NOTE: We suggest that members read this bulletin in its entirety. The future is unpredictable, but understanding the changes happening today helps us to plan for what may appear in the horizon. This bulletin will focus mainly on the legacy Defined Benefit (DB) plan, and in part the Defined Benefit component of the Hybrid plan.
Legacy DB plan applies to members hired before November 7, 2011.
Hybrid plan applies to members hired at Mainline and Rouge on or after November 7, 2011.
Dear members,
This bulletin is to explain what the YMPE is and how it is applied to our pension plan.
What is the YMPE?
YMPE stands for Year’s Maximum Pensionable Earnings. This is set by the federal government every year.
The YMPE is calculated each year based on the average wage growth in Canada.
How does the YMPE apply to our pension?
The YMPE is used in two ways:
- It is used in determining the amount you contribute into your pension plan.
And,
- It is used in the pension formula to calculate the pension benefits you would receive upon retirement.
What is the YMPE amount currently?
Currently, the YMPE is $68,500 and will increase to $71,300 in 2025.
In 2019, it was $57,400. The YMPE grew by $13,900 in 6 years. If the past growth rate in the last 6 years is the same for the next couple of years, and the YMPE grows by around $9,000*, then the YMPE will be just over $80,000. This will reach the same number as the pensionable earnings cap of $80,000. (Currently, pensionable earnings are capped at $80,000. Which means any earnings above $80,000, are not pensionable.)
*The future growth of the YMPE is not guaranteed to grow at the same rate as it has done in the past. We are simply comparing the growth of the YMPE in the last 6 years and speculating on how it may keep on growing in the future.
How a higher increase of the YMPE may affect your pension?
Higher YMPE = Lower Contribution Rates
A higher increase of the YMPE would decrease the amount one contributes into their pension plan.
Example: YMPE at $54,900
In 2016, the YMPE was $54,900.
A member with pensionable earnings/compensation of $60,000, would be contributing $2,776.50 to their pension plan. (The contribution formula is 4.5% of your compensation up to the YMPE plus 6% of your compensation above the YMPE.)
Using the same YMPE, but with pensionable earnings of $80,000, the member will be contributing $3,976.50.
Now, if for our example, we are using a YMPE set at $80,000, the member would be contributing $3,600 into their plan. That is $376.50 less in contributions compared to when the YMPE was at the lower amount of $54,900.
The reason for this lower contribution amount is due to the 6% percentage rate above the YMPE will no longer be applied. If in the future the YMPE will be equal or higher than the pensionable earnings cap of $80,000, all members will be contributing at the lower rate of 4.5%.
What about pension benefits at retirement?
As reference, we will use an example found in the Employee Pension Booklet, which can be accessed on the Alight website in HR Connex.
Example 1):
Member A
Years of allowable service: 35
Average Annual Compensation (best consecutive 36 months) of $60,000
Average YMPE: $52,400
Annual pension at age 65: $37,415**
**p.10 of the Employee Pension Booklet
(The normal retirement formula is: [1.75% X average annual compensation up to average YMPE X allowable service] PLUS [2% X average annual compensation above average YMPE X allowable service]. This retirement formula can be found on p. 9 of the Employee Pension Booklet)
Example 2): The member has higher earnings, but the YMPE is the same as for member A
Member B
Years of allowable service: 35
Average Annual Compensation: $80,000
Average YMPE: $52,400
Annual pension at age 65: $51,415
Example 3): In this example, the YMPE is equal to the earnings cap of $80,000, and the member has pensionable earnings of $85,000
Member C
Years of allowable service: 35
Average Annual Compensation: $85,000
Average YMPE: $80,000
Annual pension at age 65: $49,000
Why does Member C, who earned $5,000 more a year compared to Member B, will receive almost $2,400 less at retirement? First, we have a pensionable earnings cap of $80,000, therefore, anything earned above the cap is non-pensionable. Second, the pension formula calculates earnings below the YMPE at a rate of 1.75% and earnings above the YMPE at 2%. If the average YMPE is $80,000, then the average annual compensation will only be calculated at a rate of 1.75%.
Retirement Formula for Hybrid members at Mainline and Rouge:
Even though this bulletin is mainly focused on the legacy DB plan, for members hired on or after November 7, 2011, who are on the Hybrid plan either at Mainline or Rouge, an ever-increasing YMPE will also have a negative impact on retirement benefits.
The Hybrid plan for both Mainline and Rouge members consist of a Defined Benefit component and Defined Contribution component.
For the Defined Benefit component, the normal retirement formula uses two different percentage rates below and above the YMPE. (0.595% below the average YMPE and 1% above the average YMPE.)
If in the future, the YMPE is either equal or higher to the pensionable earnings cap of $80,000, then every member on the Hybrid plan who will retire, will have their average annual compensation calculated at the lower rate of 0.595%. Which will entail a lower pension benefit amount.
Conclusion:
Even if pensionable earnings increase substantially in the next few years, an ever-increasing higher rate for the YMPE, will mean lower pension contributions and lower pension retirement benefits.
As stated previously, we do not know by how much or how fast the YMPE may grow in the future. This bulletin is speculative and used YMPE rates for example purposes only. Our purpose to sharing these hypothetical scenarios is to highlight what may happen, if the YMPE continues to grow as it has been in the last six years. We believe members should be aware how a higher YMPE, may affect their retirement. Especially since we have seen the prices of goods and services grow in the last few years due to inflation and that our pension plan is not indexed.
Your Component Pension Committee recognizes the detriment of the growing YMPE and effectively the lower pensionable contributions and are in communication with your Component regarding the concerns.
Whether you will be working this holiday season or be at home with family and friends, we would like the time to wish you all a Merry Christmas, Happy Holidays and best wishes for the new year.
Safe travels,
Your Component Pension Committee
Marc Roumy (Chairperson)
Henly Larden (Member)
Caroline Lozeau Gelinas (Member)
Stefanie Falotico (Rouge Member)