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I recently experienced my 15-minutes of fame… however, in my case, it was more like 3.5 seconds of fame. 

Dean’s 15-minutes, err, 3.5 seconds of fame

The excitement came last month when the CBC reached out looking for someone to shed light on the Pension Plan for Members of Parliament, and to examine the claim made by Pierre Poilievre that Jagmeet Singh is holding off on forcing an early election so that he can qualify for his pension with a ‘potential lifetime payout of $2.3 million’.  The CBC asked me to review some calculations prepared by another expert on the pensions that certain Members of Parliament (“MPs”) can expect to receive at retirement, and to provide a bit of context on the pension MPs receive.  My 3.5 seconds of fame came on a news brief on The National when I confirmed that Mr. Poilievre’s pension is 3.5 times higher than Mr. Singh’s pension because he has about 3.5 times as much service.  [I know what you’re thinking – what a brilliant piece of actuarial insight!]

Realizing that I have a face for radio, the CBC published an article online that provides more context on the pension calculations – and in this space, I was afforded more time to explain some of the nuances with the Pension Plan for Members of Parliament, the differences between the pension calculations for certain MPs, and how the estimated value of a pension can differ – in some cases significantly – based on the assumptions selected.

Shortly after the release of these stories on the CBC, I thought I was about to become a television superstar, as another station reached out asking if I could be on one of their programs later in the week.  However, as the story on MP pensions faded during that week, the station messaged back saying that they would not be moving forward with this story – and alas, my foray as a television superstar was not to be.

Now, I have no business wading into the politics of whether the reason we are not heading to the polls this fall is because one MP, or another, is holding off so that they can qualify for their pension.  However, upon reflecting from this experience, there are two issues worth exploring – one related to how we communicate about pensions, and another related to the public interest on the vesting requirements for MP pensions.

First – What are we talking about when we talk about pensions?

I believe one of the reasons why this story is so sensational is because of the sheer magnitude of the figures that were quoted.  Again, Mr. Poilievre’s claim is that Mr. Singh’s pension would, upon reaching his 6-year vesting criteria, have a potential lifetime payout of $2.3 million. 

Having done my own analysis, I can confirm that this is actually quite a reasonable estimate – one that I believe is consistent with the assumptions used by the Office of the Chief Actuary in their most recent valuation of the Pension Plan for Members of Parliament.  However, what exactly is ‘a potential lifetime payout’?  And is this the right measure to use when referencing a pension?

In my experience, most people do not think of their own pension as the sum value of the total pension payments they will receive from their pension plan over their lifetime.  Calculating such a sum value can be done – but it requires the use of many assumptions, like when they will retire, how long they will live, and future levels of inflation.  Even if you do such a calculation, all that is produced is an estimate, and the actual sum value of the total pension payments a person receives will differ – and materially so if one passes early or lives exceptionally long.  Moreover, the fact that this sum value of estimated pension payments is not adjusted for the time value of money makes it difficult to comprehend, and susceptible to being confused with an actuarial present value (which it is not).

In contrast, most people think of their pension as an annual income stream they can expect to receive in retirement.  By expressing the pension as an annual amount, this allows members to easily compare their pension to their annual income, determine their replacement ratio, and understand their other income needs when planning for retirement.  This way of thinking of a pension as an annual income stream is even encouraged with legislative requirements requiring plan members be provided with a pension statement every year showing their accrued pension.

Another way to think about a pension is in present value terms – or the amount of money you would need today to secure an annual pension of $X.  While most members of defined benefit pension plans will not view their pension in these present value terms, the members of defined contribution plans will be accustomed to receiving statements showing the accumulated value of their savings – and the challenge for them is to determine how best to convert those accumulated savings into an annual pension. 

However, the present value calculation is highly dependent on the assumptions used to convert those accumulated savings into an annual pension – or vice versa, to convert an annual pension into a present value.  Given the inherent uncertainty with pensions, it is common to perform multiple present value calculations using different sets of assumptions.  For defined benefit pension plans, we use different assumptions to value the present value of pensions on different basis – with the likes of the going-concern valuation, the solvency valuation, and the accounting valuation each valuing the pension in its own unique way and serving a different purpose.  For defined contribution plans, there are multiple ways an accumulated balance could be converted into an annual pension, and it is useful to prepare multiple scenarios to understand the volatility in the outcomes.

To summarize, it is entirely possible that we are talking about the same pension when using terms like i) an annual pension of $66,000 at age 65, ii) a pension with an actuarial present value of $910,000, and iii) a pension with a potential lifetime payout of $2.3 million.  Since there are different measurements of a pension, one needs to be careful about what is being communicated, and why. 

Second – Vesting requirements for MP Pensions, and an easy solution to a perceived problem

The Pension Plan for Members of Parliament is a defined benefit pension plan but has a number of unique features in comparison to other defined benefit pension plans in Canada.  First, it is a generous pension plan with a final average earnings benefit using a 3.0% accrual rate, and also provides enhanced early retirement benefits and post-retirement indexing.  This plan has a cost-sharing arrangement which requires MPs to contribute 50% of the plan’s current service cost, and results in members contributing around 22% of their earnings to the plan.  Furthermore, it is worth noting that the members of this plan have a fairly unique employment arrangement – with Members of the House of Commons serving for as long as they wish to serve and are re-elected, and Members of the Senate who are appointed and may remain until age 75.

One of the more unique features of the Pension Plan for Members of Parliament is that members are not vested in their pension until they have contributed for six years.  If they leave before six years, they only receive a refund of their contributions with interest.  This provision is now unique in Canada where most jurisdictions currently require immediate vesting for pension benefits. 

It is this vesting provision that is at the heart of Mr. Poilievre’s critique of Mr. Singh’s desire for not calling an early election, as Mr. Singh will not reach his six-year vesting mark until February 2025. 

As I noted above, it is not my place to comment on the merits of this accusation.  However, eliminating this six-year vesting requirement could be in the public interest to avoid any possible suggestion that self-interest is working against the interest of Canadians.

Admittedly, a change to eliminate the six-year vesting requirement to the Pension Plan for Members of Parliament would likely increase the costs of the plan – a cost which would be borne equally by the MPs and taxpayers via higher plan contributions.  However, it could be possible to suggest other changes to the plan (i.e. reducing other benefits) to maintain the cost at its current rate.  Any analysis of these cost implications would be best performed by the team of highly qualified actuaries at the Office of the Chief Actuary, whose mandate is to provide a range of independent actuarial valuation and advisory services to the federal government.

Unfortunately, the idea of eliminating the six-year vesting requirement as a means to avoid any suggestion of self-interest on the part of the Parliamentarians didn’t come to until after the story went to press with the CBC.  Here’s hoping that the next time the press comes asking me for actuarial insight, that I have all my good thinking complete before I get interviewed.