Buying Prior Service

Pensionable service is a key part of the formula used to calculate a member’s future MEPP pension. The more service a member has when they retire, the larger their pension will be. Members earn service for every day that they contribute to the Plan and, in certain cases, members are also permitted to buy previous service.

For example, if a member is off from work for a period of time and not paid (Leaves of Absence) or not contributing to the Plan, this will create a gap in their pensionable service. The member can purchase this service to ensure there is no service gap.

MEPP calls purchasing service this way a buyback.
 

Further Reading

When a member buys prior years of service, also known as a buyback, it will increase their pensionable service. This means their future MEPP pension will be higher and they could retire with an unreduced MEPP pension sooner.

If a member’s contributions are with another Registered Pension Plan (RPP) that does not have a transfer agreement with MEPP, or the option to transfer has expired, the member may be able to take a lump-sum payout of that benefit and purchase a portion or the full amount of service under MEPP.

Before a member decides to remove their benefits from an RPP, it is important that they check with their financial institution to see if the institution’s requirements will allow the member’s funds to be transferred into MEPP.

Before beginning this process, there are many important factors for members to consider:

If buying service earned in another RPP, an application should not be made until the lump-sum benefit has been removed from the previous RPP. Members can speak to their employer for more information on how to apply to buy prior service.

Once you have applied you will be sent a Buyback Proposal which outlines:

• how buying prior service will affect their pension;
• how much it will cost to buy their prior service;
• how much prior service they can buy;
• how to pay for their prior service; and
• the deadlines for making their election and payment(s).

If a portion of the period a member has requested to buy is not eligible for purchase, it will not be included in their Buyback Proposal.

The cost of prior service is based on the amount of money required today to fund what a member’s pension will be in the future. This is called actuarial reserve costing, and includes assumptions about potential interest changes over time and life expectancy, as well as salary and age.

If a member is using funds from another RPP to purchase service, the value of the lump-sum benefit the member receives from them may be less than the cost of buying the equivalent amount of prior service under MEPP. This means that the member will not get credit for all of their prior service unless they pay for any resulting shortfall. However, if the value of their lump-sum benefit is worth more than the cost of buying service in MEPP, those funds will remain with the member. MEPP will not accept funds in excess of the cost to purchase prior service.

Visit the Buyback Estimator to get an estimate of the cost to buy prior service. Members can apply to buy a period of prior service through their employer’s pay and benefits coordinator.

If the prior service is from a different employer, MEPP may require additional information from them. Members can contact Member Services or their employer’s pay and benefits coordinator for help in determining when this is the case.

Examples of eligible prior service could include:

• previous employment with your current employer; and
• previous employment with an employer who participates in another Registered Pension Plan (RPP).

Your employer’s Human Resources department will be able to tell you which types of past employment are eligible for purchase. You can also contact Member Services if you have any questions.

You can only establish your service from a previous RPP under MEPP if you are able to take a payout of your benefits from that plan as a lump-sum payout. You cannot begin purchasing service in MEPP until after your funds have been removed from the other plan.

Please note: Restrictions apply to the purchase of service using a previous RPP earned before 1992. Please contact Member Services directly if you earned service within this time frame.

Members can see an estimate of how buying prior service might affect their pension by using the online Pension Estimator:

1. Visit the MEPP Pension Estimator
2. Complete the information fields and click on the button next to "Check here to provide your own service estimate"
3. Run two pension estimate calculations:
   • One with only current MEPP service
   • One that includes current MEPP service plus the prior service

Members can compare these two estimates to see how buying prior service will impact their MEPP pension. Before removing their funds from another plan, members should consider:

• the cost of the prior service;
• the length of time it will take to pay for the prior service;
• how long it will take for the increase in their pension to offset the cost of buying the service; and
• the impact that a Past Service Pension Adjustment (PSPA) might have on their RRSP contribution room.

You may want to consider speaking to an independent financial professional before deciding to remove your benefit from your previous RPP.

In certain situations, benefits paid out from an RPP must remain “locked-in” (within locked-in retirement accounts (LIRAs), RPPs, etc.) until they are used to fund a member’s retirement.

Most RPP locking-in requirements are subject to the jurisdiction (i.e. province) in which the benefits are accrued. If those funds are used to buy prior service with MEPP, they will be administered in accordance with Alberta's locking-in requirements.

Payments for purchasing prior years of service are tax-deductible within the maximum limits set under federal tax rules.

For service after 1989, federal tax rules require that members have adequate RRSP room to allow for the certification of the Past Service Pension Adjustment (PSPA) associated with the prior service they are buying. This PSPA represents the value of the increase in their MEPP benefit entitlement, using the Canada Revenue Agency's (CRA) formula, and will reduce their RRSP contribution room.

Please consult the CRA for more information on PSPAs and how they may affect contribution room.

No. There are a couple of key differences. The first is that the salary from a member’s prior service is not normally used in the calculation of their highest average salary.

The second is that if a member leaves the Plan before turning 55 years of age and chooses to withdraw their funds, their purchased service will not be used to calculate their commuted value payout. Instead, the member will receive a refund of what they paid to buy the service, plus interest.

If a member is already making payments towards a buyback when they leave their MEPP employer, the member will have 90 days to finish paying for their buyback.

If members do not complete the payment, the amount of service attached to that purchase will be adjusted to reflect only what the member has paid to date.