There are a wide array of pension plan funds available to employees throughout Canada. While many of these are geared towards military and police members, there are others still that provide benefits to federal and public service employees, too. This research has compiled information to build a SWOT (Strengths, Weaknesses, Opportunities, and Threats) for the following four notable pension plans in Canada:
1) Special Forces Pension Plan (SFPP)2) Local Authorities Pension Plan (LAPP)3) Public Service Pension Plan (PSPP)4) Royal Canadian Mounted Police (RCMP) Pension Plan
The respective website for each of the above-listed pension plans was the primary resource used to build the SWOT analyses. In addition, a very brief overview of what the plan consists of, when it was implemented, and who it is available to has been provided for reference. For the most part, strengths identified were associated with the success of each pension plan’s investment strategies, consumer satisfaction, and applicability requirements for receiving benefits. Threats and weaknesses, on the other hand, are more focused on fund liabilities and viability in the long-run, especially in the wake of the COVID-19 pandemic. We were able to identify opportunities for each pension plan by analyzing its most recently published annual report from 2019, in which heads of the pension funds discussed future goals for the programs. This information has all been detailed below based on the pension plan to which it applies.
Special Forces Pension Plan (SFPP)
- The Special Forces Pension Plan (SFPP) is administered by the Alberta Pensions Services Corporation (APS).
- This program has been around since 1979 and is available to local authorities employed by the Province of Alberta, including police officers and chiefs.
- In 2019, there were a total of 7,506 members that were receiving benefits via the SFPP, of which 4,570 were active, 2,725 were retired, and 211 were deferred. On average, these individuals were 55.6 years of age and received approximately $56,471.28 in pension benefits per year.
- The SFPP is a defined benefit pension plan. This means that every person to receive funds from this pension is provided the formula used to calculate their payments and the total amount upfront.
- SFPP funds are sourced from members, employers, and investment earnings to ensure that funds are never depleted. Employers always contribute 1.1% more than the members/receivers of the pension do.
- Monthly pension amounts do not vary once set, providing receivers with a reliable and secure source of income upon retirement. Upon death, SFPP benefits can be passed on to spouses, beneficiaries, or even distributed in a lump sum payment to estates or organizations.
- The Canadian federal government defines a Year’s Maximum Pensionable Earnings (YMPE) amount that prevents pension distributions from exceeding a certain value to ensure the fund is not depleted.
- Overall, the SFPP experienced a 13.5% return on investments, in large due to its participation in equity markets. This was the source of the majority of the Plan’s net assets in 2019.
- Individual pension benefits are not determined based on the amount that a given person has paid into the plan, but rather on how long a person was in pensionable service and their highest average salary over a 5-year period during that time.
- Members of the SFPP can receive benefits from their pension as early as age 55, or as soon as they have completed at least 5 years of pensionable service. Members are not required to wait until the retirement age of 65 to receive benefits. Unreduced pension benefits are available to any individual as soon as they have served at least 25 years.
- Today, both members and employees are each contributing an additional 0.75% in their payments to the SFPP to pay off the pre-1992 unfunded liability. This liability is a debt that resulted from shortcomings in investment returns and contributions, and these benefits are still guaranteed to be paid by the Province of Alberta. This liability is not expected to be paid off until December 31, 2036. The Government of Alberta contributes an additional 1.25% to this liability.
- Regardless of employment, individuals who have completed at least 35 years of pensionable service no longer required to contribute to the SFPP fund. However, these individuals can still have increases in their salaries attributed to their pension calculation.
- As of September 1, 2019, part-time employees of the local authorities of Alberta are eligible to receive benefits via the SFPP.
- The Special Forces Pension Plan Board (Board) is interested and willing in utilizing a more diversified investment portfolio that includes both high- and low-risk investments in both the short- and long-term to help maintain the longevity of the fund and prevent increases in member and employer investments down the road.
- The Investment Plan for the SFPP permits substitutions to be made on benchmarks and investment types if and when new opportunities arrive. The expectation of this is to bring about higher returns than could come about via passive investments in indexed funds.
- The SFPP is now a jointly-sponsored program because of the Joint Governance of Public Sector Pension Plans Act (JGA). This new format for the SFPP makes it possible for members and employers to have more say in the legislation behind the calculation and distribution of funds through the Plan. The idea behind this is to bring additional value to the plan by having additional outside input in the decision-making processes.
- Individuals that were eligible for pension benefits from the Local Authorities Pension Plan (LAPP) and/or the Royal Canadian Mounted Police (RCMP) Pension Plan are able to transfer their benefits to instead receive them via the SFPP.
- In recent years and still as of January 2018, payments and benefits distributed via the SFPP have exceeded the service cost contributions. There has been an unfunded liability concern going on with the Plan since December 2016.
- The Board’s plan for investments is to generate a real annual rate of return of at least 4.3% after inflation. However, the Board states that their investment plan is expected to be very sensitive to inflation and future salaries of members are going to play a big role in benefit amount determinations.
- As of the most recent valuation of the SFPP in December 2016, the fund is expected to have a shortfall in funding of $457.6 million.
- The current cost of service of the SFPP increased to $112.1 million in 2017, up from $86.3 million in 2014. The increase is mainly a result of changes in the basic current service cost, as well as changes in assumptions and member demographics.
- Retirees under the SFPP are living at least 4 years longer than those who retired in the previous generation. This means these individuals are being retired for a longer period of time, which means a greater portion of the Fund is being distributed to retired employees.
Local Authorities Pension Plan (LAPP)
- The Local Authorities Pension Plan (LAPP) was established in 1962 as a pension fund for local authorities in the Province of Alberta.
- Pension funds via the LAPP are available to health care employees, as well as employees of the cities, towns, municipalities, schools, and any other public sector organization in Alberta.
- In 2019, there were 274,151 individuals in Alberta that received benefits from the LAPP. Of these individuals, 167,162 were active, 71,880 were retired, and 35,109 were deferred. Furthermore, 52% worked in healthcare, 29% worked for municipalities, and 19% worked in education.
- The LAPP is a defined benefit pension plan, which means that the monthly benefits an individual receives via the pension is defined prior to disbursement and will not change over time.
- Members of the LAPP can purchase additional pension benefits to increase their pay once retired by either buying prior service or leaves of absence.
- Funds for the LAPP are sourced from both members and employers. Employers pay 1% more to the LAPP than members do. These finances are used to pay the benefits of current pension members.
- There were a total of 420 employers that contributed to the LAPP fund in 2019, paying a total of $2,483 million in 2019 to the fund.
- The LAPP fund has seen a regular surplus year-after-year in the fund after all pension obligations. In 2019, this amounted to a surplus of $7.9 billion, up from $3.5 billion in 2018. This amounts to a 119% funding rate.
- The Canadian government identifies a Year’s Maximum Pensionable Earnings (YMPE) limit each year to ensure that there are enough funds available for every member to receive the maximum benefit amount possible, guaranteed.
- The LAPP offers a wide array of preparation services to members, including one-on-one information sessions, seminars, webinars, and online tools that are aimed at helping members estimate their pensions in preparation for retirement.
- In 2019, the LAPP achieved a 99.4% payout accuracy rate for their calculated benefits vs. actual paid benefits. From a member perspective, 84.3% reported being satisfied.
- Pension benefits are determined not by an individual’s investment into the plan while working pensionable hours, but rather based on their salary and years of service.
- When it comes to making investments with funds for the LAPP, very few strategic, long-term investment attempts are made. A majority of the assets are invested with fixed income and short-horizon terms, while does not bode much for the long run of the fund.
- Members of the LAPP can retire early and start receiving benefits once they have completed at least 30 years of service. Upon receiving benefits, these benefits are guaranteed until a member’s death, which could pose harm to the fund’s longevity.
- The LAPP fund is working to be funded with a ratio of more than 100% to funds available vs. funds needed, while also ensuring that contribution rates from both employers and members do not exceed 25% of total pay to cover the cost of the program.
- Additional efforts are being attempted to increase the LAPP fund by earning returns on investments. In 2019, a market return of 11.9% was seen, although return rates have varied significantly from year to year, indicating that the fund is in need of a more stable investment profile and manager. In 2016, the LAPP only saw a return of 5.8% on investments, but then increased it to 10.1% in 2017, just to drop down to 2.0% in 2018.
- When Bill 22: The Reform of Agencies, Boards and Commissions and Government Enterprises Act, 2019 was passed in fall 2019, the LAPP lost the opportunity to choose service providers, including an investment manager and benefits administration provider. This loss caused issues with the composition of the Board for the LAPP, taking away the independence of members to have a say in who would sit on the Board of this organization.
- The LAPP Corporation must decide on a process by which two individuals will be recruited to sit on the Board for the LAPP. This must be done by Summer 2020 at the very latest, and may cause issues with plan sponsors, specifically employers and members.
Public Service Pension Plan (PSPP)
- The Public Service Pension Plan (PSPP) is available to any individual that works or worked for the federal public service in Canada.
- The PSPP fund has been available since 1947 for employees of the Government of Alberta and its related agencies, boards, and commissions.
- As of December 31, 2019, there were a total of 28 employers contributing to the PSPP fund. There were 41,911 active PSPP members, 19,402 inactive members, and 27,744 retired pensioners receiving benefits from the PSPP fund in 2019.
- The PSPP is a defined benefit pension plan, which provides members with a set benefit payment on a monthly basis upon retirement based on their years in service and average salary.
- Between 2013 and 2017, the employee contribution rates to the PSPP fund were increased on an annual basis until both employers and employees were contributing the same percentage of compensation to the fund to ensure its viability in the long run.
- New employees of the federal public service as of January 1, 2013 had their retirement age increased from 60 to 65 as part of the Jobs and Growth Act of 2012.
- No individual can receive benefits via the PSPP fund for more than 35 years of pensionable service. Only salary can effect a person’s benefit amount after 35 years of service.
- Members of the PSPP fund can buyback service from other pension plans or employers to increase their benefits paid. However, these buybacks do not often pay as much as do the original pension amounts prior to transfer.
- Since 2016, the PSPP fund has either met or exceeded pension obligations, leading to a surplus each year.
- In the wake of the COVID-19 pandemic, active members that processed a service buyback were permitted to cancel the transaction if their monthly payments to the PSPP fund were more than 2% of their monthly salaries.
- Individuals can pass on their PSPP benefits to beneficiaries, spouses, and offspring upon death. This could be problematic for the longevity of the fund.
- The PSPP fund is not permitted to choose their own investment manager to handle investments of the PSPP fund. This fund is required by the Government of Alberta that AIMCo be the sole service provider for investment of the PSPP fund, which negates responsibility of this from members and employers.
- Because of COVID-19 and a lack of control of investments (since these are now controlled by AIMCo), the PSPP fund loss 12.69% of their investments in Q1 2020, decreasing the fund from being worth $15.4 billion at the end of 2019 to only $13.6 billion by the end of March 2020. The PSPP board largely attributes this to volatile investments by AIMCo.
- The investment portfolio of the PSPP fund does not have a strong, long-term track record. While the fund saw a 12.3% return on investments in 2019 due to gains from equity markets, investment success has varied year-on-year. In 2018, the fund experienced only a 1.5% return, compared to 11.3% in 2017 and 6.9% in 2016. The fund is in need of a more stable portfolio.
- Investment-wise, the PSPP fund is interested in taking more opportunistic investment strategies by putting money into environment funds, social funds, and government funds to increase long-term stakeholder value.
- Global investment markets that the PSPP fund was invested in took a large hit amidst the COVID-19 pandemic. While the fund is still secure in the long run, short-term funding for benefits will be tight for the remainder of 2020. So far, these losses have forced the AIMCo to initiative their business continuity plans in order to stay afloat.
- The PSPP fund depends heavily on the discount rate for long-term funding. The discount rate is factored into the actuarial valuation each year, but should the rate increase, the PSPP fund could be at risk.
- Despite losses in funds due to poor investments and market volatility from COVID-19, the contribution rates for both members and employers to the PSPP fund is set to remain the same in 2021. This could make it more difficult for the fund to bounce back from 2020 losses.
Royal Canadian Mounted Police (RCMP) Pension Plan
- The RCMP Pension Plan is an option for any individual that served in the Royal Canadian Mounted Police. An individual must graduate from the RCMP training facility in order to be considered, and the time spent in training does not count as pensionable service.
- The RCMP Pension Plan was implemented in 1960 to provide lifetime pension benefits to employees, both past and present, of the Royal Canadian Mounted Police.
- Non-traditional components are considered in the calculation for an individual’s pension benefits via the RCMP Pension Plan, including applicability of other Government pension plans (i.e. Old Age Security and Canada Pension Plan), as well as the amount in one’s personal savings.
- Any individual that serves less than 2 years in the RCMP will have their contributions either returned to them or be allotted a cash termination allowance. They will not receive pension benefits via the RCMP Pension Plan.
- Under no circumstances can a civilian member of the RCMP Pension Plan receive their annual allowance from the fund prior to the age of 50. Furthermore, for each year that an individual of this type receives their fund before the age of 60, a 5% reduction is taken from the allowance, as well as a 5% reduction if total pensionable service years is fewer than 30.
- The only individuals that can retire early without a reduction in their benefits are Corps Sergeant Majors, Staff Sergeant Majors, Sergeant Majors, and Staff Sergeants that are at least 58 years old, Sergeants that are at least 57 years old, and Corporals, Constables, or Special Constables that are at least 56 years old.
- Members of the RCMP Pension Plan can opt to receive a lump sum payment instead of monthly pension benefits. These payments can only be paid to locked retirement vehicles and retirement plans.
- Pensionable service by members of the RCMP is counted both as service in the force (which can be credited towards other pension plans), as well as pensionable service for the RCMP fund. The service in the force determines the type of pension benefits an individual is applicable to receive, while pensionable time served determines the amount. Not all time served is counted as pensionable service.
- Pension benefits are not affected by market inflations. In fact, pensions can be increased based on new estimates of the cost of living until a recipient’s death.
- Members of the RCMP Pension Plan are only required to serve two years in the force in order to receive benefits, while other pension plans require members to have served at least 5 years. Any individual that has served more than 2 years is applicable to pass their benefits on to beneficiaries, spouses, and/or offspring upon death.
- Due to the COVID-19 pandemic, investments of the RCMP Pension Plan are currently losing funds, with a net return of -$0.1 billion so far in 2020. The RCMP Pension Plan fund has also experienced regular decreases in their comprehensive income since 2017 (despite still making positive income), indicating that investments strategies and/or contribution percentages are inadequate compared to the applicable payable benefits.
- Between 2015 and 2018, the actuarial shortfall in the RCMP Pension Plan fund has increased from $225 million to $886 million. An increase in this liability could require future amortization payouts for at least 15 years, unlikely assuming no additional shortfalls.
- Due to its involvement with gender and job-sharing discrimination claims, the RCMP Pension Fund could benefit from implementing guaranteed measures to support both genders equally, as well as implementing a job-sharing program that would protect pensionable hours served for employees of the RCMP.
- The comprehensive income and cash flows of the RCMP Pension Fund has experienced regular decreases since 2017. New efforts could be required to rebound, especially considering the potential and still not completely understood impacts from the COVID-19 pandemic.
- In October 2020, the RCMP Pension Fund was involved in a case with the Supreme Court of Canada (SCC) due to a claim that the fund was discriminating against women who job-shared while working under the RCMP. This left the RCMP with a negative public appearance, making the fund less attractive to potential candidates.
- The RCMP has been accused of upholding long-standing gender biases towards women by reducing their benefits despite time in service. The fund has also been viewed as inadequate in creating priorities for a work-life balance since they have not opted to create a job-share program for their employees. This could discourage new members from joining the RCMP in the future.
- The RCMP Pension Fund is expecting decreases in the total number of contributors from both employers and the government, which could increase the fund’s liability and reduce their net income/assets.