Frederick Vettese is the former chief actuary of a large actuarial firm and the author of Retirement Income for Life: Getting More without Saving More.
As secure workplace pensions continue to die out across the Canada, the Ontario Teachers’ Pension Plan (OTPP) and the federal Public Service Pension Plan (PSPP) are two gold-plated retirement plans that remain intact. So just how good are they – and how do they compare with one another?
These plans are large by any measure. At last count, the OTPP has 323,000 active members and pensioners while the corresponding figure for the PSPP is 590,000. Based on 2017 asset figures, that comes out to $587,000 per person in the OTPP and $327,000 per person in the PSPP.
Most Canadians think of age 65 as “normal retirement age.” In the public sector, there is nothing normal about retiring that late. The median retirement age in the public sector has been as low as 57.2 in the past, though it has since risen to 61.3.
In the case of the OTPP, teachers can retire without penalty once their age plus “qualifying years” total 85 or more. For example, a teacher with 32 qualifying years can retire without penalty at age 53.
The early retirement rules within the PSPP are also generous though they don’t quite match the OTPP. Civil servants used to be able to retire without penalty as early as 55 if they had 30 years of pensionable service. During the government of Stephen Harper, the age 55 condition was changed to 60 for new hires.
In both plans, members can retire even earlier subject to a modest penalty.
When combined with CPP, the PSPP provides a pension of 70 per cent of the final five years’ average earnings if the member contributed for 35 years. After 65, the pension (including CPP) is actually a little more than 70 per cent because integration with the CPP is not perfect. In addition, members receive OAS pension.
The pension for OTPP members is virtually the same except that the pension payable after 65 is even higher than it is under the PSPP.
Members with 35 years of service under either plan will be very comfortable in retirement. For workers who were raising families or paying off mortgages, which means almost everyone, a 70-per-cent pension (plus OAS) translates into a standard of living in retirement that is significantly higher than what they enjoyed while they were working. With the CPP being enhanced, this can only go up.
Both plans strive to provide 100-per-cent inflation protection of pensions, meaning that pensions rise each year in line with the annual change in the consumer price index (CPI). For convenience, this feature is referred to as indexation. The difference between the two plans is that indexation is guaranteed in the PSPP but conditional in the OTPP, depending on the funding level. The full, uncapped indexation within the PSPP is a rarity, even in the public sector.
Cost-sharing in the public sector has been evolving in recent years. Most plans now split pension costs 50-50. This is one reason why employee contributions have been rising over the past decade. Another reason is to pay for the investment losses that occurred during the global financial crisis.
In the OTPP, employees contribute 10.4 per cent on their earnings below $57,400 and 12 per cent on earnings over $57,400 (which we refer to as 10.4/12). Contributions under the PSPP are a little lower at 9.49/11.67 (same threshold of $57,400).
When we add in the employer’s share, total contributions in both plans exceed 20 per cent of pay. In addition, employees can still contribute another 4 per cent or 5 per cent of pay to a registered retirement savings plan. Note that the federal government restricts tax-assisted saving by workers who are not in defined benefit plans (which describes 90 per cent of private sector workers) to only 18 per cent of pay. Another instance of “Do as I say, not as I do." The federal government should be called upon to explain this double-standard or better still, to level the playing field.
Even though the contribution formulas are similar, the 50-50 cost-sharing mentioned above is applied very differently in the two plans. In the OTPP, the active members and the employers share all costs 50-50. In the PSPP, the cost of deficits is borne purely by the government (i.e., the taxpayer). This can be a big deal since a federal plan deficit arising of $20-billion or more is not out of the question.
Approach to funding
In the OTPP, the actuary assumes that the fund will earn a nominal return of just 4.8 per cent. Under the PSPP, the assumed fund return is 6 per cent. The PSPP is thus taking a far more aggressive stance, which can become a problem if future returns are lower than past returns. (There are demographic reasons why this will actually be the case; aging societies – Japan, for example – tend to have lower interest rates.) This is largely why the PSPP’s assets per member are so much lower than under the OTPP.
The two plans are fairly similar in most respects except for cost-sharing. The fact that PSPP does not extend the 50-50 cost-sharing principle to the sharing of deficits makes the PSPP considerably more generous overall.
In both plans, the contributions being made exceed what private sector workers can contribute to RRSPs or defined contribution pension plans.
In both plans, the early retirement rules are quite generous. This might have made some sense in a previous era when the country had more potential workers than the economy could absorb. That is no longer the case, and in fact, we are on the brink of a time when workers will be scarce, even with high levels of immigration. For at least the next two or three decades, it is in the public interest to encourage people to work longer. The PSPP and the OTPP do exactly the opposite.