Local Authorities PENSION PLAN

 

Important Update – January 2013

There has been much discussion about potential changes to the Local Authorities Pension Plan. Like many pension plans, the LAPP has a large unfunded liability at this time. In order to address the unfunded liability, there needs to be more contributions and/or changes made to the plan itself to off-set the liability.

There are three options that are being explored and none of the three choices are particularly appealing. Further to this, you can also expect new standards regarding taking out your commuted value (cash value) from the pension plan, and this will be discussed by LAPP in March 2013.

Not all of us have a good working knowledge about our pension plan. Many people don't, and simply count on the pension being in place when they need it. That was a reasonably safe approach for many years. It is still reasonable to count on your pension being there when you need it, however you will need to become involved in the path to your pension earlier than you may have anticipated.

The three options that are being explored were included in a survey on the LAPP website. It was not well communicated that this survey was up and running and it was only available for a short period of time.

During a Civic Union Coalition meeting last week, it was agreed by all participating unions and associations that we would engage our members to voice their concerns about upcoming changes, and in particular, one change that may eliminate or reduce the cost of living allowance that is currently contained as part of your pension benefit. Rather than re-invent the wheel, we have included a revised communication from CUPE 38 that details our collective concerns, for your information. As attached.

 First we would ask that you read the below noted information contained on the LAPP website. This information outlines some basic understandings of the three issues that are being discussed, and how LAPP itself is structured. The LAPP structure is good to know information because it highlights how involved the provincial government is in our pension plan, yet they do not bear any liability for their involvement. This is another matter that would be particularly important and appropriate for you to voice your concerns about.

 

The three issues are:

       1.Removal of the pension indexing – this would see an elimination of the annual cost of living increases;

 

  1. Modification of the “85 Factor” – this would see employees having to work longer before attaining a retirement date

 

  1. Increase the retirement age from 65 to 67 years

 

** Please take the time to make your voice count on this issue **

                                      It's your future at stake!  

 

Information from LAPP Web-site:

 

Option 1 - COLA

COLA stands for Cost oLiving Adjustment. COLA is a guaranteed benefit under the plan which promises retirees an increase in pension payments each year to help keep pace with increases in the cost of living. 

COLA is paid out at a rate equal to 60% of the Alberta Consumer Price Index, which is set each year by Statistics Canada.

One way for the plan to save money is to pay COLA only when the plan can afford to pay it and that would mean changing COLA from a guaranteed benefit to a conditional benefit. This means COLA would be reviewed each year based on the plan's financial position and a decision would be made about whether it can be paid and how much can be paid.

The advantage to making COLA conditional is that when times are good and the plan is in surplus, it would be possible to pay COLA at 100% of the Alberta Consumer Price Index instead of only 60%. It would also be possible, in times of a surplus, to pay members and retirees back for any year they weren't granted COLA.

The disadvantage of making COLA conditional is that no one can know in advance whether it will be paid out in any given year. In a year where the plan is in a tough financial position, there may be a decrease in the cost of living adjustment or there may be no adjustment paid at all.

 

Option 2 - 85 factor

85 Factor is the name given to a plan benefit which allows members 55 years of age and older to retire early with an unreduced pension if they have enough years of service in the pension plan. You reach your 85 factor when your years of pensionable service and your age total 85. (For example: if you are 55 years old and you have 30 full years of service in the plan you have your 85 factor and you can retire immediately with an unreduced pension.)

Not everyone in the plan can achieve the 85 factor but everyone in the plan has to pay for it in their contribution rates. One way for the plan to save money is to change how early people are allowed to retire with an unreduced benefit. If a member retires at 55 with the 85 factor and lives until he is 90 (more common each day) that means they will collect a pension cheque longer than they collected a paycheque, and this will increase costs for the plan.

The advantage to increasing the 85 factor to an 87 factor or a 90 factor is that costs will be reduced for everyone. The disadvantage is that those who had a chance of reaching their 85 factor will now have to work a little longer before they can retire with an unreduced pension. For someone already close to his retirement goal, it would mean working an extra few months. For someone who is new to the pension plan, it would mean working a maximum of another 2.5 years.


Option 3 - Normal Retirement Age

Normal Retirement Age is the age at which any pension plan member can retire and receive an unreduced pension immediately. For LAPP the Normal Retirement Age is 65. 

One way for the plan to reduce costs is to look at increasing the normal retirement age above 65, to reflect the reality that people are living longer and collecting a pension for more years than was expected when the plan was first set up 50 years ago.

The advantage to increasing the normal retirement age is that the rule would apply to everyone equally and everyone would benefit from the cost reductions that result. The disadvantage would be that people who want to retire at 65 would have to work a little longer than expected, or take a reduction in their pension by retiring at 65. 

LAPP Governance
The LAPP Board is interested in hearing your opinions on LAPP's governance structure and would appreciate you taking the time to read the short synopsis below explaining how the Local Authorities Pension Plan works. Then we will ask you four questions on governance.

Background
The Local Authorities Pension Plan is currently governed by a structure which has the Alberta Minister of Finance situated at the top, as the Plan Trustee. This means the Minister of the day has final authority over almost all of the decisions made respecting plan administration, plan benefits, plan design, plan rules and investment of the LAPP fund.

The Minister has delegated certain functions as follows: 

• Alberta Pensions Services Corporation (APS), once a government department and now a crown corporation, has been tasked with the day to day administration of LAPP pensions. The Minister is the single shareholder of that corporation. The LAPP Board pays fees for APS services but has no authority to oversee how the services are provided.

• Alberta Investment Management Corporation (AIMCo), once a government department and now a crown corporation, has responsibility for managing LAPP's $22-billion fund. The Minister is the single shareholder of that corporation and decides with AIMCo how much LAPP will pay its investment manager. The LAPP Board has authority to set investment policy for LAPP but has no authority to oversee plan investments or investment management costs.

 

• The LAPP Board has the authority to set contribution rates but can only make recommendations to the Minister on plan design, plan benefits, plan rules and plan governance. On all of these matters, the Minister of the day has the discretion whether or not to act on any recommendations from the Board.

• LAPP Board members are recommended by employer and employee organizations, but are appointed by government on the basis of the Minister's recommendations to Cabinet. Although employees and employers are represented on the LAPP Board, Board members have no authority to make decisions about plan design, plan benefits or plan governance on their behalf.

How the pension plan is funded: 

• LAPP pensions are paid for through payroll contributions and the investment returns made on those contributions. All of the contributions are paid by the employers and employees who participate in the plan. The Government of Alberta does not contribute directly to LAPP and none of the employees in the plan work for the Government of Alberta. LAPP employees work in health, education and municipal sectors.

• The Government of Alberta does not guarantee LAPP pensions, nor does it have any obligation to bail out the pension plan in the event of any emergency.

• LAPP currently has a significant unfunded liability, which means it doesn't have enough assets set aside today to pay for all the pension money it owes in the future. LAPP is required by law to raise all the money it needs within 15 years to eliminate any unfunded liability. This is being paid for by employers and employees through their contribution rates. Nothing is contributed by the Government of Alberta.

 

Information from CUPE

 

Pension is Under Attack

The Alberta Minister of Finance has requested a “Sustainability Review” of provincial pension plans. In response to this, the LAPP Board of Trustees established a Stakeholder’s Group comprised of Employer and Employee representatives.

In early December, the Stakeholder’s were presented with several options, regarding LAPP. At that time, the Employee representatives expressed significant concern regarding the direction proposed by LAPP.

In early January at a Stakeholder’s meeting, LAPP presented a survey that included the earlier proposals. The Employee representatives reinforced their objections to the narrow proposals. These proposals were limited to the following three options:

 

  1. Removal of the pension indexing – this would see an elimination of the annual cost of living increases;

 

  1. Modification of the “85 Factor” – this would see employees having to work longer before attaining a retirement date

 

  1. Increase the retirement age from 65 to 67 years

 

On January 7th, despite the lack of consensus regarding the above proposals, LAPP chose to post the survey on their website. Very little attempt was made to effectively communicate the presence of this survey to the broader plan members.

The survey was only available from January 7th to the 18th and has now been removed from the LAPP website.

Those who were aware of this survey were asked to rank the three options in the order they would like to see them changed in the future, to control plan costs. . (Rank as #1 the benefit you would like to see changed first. Rank as #2 the benefit you would like to see changed second and rank as #3 the benefit which you would only want changed as a last resort.)

There was not an option to request 'none of the above' as an option to control plan costs.

The City of Calgary agrees that the options are negative, and that they do not support the removal of pension indexing.

The above changes represent a significant reduction in the pension promise, and pose a clear threat to your retirement income. In particular, the elimination of a cost of living allowance (COLA) would see your pension become gutted to the point of being unable to provide a reasonable standard of living.

As such, it is important to express your views on this issue to LAPP and the Minister of Finance. We encourage every plan member to do the following:

1. Send an email to LAPP Chairman Grant Howell at This email address is being protected from spambots. You need JavaScript enabled to view it.

2. Send a similar email to Minister of Finance Doug Horner at

This email address is being protected from spambots. You need JavaScript enabled to view it.