At the time this article was written
Randall Chan was a researcher with the Economics Division of the Research
Branch of the Library of Parliament.
The decision to enter public life involves a
number of political, personal and financial considerations. Few
parliamentarians remain in office for twenty-five or even fifteen years and the
farmer, businessman or professional who gives up his livelihood to sit in the
legislature may rind that his tenure is much shorter. For this reason most
legislatures have adopted pension plans which reflect the unique nature of the
parliamentary profession. This article compares certain aspects of the existing
plans, although such comparisons are difficult due to the diverse nature of
service in the various assemblies. The article also provides dollar figures of
pension benefits in certain hypothetical cases. The figures are based on
certain assumptions about rates of inflation and they are not intended to
indicate actual payouts but merely to provide a basis for comparing the plans.
Calculations are based on remuneration received in 1980.
Pension plans in Canadian legislatures can be
divided into two categories: defined benefit plans and money purchase plans. A
defined benefit plan, which is used in Parliament and all legislatures except
Saskatchewan requires that the amount of the retirement allowance be calculated
according to a formula based on either pre-retirement earnings or the amount of
pension contributions, years of service, a benefit rate, and in some cases an
allowance for inflation. One of the main advantages of a defined benefit plan
is that it allows the recipient to determine the amount of pension benefits
before retirement. One argument against such plans is that contributions from
members plus invested income may be insufficient to meet all obligations. This
could lead to an unfunded liability which has to be financed by increasing the
contribution rate, increasing the number of contributors or reducing benefits.
Under a money purchase plan, the employee's
contributions and the employer's matching share are held in a trust account
under the name of the individual member. Funds accumulate as yearly
contributions are made. At retirement the entire sum is used to purchase a life
annuity. The monthly or annual retirement income cannot be predetermined since
they depend on the amount in the fund and the prevailing rates on life
annuities at the time of retirement. In 1979 Saskatchewan changed from a
defined benefit plan to a money purchase plan. The former plan remains in
effect for members elected prior to 1979 and only these figures are shown in
the accompanying tables.
Table I provides a comparative summary of
the existing plans except for the Northwest Territories which is in the midst
of revising its plan (Yukon does not have a pension plan for the moment
although one is under study). The table compares the membership, contribution
rate, eligibility requirement, benefit rate, indexing coverage and provisions
for survivors' benefits for parliament and for provincial legislatures. The
adjustment factor used in calculating the dollar benefits on the subsequent
tables is assumed to be ten per cent. In terms of benefit, indexation is the
most notable feature for distinguishing one plan from another. It is
significant both to the employer because of cost implications and to the
employee because of the income protection afforded by indexation.. In this
regard Saskatchewan may have circumvented or at least minimized any potential
unfunded liability by adopting a money purchase plan. Newfoundland, New
Brunswick, Ontario, Saskatchewan and Alberta have no indexing provision. The
Nova Scotia Plan is capped at six per cent and the Prince Edward Island plan at
eight per cent. The indexing procedure for the House of Commons and Senate is
unique. Members contribute one per cent of their indemnity (and salary in the
case of Ministers, party leaders and others holding remunerative positions) to
a Supplementary Retirement Benefit Account (SRBA). The pension entitlement
remains fixed prior to age sixty. However, at age sixty the supplementary
benefit takes effect. For example if a Member of Parliament began collecting a
retirement allowance of $5,000 per year at age forty-five, assuming an annual
inflation rate of ten per cent a year for fifteen years, the total income he or
she would receive at age sixty would be $12,500 ($5,000 annual retirement
allowance plus $7,500 supplementary retirement benefits). The indexing is
retroactive to the age of retirement but only becomes fully effective at age
sixty. But from age sixty onward, indexation is applied yearly.
Insofar as eligibility requirements are
concerned the commons criteria are age, years of service, the number of terms
in office or some age-service combination. Most legislatures have eligibility
requirements that involve two of these criteria. Alberta is the only province
to make a distinction between a Member of the Legislature and a Member of the
Executive Council. The eligibility for MLAs is five years while for the others
it is one year.
The highest benefit rate is found in Quebec
where members can receive 75% of total contributions after eight years of
service. The combination of high pay, generous benefits and indexation provide
the highest stream of pension income among the plans.