transfer to a new payroll system where previous earnings have not been accounted for, and
• the member’s combined annual earnings exceed the YMPE.

In most situations where such a contribution shortfall occurs, OPTrust will bill the new employer directly for both the member and employer contributions owing.

Avoiding Contribution Shortfalls for Transferring Employees
In such cases, if the new employer is aware of the member’s current year earnings and pension contributions prior to the change in employment, the employer can ensure that the correct contribution rate is applied to the member’s earnings for the balance of the calendar year. This information may be available from the new employee (based on a final pay stub or Record of Employment issued by the previous employer), or from the previous employer.

Reconciling Contribution Shortfalls
OPTrust may identify contribution shortfalls of this type in one of several ways. The two most common methods are:

• At enrolment – When the new employer enrolls the employee in the Plan, OPTrust will determine if there are missing mandatory contributions starting from the employee’s new Plan Membership Date (PMD). These calculations lag the employer’s payroll process by a several pay periods to allow the employer the opportunity to identify and correct any shortfall through “catch-up” payments.
• Through OPTrust’s regular Confirmation Report – Following the employer’s submission of its biweekly payroll data, OPTrust conducts a series of data tests and generates a Confirmation Report. This report will identify any contribution discrepancies due to errors in salary or credit data, contribution gaps, or the incorrect application of the OPSEU Pension Plan contribution formula – including the use of incorrect rates or problems with CPP integration.

When OPTrust identifies a contribution shortfall, we will notify the employer directly so that arrangements can be made to remit the amount owing to OPTrust.

For more information on the OPTrust’s Payroll Data Reporting Process, please refer to our online Employer Manual.

Return to top of page