Cost of service purchases updated
The method used to cost past service purchases, or ‘buybacks’, is being changed to improve equity among active members contributing to the Plan on an ongoing basis and those members purchasing pre-enrolment service and certain types of leaves.
When the Plan first introduced buybacks, the original costing method provided that, for certain buybacks, if the service was purchased within 6 months of the member’s enrolment or the end of a leave, the cost of the buyback would be the member contributions for the period. Whereas if the purchase was made later, the cost would be the “actuarial value” of the service. This costing method was intended to encourage members to exercise their buyback options at the earliest opportunity. However, increases in contribution rates over the years have led to these types of purchases costing more on a contribution basis than they do when the cost is determined on an actuarial value basis, creating an unintended inequity.
The actuarial value is the present day cost of the additional amount of pension being purchased. Many factors play into the actuarial value – from the member’s age, earnings and service to the interest rates and plan provisions in effect when a purchase quote is issued.
As of July 1, 2012, the cost of those purchases which are currently determined on an actuarial value basis will either be based on the actuarial value of the service OR the current contribution rates at the date the purchase request is made, whichever is higher. This new costing method ensures that members purchasing pre-enrolment service or service from a leave are paying at least as much for that period of service as active members contributing to the Plan through active employment.
The change will apply to purchase requests received from July 1, 2012 onwards.
The change to the costing method does not change the fact that a past service purchase made on an actuarial value basis becomes costlier as a member nears retirement; the price of a buyback rises as you near retirement. One reason for this is the Plan has less time to realize investment returns on the funds it collects and therefore needs to charge more funds to secure your pension. “For this reason, we always encourage members who are considering a buyback to not postpone doing so for very long,” says Tracey Leask, the Plan’s Director of Pension Operations.
If you have questions or comments, please be sure to contact us by email at: contact@caatpension.on.ca.