July 2, 2009 at 5:00 PM
Recently we have all received pension statements for 2008 year end. The projected pension payments differ for each person, based on service and earnings. Some will see an increase; some will be the same, while others will see a decrease. It should be noted that these are simply projections which become more accurate the closer one gets to actual retirement.
There are two important definitions that are used in the pension calculation. First is Final Average Earnings (FAE), which for Air Canada years is your best 36 consecutive months of your entire career and for Canadian Airline years is the last 36 months of your entire career. While the best 36 months can remain the same for years, the last 36 months changes every month you work as it follows you through your career. Second is Yearly Maximum Pensionable Earnings (YMPE), which is the national average wage index, set annually by government. In addition to pension calculations, it also determines Canada Pension Plan (CPP) and Employment Insurance (EI) payments and deductions. For example, you will notice the omission of these deductions near the end of the year as you reach the annual YMPE limit in earnings for that year. The YMPE used for pension calculations mirrors the exact time of an employee's FAE.
These terms, and their corresponding values, both matter when it comes to calculating pension payment amounts. There is one calculation based on the part of one's FAE up to YMPE and another for the remainder of earnings above YMPE. Both use a percentage multiplier, with the multiplier for post-YMPE earnings higher than pre-YMPE earnings.
Any time there is a new FAE, the corresponding YMPE will be higher. Thus some of the previous earnings "leaks" down from the higher to lower multiplier. If the new FAE is higher than the old FAE, the increased earnings using the higher multiplier can offset the "leakage" and potentially increase the total pension payment calculation. There is also the potential to have a higher FAE that does not cover the "leakage" of the higher YMPE, which also results in a lowered pension calculation. If the new FAE is equal or lower, there is only the "leakage" and a resulting lower pension calculation.
There can be fluctuations between annual pension statements. This is due to the pension calculations using updated information. Members do not "gain" or "lose" on their pension payment calculation from these statements. Rather, they get a more accurate projection. With a more accurate pension projection, we can make a better retirement plan.