With 25,000 members and $4 billion in assets, British Columbia’s College Pension Plan is by far the smallest of the province’s four multi-employer public sector pension plans. Nonetheless, it has developed a reputation as an innovator and trendsetter in the sector.

In 2000, the College Pension Plan was the first to shift from government sponsorship to joint sponsorship and trusteeship. The other three larger multi-employer public sector plans followed suit in 2001. In 2008, the College Pension Plan was the first plan in the sector to implement a framework for sustainably managing its prefunded, but contingent, inflation-adjustment provisions.

On Jan. 1, 2016, the plan lived implemented a new benefit formula that eliminates its bridge benefit, raises the accrual rate to a flat two per cent and increases early retirement reductions. It also moved away from integration with the Canada Pension Plan.

The context for reform

The last major restructuring of the College Pension Plan’s benefit formula occurred in the 1960s. In response to the introduction of the CPP, the plan reduced its benefit accrual rate on earnings below the year’s maximum pensionable earnings to 1.3 per cent from two per cent. The changes left the accrual rate on earnings not covered by the new CPP at two per cent.

Because the CPP benefits weren’t available until age 65, the College Pension Plan also introduced a bridge benefit, payable to age 65, that topped up pension income for members who retired before 65. Early retirement reduction factors applied only to members who retired before age 60. Many other Canadian public sector pension plans have had similar provisions since the 1960s.

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The CPP, however, has subsequently moved away from restricting benefits until age 65. That left the College Pension Plan tightly integrated with a CPP provision that no longer exists. Increases over the years in the College Pension Plan’s accrual rate below the earnings threshold (to 1.7 per cent from 1.3 per cent) had also reduced the relevance of its integration with the CPP.

The College Pension Plan is a late-entry plan with an average age at enrolment of 42 and an average age at retirement of 62. Post-secondary instruction is one of those white-collar jobs where it’s often feasible and desirable to continue working beyond age 60. Under the plan’s old formula, however, the bridge benefit, plus early-retirement reductions that applied only to retirements before age 60, created a strong financial incentive for members to retire at or before that age. The results was a misalignment with member and employer needs in the college sector.

The new pension formula

For service earned after Jan. 1, 2016, the basic pension formula has become: basic lifetime pension equals two per cent multiplied by the highest average salary multiplied by years of service. The year’s maximum pensionable earnings has disappeared from the formula, so contribution and benefit accrual rates are now the same above and below the threshold. The early-retirement adjustment factor remains three per cent per year, but the reductions now apply from age 65 rather than at 60.

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The early-retirement adjustment factor of three per cent per year may look low to some readers and appear to subsidize early retirement. The plan, however, uses entry-age normal actuarial methods. A three per cent adjustment per year for early retirement from age 65 is approximately the cost-neutral adjustment rate for the plan. Taken together, these measures eliminate an arbitrary financial incentive to retire at or near age 60 and make the plan more equitable between early and late retirees.

The reform process

Prior to achieving joint trusteeship in 2000, statute and regulation’s set out the College Pension Plan’s rules, with amendments made by the government. That’s not the case today. In an unusual arrangement, all four of British Columbia’s multi-employer public sector pension plans provide constrained plan rule amendment powers to both the plan sponsors and trustees.

The college pension board of trustees has a limited capacity to amend plan rules for future service. The key restriction is that its amendments must be cost neutral and not put upward pressure on contribution rates.

Read: B.C. Teachers’ pension reduces employer contribution rates

The plan’s sponsors, acting together, also have plan amendment capacities. They’re not subject to the cost-neutrality constraint and can increase contribution rates. They must, however, consult with the trustees prior to proposing an amendment. The trustees must review amendments proposed by the sponsors and may decline to implement those that would be contrary to applicable law or to their fiduciary duties. In effect, the trustees and their actuary determine whether employer-driven amendments have adequate funding.

The current reform proceeded as a partners’ agreement and was a cost-neutral package, with the increased accrual rate paid for by increasing the earliest retirement age for a non-reduced pension. There were prior consultations with the trustees and plan members. The trustees accepted and implemented the final agreement.

In general, the post-2000 governance arrangements have been more effective than the old statutory arrangements. The joint-trusteeship arrangements encourage the plan sponsors and trustees to proactively evolve the pension plan to keep it well adapted to a changing world.

Weldon Cowan is vice-chair of the College Pension Plan’s board of trustees.

Copyright © 2020 Transcontinental Media G.P. Originally published on benefitscanada.com

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Gladys Latty:

I am impressed with the joint management of the College Pension Plan. Kudos to those charged with managing it now and in the past.

Tuesday, September 27 at 2:02 pm | Reply

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