Special Notice Feature Article Regulatory Initiatives Did You Know? What s Next NCPC Update Contacts. VOLUME 7 May 2005

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1 THE PAC NEWS The Voice of the RCMP Pension Advisory Committee Special Notice Feature Article Regulatory Initiatives Did You Know? What s Next NCPC Update Contacts VOLUME 7 May 2005 SPECIAL NOTICE - Conversion of Deferred Annuity Pension Option to a Commuted Value Option A number of Members who retired prior to the April 1, 2003 outsourcing date were advised to opt for a deferred annuity benefit until such time as the Commuted Value option became available. The coming into force date for the Commuted Value option was September 1, Morneau Sobeco will be writing to all affected Members, who are eligible to convert their deferred annuity option to the commuted value payment, to advise them of the Commuted Value amount and to request confirmation of the Member s choice of pension benefit entitlement. Contact the RCMP Benefits Administration Centre at , if you are affected by this change in pension benefit options and have not received a recent communication from Morneau Sobeco. Work continues on: drafting of new part-time pension Regulations drafting of Regulations for the expansion of the elective service provisions began in February 2005, as well as, new Regulations for Pension Benefit Division Act (PBDA) & Commuted Value calculations introduced by the Canadian Institute of Actuaries, effective February 2005 For more information on how these changes may affect you, please read our article on Regulatory Updates. For the latest PSPIB investment performance, please read our article on Investment Results. PAC Committee Members: PAC is pleased to announce the recent re-appointment of Assistant Commissioner Steve Graham, CO of J Division and Dr. Mark Thompson of the University of British Columbia to the RCMP PAC by the Minister Hon. Anne McLellan. A/Commr. Graham sits on PAC as a

2 representative of senior management, and his views help maintain a balanced perspective in the examination of pension issues from both the employer s and Members outlook. Dr. Thompson, who has also completed a three year term with PAC, is a well known labour relations expert and sits on PAC as one of two other persons appointed by the Minister to adds an independent perspective to PAC deliberations. Dr. Thompson also sits on the RCMP Pay Council and is familiar with the total compensation methodology used within the RCMP. FEATURE ARTICLE - THE VALUE OF RCMP PENSION BENEFITS What is the cost of purchasing comparable pension benefits as those provided by the RCMP Pension Plan? An interesting question was raised by a Member during the recent RRSP season. How much would the typical Member need to have in an RRSP or a Defined Contribution pension plan in order to buy the same pension benefit that is provided under the RCMP Pension? According to the latest Actuarial Report for the RCMPSA, the typical RM retires at age 48.7 and the average CM retires at age The pension benefit provided by the RCMP Pension is often described as a 2% pension benefit integrated and reduced at age 65 with the CPP/QPP pension. Because of the integration with CPP/QPP, our pension plan is, in reality, made up of three components: 1) a 2.0 % lifetime pension benefit on salary over the CPP/QPP contribution limit, and 2) a 1.3 % lifetime pension benefit on salary below the CPP/QPP contribution limit, and 3) a bridge benefit of 0.7 % paid from the RCMPSA until age 65, the normal age for receiving CPP/QPP The RCMP pension also provides a 50% spousal survivor benefit and is indexed for RMs at age 60, or earlier when the 85 factor of age & service is reached. CMs in receipt of an RCMP pension are eligible for indexation from age 50 onward. If the RM retires in 2005 at age 48.7 years of age with 25 years of pensionable service and a final average salary of $65,000, an annual pension of $32,500 will be received. (Breaking this down into the component parts mentioned above, the 2.0 % lifetime component on the portion of salary over the CPP/QPP limit equates to $12,612, the 1.3 % lifetime benefit on salary below the CPP/QPP limit is $12,928, and the temporary bridge benefit paid to age 65 is approximately $6,960.) The bridge benefit will cease at age 65, the normal age that CPP/QPP commences. (There is a provision for CPP/QPP retirement benefits to start as early as age 60 at a reduced amount.) A recent pension quotation obtained from a leading Canadian insurance company provided an estimate of the value of these typical pensions paid to retiring members. For a married RM retiring at age 48.7 years it would cost approximately $981,849 to purchase an equivalent $32,500 annual pension benefits provided under the RCMPSA. The cost of providing the basic $32,500 pension is approximately 70.3% of that amount, or $671,352, with the balance of $283,629 being required to pay for indexation of the benefits. (Note that the quote requested provided for a cap of 3% on indexation, whereas the RCMP pension is fully indexed to the cost

3 of living, so the cost of indexation could, in fact, be higher over the lifetime of the Member or survivors, if inflation moves above 3.0%.) A married CM retiring at age 57 with 28 years of service and a five pensionable year salary average of $75,000 would receive a total annual RCMP pension of $42,000. The cost to purchase this pension would be approximately $933,560, bases on current interest rates, with an equivalent portion of that required for indexation. An additional question to consider is: how much would a Member have to contribute to an RRSP or a Defined Contribution Pension over their careers to accumulate these sums in order to retire with an equivalent pension earned with the RCMP? To accumulate the required $981,849 over 25 years of service in an RRSP, an individual would have to contribute $750 per month or $345 per pay, increase contributions 4.0 % annually as salary increases, and earn an averaged 8.0 % on investments over that period. This would equate to approximately 29 % of pay over the 25 years of service, which is probably beyond the savings rate an average member could allocate to retirement savings, if not in our existing pension plan. If the individual were in a defined contribution Pension Plan where the employer matched employee contributions to the pension plan, the individual would have had to contribute half that amount or roughly $ per pay or 14.5 % of pay. In comparison, it should be noted that, under current RCMPSA Regulations, a Member earning $65,000 in 2005 is contributing approximately 5.29 % of salary or $ per pay to the RCMPSA. The Member s share of RCMPSA contributions in 2005 is approximately 26.8 %, with the government providing the other 73.2 % or $ per Member per pay. Similarly a CM wishing to accumulate the $933,560 required to purchase the $42,000 annual pension would have had to contribute $ per pay or approximately 26.6 % of pay into an RRSP over the 28 years of service, again assuming an 8.0 % return and increasing contributions annually as salary increases. The point of this article is to put a value on the pension benefit provided to members compared to individuals in defined contribution pension plans or those Canadians relying entirely on their RRSPs for future retirement income. According to Statistics Canada data there were approximately 14,000 employer-sponsored registered pension plans in Canada at the end of 2002, representing approximately 5.5 million Canadians or 40 % of all paid workers. Therefore sixty percent of all Canadian workers are without employer-sponsored pension plans and will be relying on their RRSPs for most of their retirement income. BUDGET AMENDMENT TO PENSION BENEFIT ACCRUAL RATE FOR PUBLIC SAFETY CATEGORY EMPLOYEES at RCMP The 2005 federal Budget contained an amendment to the Income Tax Act (ITA) to allow for increases in the maximum annual pension accrual rate from 2.0 % to 2.33 % for Public Safety Category employees like Regular Members of the RCMP. The provision would not apply to Civilian Members, as they are not classified as public safety category occupations under the ITA.

4 A previous Budget in 2003 had provided this provision to firefighters, but excluded other public safety employees. Our Minister, on the recommendation from RCMP PAC, had forwarded a letter to the Minister of Finance in 2003 requesting this benefit be extended to all Public Safety Category employees. This change in the ITA has no immediate effect on pension plans like the RCMP Pension Plan, as changes would have to be made to the RCMP Superannuation Act and Regulations before this provision would apply to the RCMP Pension. To date, no pension plan or employer of Public Safety Category employees has implemented this benefit improvement for their members. Furthermore, any increased costs to the RCMP Pension Plan for the enactment of this provision, estimated to be in the range of 3.23 % of pensionable payroll annually, would have to be determined and negotiated with Treasury Board and may form part of the total compensation negotiations used within the RCMP. Any change in this provision within the RCMPSA would require the approval of Treasury Board Ministers. The Treasury Board position on the issue would have to encompass the wider cost implications of extending this benefit to all Public Safety Category employees within the federal public service, including correctional officers, fire fighters, air traffic controllers as well as police officers. The RCMP PAC and RCMP Pay Council will be studying this issue in order to make appropriate recommendations to RCMP management. It is important to note that this is NOT A BENEFIT IMPROVEMENT THAT MEMBERS SHOULD EXPECT TO SEE REALIZED IN THE IMMEDIATE FUTURE. We will provide further information on this issue in future editions of PAC News. UPDATE - LATEST QUARTERLY INVESTMENT RESULTS (OCTOBER 1, 2004-DECEMBER 31, 2004) The Public Sector Pension Investment Board (PSPIB) reported Quarterly results for the three month period ending December 31, For the Quarter, PSPIB reported investment returns of $68.9 Million which equates to a return of approximately 5.9% of assets available at the start of the Quarter. The investment return compared favourably with returns of Canadian pension funds as measured by several indicators monitored by the Pension Accounting Unit. Comparative average returns reported by Mercers, Russell-Mellon, RBC Global Services, and Morneau Sobeco reported average returns for Canadian balanced pension funds at 5.3%, 5.6%, 5.3%, and 5.45 respectively. Realizing that a Quarter is too short a time period for meaningful comparison, we simply want to indicate that the investment performance of the PSPIB continues to keep pace with industry pension results. The CPP Investment Board reported a return of 5.2% for the Quarter as well. More importantly, the asset mix is changing slightly going forward to reflect the diversification of investments into alternate asset classes such as real estate, private equity investments and real return Bonds, which are indexed to inflation. When fully implemented the investment asset mix will shift to reflect this more diversified strategy as indicated below:

5 Current Asset Mix (Dec. 31, 2004) Target Asset Mix % Equities % Equities - 0.0% Private Equities - 8.0% Private Equities % Bonds % Bonds % Real Return Bonds % Real Return Bonds % Real Estate % Real Estate % Cash % Cash Total assets invested in the new RCMP pension fund as of December 31, 2004 amounted to $1.332 Billion compared to $1.057 Billion at March 31, For a more comprehensive summary of the latest full year investment results or to view the PSPIB s Statement of Investment Policies, Standards, and Procedures visit the PSPIB web site at: REGULATORY INITIATIVES Expansion of Elective Service: Currently, the Royal Canadian Mounted Police Superannuation Act only recognizes certain types of federal service with the Canadian Forces and the Public Service of Canada. Service with an absorbed police force may be recognized under very specific conditions if the requirement to do so is contained with the absorption agreement. PAC recommended the expansion of the elective service provisions recognizing pensionable service acquired with other police forces in Canada, as well as service with other Canadian registered pension plans. In March 2005, a Request For Proposal process was completed and a contract awarded for the initial drafting of the required Regulations. The contract stipulates that a working draft of the Regulations will be delivered at the end of April The contract further outlines a requirement for an initial consultation with the Department of Justice (DOJ) drafters and on-going consultations with NCPC so as to ensure that the drafting exercise succeeds. Our objective was to expedite the process by providing DOJ with as complete a document as possible. Once they are able to allocate the necessary resources to this project which, at a minimum, will not be until the part-time Regulations are blue-stamped, they will begin their initial review. It is important to note that completion dates for Regulatory initiatives of this nature are impossible to predict or estimate given that all the stakeholders involved in this process are from different government departments with different priorities. A period of twentythree months was required to complete the Regulatory process for Commuted Value and the expansion of Elective Service is larger in scope. We will continue to provide updates on this important issue in future editions of the PAC News. Part-Time Service: The work of introducing Regulations recognizing part-time service for pension purposes continues. The RCMP forwarded extensive comments and revisions on the fourth draft of these

6 Regulations to the Department of Justice (DOJ) drafters in December 2004; however, since that time the DOJ drafters have been devoted to another project. They are expected to begin working on the fifth, and hopefully final, version of these Regulations by the end of March Once the DOJ final draft is obtained, the document will be forwarded to Treasury Board Secretariat for review and approval. Once TBS approval is secured, a final formal "blue stamped" version will be prepared by DOJ. Following this, an official Treasury Board Submission is forwarded to the Minister's office for approval. Barring a major change request(s) by the DOJ or TBS, RCMP work on this initiative is nearing completion, however, it is anticipated that final TB Minister approval may still take several more months. Editor s Note: Again, please DO NOT contact the RCMP Benefits Administration Call Centre with inquiries about when the work to change the RCMPSA Elective Service and Parttime Regulations will be completed, as this is a function of the National Compensation Policy Centre, and Call Center personnel will not be able to provide you with any information on these issues. Contact NCPC personnel listed at the end of this PAC News for any additional information required. DID YOU KNOW? Exodus Of Babyboomers still Looming Impending Baby Boomer retirements, a widening skills gap driven by declining educational standards, and outdated and ineffective approaches to talent management are combining forces to produce a perfect storm that threatens the global business economy, says research from the human capital practice of Deloitte. In a recent U.S. survey of human resources executives, more than 70 per cent of the respondents say incoming workers with inadequate skills pose the greatest threat to business performance over the next three years, followed by Baby Boomer retirement (61 per cent), and the inability to retain key talent (55 per cent). A similar survey of Canadian HR executives found 55 per cent of respondents indicated that they had significant challenges hiring for key technical or skilled jobs and 60 per cent reported significant challenges in retaining critical talent. In only three years, the first wave of Baby Boomers will turn 62, the average retirement age in North America, Europe, and Asia. The Deloitte survey predicts onethird of U.S. companies will lose 11 per cent or more of their current workforce to retirements by Canada, Australia, and the U.S. could lose the services of more than a third of their government employees by What s Next Future editions of the PAC news will provide the usual updates on all new & outstanding issues, with feature articles on various items of interest. Of special note will be an update on the issue mandatory retirement within the RCMP, so stay tuned. We can be contacted via the PAC Web Site or by fax at (613) We look forward to hearing from you! Special Notice Feature Article Regulatory Initiatives Did You Know? What s Next NCPC Update Contacts Contacts: Bob Slipp Jeff Hutcheson Bernard Potvin