OPSEU Allocates $476 Million Plan Gains

posting date Posted: February 20, 2003

- Factor 80 extended, member contributions stabilized

February 20, 2003 (revised)

It's official. The package of improvements to the OPSEU Pension Plan selected by OPSEU earlier this fall is now in effect.

The changes include an extension of the Plan's Factor 80 early retirement option from November 1, 2002 to March 31, 2005. The temporary “points off” program, which increases the pension of those who retire early with a reduced pension, has been extended to December 31, 2005.

Plan gains are also being used to continue a modified contribution reduction for OPTrust members over the next three years, while $146 million has been set aside to stabilize member contributions against possible losses in the future.

Finally, two permanent changes to the way OPTrust pensions are integrated with the Canada Pension Plan will mean increased pensions for current and future retirees, and for the survivors of retirees who die before age 65.

As a Plan sponsor, OPSEU is the sole decision-maker in allocating the members' and pensioners' share of gains - not OPTrust.  OPSEU chose the package of improvements after reviewing survey responses from more than 15,000 OPTrust members and pensioners. The survey was mailed to every active OPTrust member, divested member and current and deferred pensioner in late July.

The changes selected by OPSEU will be paid for with the members' and pensioners' $467 million share of Plan gains. Total gains of $867 million were identified in the Plan's most recent funding valuation, covering the years 1999, 2000 and 2001.

In November, both sponsors - OPSEU and the Government of Ontario - signed the plan amendments needed to implement the changes.

For more details, click below:

How Members' and Pensioners' Gains Will Be Used
Plan Changes - Who is Covered?
Factor 80 and “Points Off” - Early Retirement Options Extended
Improvements to CPP Integration for Current and Future Pensioners and Survivors
Contributions Reduced until December 2005
$146 Million Reserve Set Aside for the Future
How Gains are Shared
Plan Improvements and Your Taxes
Frequently Asked Questions

How Members' & Pensioners' Gains Will Be Used

chart showing how members' and pensioners' gaines will be used

Plan Changes - Who Is Covered?

The package of improvements selected by OPSEU applies to all OPTrust members. While most of the changes took effect on December 1, 2002, the extension of Factor 80 is effective from  November 1, 2002.

The changes in the CPP integration formula and survivor pensions apply to retirees and eligible survivors  who were receiving an OPTrust pension on November 30, 2002.  These two improvements - and the extension of the “points off” option for those who qualify for a reduced pension - are also available to OPTrust's regular deferred pensioners.

Benefits have also been extended to divested members. These benefits include:

  • Factor 80 until March 31, 2005
  • access to "points off" until December 31, 2005
  • permanent reduction in CPP offset to .655%
  • elimination of CPP offset on survivor pensions for pre-age 65 death of retirees

Factor 80 and “Points Off” - Early Retirement Options Extended

The plan improvements chosen by OPSEU include the extension of two temporary early retirement options. As a result, qualifying members will be able to retire sooner and with a bigger pension from OPTrust.

Factor 80
OPTrust's voluntary Factor 80 early retirement option has been extended for active OPTrust members. Under Factor 80, members can now retire with an unreduced pension if their age plus their credit total exactly 80 years on or before March 31, 2005. About 3,100 members will be eligible for Factor 80 during this period.

OPTrust will send personalized letters to members whose pension records indicate that they may qualify for Factor 80 by June 30, 2003. If you will qualify later, your Factor 80 date will be listed on your 2002 Annual Pension Statement, which will be mailed to you in spring 2003.

There are strict time limits for retiring under Factor 80. If you think you may qualify within the next six months and don't receive a personalized notice by January 31, 2003, please contact OPTrust as soon as possible to confirm your eligibility.

Example: Gillian was born in April 1947 and has been working with the Ministry of Corrections for 24 years. If Factor 80 had not been extended, Gillian could not have retired with an unreduced pension until she qualified for 60/20, in May 2007. Under Factor 80, she will qualify for an unreduced OPTrust pension in August 2003.

“Points off”
The  “points off” program, for members who retire early with a reduced pension, has also been extended by 13 months, to December 31, 2005.

The OPSEU Pension Plan allows members who are 55 or older when they leave their jobs - and who don't qualify for an immediate unreduced pension - to take a reduced pension before age 65. Normally, these members' pension would be reduced by 5% for each year they are under 65. Under “points off,” the reduction is based on the number of years the member would have needed to reach the earliest permanent unreduced retirement option (Factor 90, 60/20 or age 65) if he or she had continued working.

“Points off” applies both to active members and to deferred pensioners who take a reduced pension before December 31, 2005.

Example: Luis is considering retiring with a reduced pension when he reaches age 58, in June 2005. By then he will have 18 years of credit in the Plan and expects to have an average annual salary of $48,000.

Because Luis will be seven years from his 65th birthday, his pension would normally be reduced by 35% (5% x 7 years) to $11,232 per year. However, Luis is only two years away from qualifying for the 60/20 option. With the “points off” program, the reduction will be just 10% (5% x 2 years), giving Luis an annual pension of $15,552, $4,320 higher than under the Plan's normal reduction formula.

Improvements to CPP Integration for Current and Future Pensioners and Survivors

The package of plan improvements selected by OPSEU includes two permanent changes that will increase the size of OPTrust pensions for current and future retirees.

A higher pension at age 65
Your OPTrust pension is “integrated” with the Canada Pension Plan (CPP). This means that the pension you receive from OPTrust is reduced when you reach age 65. This is the age at which members usually start to receive a pension from CPP.

One of the improvements to the Plan changes the formula used to calculate the reduction for CPP integration (the “CPP offset). Starting December 1, 2002, the reduction will be based on a factor of 0.655%, down from 0.675%.

The result is a smaller CPP offset - and a larger OPTrust pension at age 65 for every active member of the Plan.

The change to the CPP offset also applies to OPTrust's current and deferred pensioners and to survivor pensions. About 6,500 pensioners who have already reached 65 will see an immediate increase in their OPTrust pensions, effective December 1, 2002. Younger retirees and deferred pensioners will benefit from the smaller CPP offset when they reach 65.

Example: Sita will be retiring next year with an unreduced pension of $33,000 per year, under OPTrust's Factor 90 option. On her 65th birthday, her pension will be reduced for CPP integration. With the smaller CPP offset, Sita's annual pension at age 65 will be $25,313. This is $235 per year more than she would have received under OPTrust's previous CPP offset.

Increased survivor pensions
A related change improves survivor pensions when an OPTrust retiree dies before age 65. In the past, these survivor pensions were calculated based on the pension the retiree would have received at age 65, after CPP integration. With the change, these survivor pensions will not be integrated with CPP until the date on which the deceased pensioner would have turned 65.

Note: This change does not affect survivor benefits in cases where an OPTrust member dies before retirement.

A higher commuted value
The two permanent benefit changes also affect the amount that terminating members can transfer into a locked-in RRSP. If you leave your job with an OPTrust employer before age 55, you have the option of:

  • leaving your money in the OPSEU Pension Plan and taking a deferred pension, or
  • transferring the “commuted value” of your pension to a locked-in RRSP.

The commuted value equals the present, lump-sum value of your future OPTrust pension. By increasing your age-65 pension and the pension payable to your survivors, the permanent benefit changes increase the amount that you can transfer out of the Plan. This applies to active members who leave the Plan on or after December 1, 2002.

Contributions Reduced until December 2005

A portion of the gains is being used to continue a partial contribution reduction for active members over the next three years.

Since 1999, your OPTrust contributions have been reduced by 4% of your earnings. This reduction was set to expire on November 30, 2002. With the new gains-related changes, the contribution reduction will be phased out gradually, with contributions rising annually by 1% of earnings, starting with the pay period that includes December 1, 2002.

Your OPTrust contributions are now scheduled to return to the normal rate as of your December 1, 2005 pay period. The normal contribution rate is 8% of earnings. These contributions are integrated with the Canada Pension Plan (CPP). This means your OPTrust contributions are lower for the part of your salary that falls between CPP's Year's Basic Exemption (YBE) and the Year's Maximum Pensionable Earnings (YMPE).

New Contribution Rates

MEMBER CONTRIBUTION RATES (percentage of earnings) Starting from the Pay Period that includes
Below YBE Between YBE & YMPE Above YMPE
5% 3.2% 5% December 1, 2002
6% 4.2% 6% December 1, 2003
7% 5.2% 7% December 1, 2004

* The YBE and YMPE are set each year by CPP. The YBE for 2002 is $3,500. The 2002 YMPE is $39,100.

Member contributions are scheduled to return to the normal rate of 8%, 6.2% and 8% as of the pay period that includes December 1, 2005.

Example: Julie is a member who earns $49,000 per year. At OPTrust's normal contribution rate, her contributions to the Plan would be $3,279 per year. With the phasing out of the contribution reduction, Julie's annual OPTrust contributions will be approximately:

  • $ 1,809 starting December 1, 2002 ($1,470 below normal)
  • $ 2,299 starting December 1, 2003 ($980 below normal)
  • $ 2,789 starting December 1, 2004 ($490 below normal)
  • $ 3,279 starting December 1, 2005 (OPTrust's normal rate).

$146 Million Set Aside for the Future

As well as improving benefits and reducing contributions, OPSEU has set aside $146 million to stabilize contributions in the future. This brings the total value of the member's contribution stabilization reserve to $149 million.

If the OPSEU Pension Plan were to experience a loss, this reserve would be used to reduce the impact on members' contribution rates. With today's challenging investment climate, this means added security for OPTrust members.

Shared risks and rewards
The OPSEU Pension Plan is jointly sponsored by OPSEU and the Government of Ontario. Any gains identified in the Plan's three-year actuarial funding valuations are divided between the Government and OPTrust's members and pensioners.

The same principle would apply if a future valuation showed a loss in the Plan. Responsibility for the loss would be shared - and any funding shortfall would be made up by an increase in both the members' and the employers' contribution rates.

Stabilizing member contributions
In the event of a loss, the stabilization reserve would be used to offset all or part of the members' share of the funding shortfall, reducing the impact on members' contribution rates. If a contribution increase were still required, the payments to make up the deficiency would be spread out over a 15-year period, to further cushion impact on members' incomes.

Funding outlook
It is still too soon to predict the results of the Plan's next three-year funding valuation, due in mid-2005. However, any investment losses, including a deferred loss of $192 at the end of 2001, will reduce any gains that may be identified.

In the meantime, OPTrust's Board of Trustees reviews the Plan's gains and losses annually and actively monitor the Plan's financial status on an ongoing basis. OPTrust's financial results for 2002 will be reported to members and pensioners in April 2003.

How the Gains Are Shared

Total gains of $867 million were identified in the OPSEU Pension Plan's most recent three-year actuarial valuation, covering the years 1999-2001. Under the terms of the Plan, these gains are shared between OPTrust's members and pensioners and the Government of Ontario.

The members' and pensioners' share of current gains is $467 million, after a reduction of $6 million to cover the cost of benefits negotiated between OPSEU and the Government this spring.

The Government's unallocated share of the gains is $297 million. This reflects reductions of $33 million to cover the employers' cost for the negotiated benefit improvements and $63 million to pay down the Plan's remaining initial unfunded liability. The OPSEU Pension Plan is now fully funded.

The Government can use its gains to improve benefits, reduce employer contributions or establish a contribution stabilization fund for employers. The province is still considering its options for the employer share of the Plans' gains.

Plan Improvements and Your Taxes

Under Canada's Income Tax Act, the pension benefit you earn each year reduces your RRSP contribution room for the following year. This also applies when permanent changes to the Plan increase the value of your earned pension.

The change in the Plan's CPP offset  increases the value of your OPTrust pension. As a result, OPTrust must calculate a “past service pension adjustment” (PSPA) to reflect this additional benefit. This PSPA will reduce your available RRSP contribution room for the 2003 tax year.

The maximum PSPA from the recent plan changes is $900. This will apply to members whose income was at or above the Canada Pension Plan's YMPE for every year between 1990 and 2001. (The YMPE was $28,900 in 1990 and rose to $38,300 in 2001.) Your PSPA will be smaller if you earned less than the YMPE or did not contribute to the Plan for part of this period.

OPTrust will send you a PSPA notice in early 2003, for your records. You do not need to report PSPAs on your income tax return. Instead, we will report your PSPA directly to the Canada Customs and Revenue Agency. CCRA will take your PSPA into account when calculating your RRSP contribution limit for 2003. This will be listed on the 2002 Notice of Assessment you will receive from CCRA.

PSPAs will be sent to all active members, deferred pensioners and OPTrust retirees. If your total PSPA is less than $50, it will not be reported to CCRA, and your RRSP contribution room will not be affected.

Frequently Asked Questions

Question: Where do gains come from?

Answer: Every three years, OPTrust's actuaries prepare an “ actuarial funding valuation” of the OPSEU Pension Plan, which is filed with Ontario's pension regulators. This independent study compares the growth in the Plan's assets to the anticipated cost of members' and pensioners' benefits. Gains result when the Plan's investments grow more quickly than its liabilities. If assets grow more slowly than needed to fund the Plan, the result is an actuarial loss.

Question: Why weren't the gains just paid to us in cash?

Answer:  Under the terms of the OPSEU Pension Plan, gains cannot be paid out in cash. Instead, the members' and pensioners' share of gains can be used to:

  • pay for temporary or permanent benefit improvements
  • reduce members' contributions, and/or
  • set aside a reserve to stabilize contributions in the event of a future loss.

As a Plan sponsor, OPSEU is responsible for deciding how to use the members' and pensioners' share of gains.

Question: When is the next funding valuation?

Answer:  The Plan's next funding valuation will cover the years 2002, 2003 and 2004. The results will be available in mid-2005.

Question: I was divested in 1998 and started receiving an OPTrust pension in 2000. Do I get the benefit improvements?

Answer: Yes. Since you were receiving an OPTrust pension before December 1, 2002, your pension at age 65 will be higher because of the improved CPP offset. You also have the security of knowing that if you die before age 65, your survivor's 60% pension will not be reduced for CPP integration until the date you would have turned 65.

Question: I left my job and terminated membership in the OPSEU Pension Plan in 2001. I'm now thinking of taking my commuted value out of the Plan. Do the changes affect how much I can transfer?

Answer:  No. There is no change in your commuted value if you terminated membership before December 1, 2002. Your CV is based on the pension benefits in effect at the time you terminated. However, if you take a deferred pension, the improvements to the Plan's CPP offset and post-retirement survivor benefits will apply when you start to collect your pension from OPTrust.