Annualization
The new contribution rates, two-tier format, and annualization methodology will start with the first pay period in the new year, even if your first pay period of the year includes days from 2011.
Use the Contribution Calculation Worksheet to calculate contributions for Full-Time members. NOTE: Worksheet to be revised.
As we implement a two-tier contribution rate formula for 2012, we will also implement a new annualization method: a change in the way contributions are calculated on each pay.
The changes result from an overall review of Plan processes, with the goal of improving equity among Plan members. We are also attempting to more closely align our administrative practices with the Plan text. Changes will be made in a number of stages, leading up to the implementation of Active Payroll, our new payroll based reporting system. We hope to have any administrative changes in place and well understood by our employer group before Active Payroll is implemented.
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Under the annualization method, contributions will be calculated on both tiers (i.e., below and above the YMPE) in each pay. An equivalent amount of contributions will be deducted in each pay period throughout the year. At year end, members will have paid an identical amount of contributions under the new method as they would have under the old “step rate” method. However, for those who join or leave the Plan in the middle of the year, the new method will eliminate under- and over-payments, and will result in members paying the same amount for the same pension, thereby improving Plan equity. Most pension plans in Canada use the annualization method, and we expect all payroll providers will understand it.
How to calculate annualized contributions
The Contribution Calculation Worksheet (to be revised) will calculate contributions for Full-Time members.This spreadsheet can be used for full-time members who:
- are active for the entire pay period
- have less than full service in a pay period due to a leave or entry/exit during the pay period
- have received a lump sum payment in addition to, or in lieu of, regular pay period earnings
The method is as follows:
Full-time members
- Start with the number of pay periods in the year. You will use this number throughout.
- Calculate the pay period YMPE by dividing the YMPE by the number of pay periods in the year (e.g. if pays are bi-weekly, then number of pay periods is 26).
- Then for each member, divide the annual salary rate in effect during the pay period by the number of pay periods in the year.
- Determine the pay period earnings up to the pay period YMPE and in excess of the pay period YMPE.
- Calculate the contributions on each tier of earnings.
In this example, assume a bi-weekly payroll with 26 pay periods in the year. The member is paid $96,000 a year. The 2012 YMPE for this example is assumed to be equal to the 2011 YMPE of $48,300.
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YMPE |
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YMPE / Pay periods in year |
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$48,300 / 26 |
= $1,857.69 |
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For this member, the first $1,857.69 of every pay (the amount of pay under the pay period YMPE), will have contributions deducted at the lower rate. |
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Pensionable earnings |
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Annual salary rate / pay periods in year |
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$96,000 / 26 |
= $3,692.31 |
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Pensionable earnings above the YMPE |
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Pensionable earnings per pay period – YMPE per pay period |
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$3,692.31 – $1,857.69 |
= $1,834.62 |
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For this member, on the $1,834.62 per pay in excess of the pay period YMPE, contributions will be deducted at the higher rate. |
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Contributions for each pay period |
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(UP to the YMPE) + (Above the YMPE) |
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($1,857.69 x 11.1%) + ($1,834.62 x 12.9%) |
= $442.87 |
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Each pay, the member will contribute $442.87 to the CAAT Plan and the employer will match. If the member’s salary increases, simply re-entering the annual salary rates will recalculate the new contributions, effective the date of the salary increase. |
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Other Than Regular Full-Time members
Other than regular full-time (OTRFT) members will have a slightly more complex calculation. Details on how it will work will be communicated in the near future. We want to ensure the full time calculation is understood before introducing the OTRFT calculation.
We will be organizing a conference call with our administrators to discuss the full time calculation. Further information about the call will be available soon.
Consistency and accuracy
This change is a result of our ongoing efforts to improve equity in Plan provisions for all members. The new method will resolve some additional issues of inequity concerning intergroup transfers and concurrent employment entitlements, and reduce the need for end of year adjustments. Contributions will be more stable through the year under the new method. There will be greater consistency and more accurate remittance of contributions.
Click here for the Methodology - a comparison of Step rate vs Annualized calculations
Q: Why are you making this change?
A: This method is being adopted as part of our ongoing objective to improve Plan equity among members.
Under the new annualized contribution method, over the course of a full year, members will have paid an identical amount of contributions as they would have under the old “step rate” method. However, for those who join or leave the Plan in the middle of the year, or who take an unpaid leave of absence during the year without purchasing it by the end of the same year, the new method will ensure members pay the same contributions for the same pension benefits.
This is a change in procedure only. It should simplify the calculation and remittance of contributions, and members will experience regular, predictable contributions throughout the year.
The annualization method is used by the vast majority of Canadian pension plans and payroll providers. This change will align our Plan with industry standards.
Q: When does this change take effect?
A: The annualization method must be in place for contributions remitted in the first pay period of 2012. Note that this is also when the new contribution rates and the new two-tier contribution rate structure will be in place.
Q: Can you explain how the old method caused discrepancies in contributions?
A: For members who are working for a full calendar year, there is no difference to the amount of contributions they would make to the Plan. The difference occurs when a member is hired or retires mid-year, or takes an unpaid leave of absence. The step rate method causes contributions to fluctuate throughout the year because it takes a number of months for members who earn more than the YMPE to get past the YMPE and start contributing at the higher rate. If they retire before they reach the YMPE, they will have the benefit of using high annual earnings in their pension calculation, but will not have contributed in respect of those high earnings.
For example, assume 2 members retiring in 2011 have the same HAPE, AYMPE and, say, 5 years of service when they retire even though they retire at different times of the year. They each contributed at the same rate throughout their careers, using the step-rate method. They each retire with an equivalent pension.
One member retires in June and the other member retires in December. Although you would assume that each member would have contributed the same amount, in fact, using the step rate method, the member who retires mid-year contributes over $750 less over his career than the member who retires in December. Using the annualization method, both members would have contributed the same amount over their 5 year career.
The annualization method will eliminate this kind of discrepancy, and will ensure that all members are contributing the same amount for the same benefit.
Q: Will you be communicating with members?
A: We will make members aware of the changes in the Fall Newsletter, which will be emailed in October, and available on our website at that time.
Q: Is this change related to funding?
A: No. This is an effort to ensure that members and employers pay the right amount, throughout the year. It will not impact the funded status of the Plan.
Q: What do we tell members?
A: We will announce the change in the Fall Newsletter, which will be emailed in October, and available on our website. Members may notice that their contributions to the Pension Plan no longer fluctuate throughout the year.
We will also be adding some information to our member presentations. We are always available for members with questions, if you would like to refer them to us.
Q: What about mid-year pay increases?
A: We have attached a spreadsheet with detailed examples that you can use to calculate contributions.Simply recalculate the contributions by adjusting the annual earnings in the formula. The spreadsheet will calculate the new pay period rate for you.
Q: Are there tax implications?
A: No. There is no change to current income tax reporting procedures.
Q: Is this related to Active Payroll?
A: No. The Active Payroll project is a separate project that is still ongoing. Having said that, our overall goal is to make sure most necessary Plan changes are understood and made before Active Payroll is implemented.
Q: Why are you using calendar days in a year in the worksheet?
A: Using calendar days ensures consistency for employees who don’t work traditional Monday – Friday positions, and those who work shifts or other types of arrangements. It also simplifies year to year updates as we don’t have to adjust based on the number of working days in a year.
Q: How do we calculate contributions for leaves that are paid by contributions?
A: Use the same methodology as the strike purchase.