May 24, 2016
ETFO: Voluntary Early Gratuity Payout
The following memo was produced by ETFO.
One of the features of the Central Agreements was an early vested retirement gratuity payout. There have been many questions about this early payout and these FAQs will address them.
The language in the Teacher/Occasional Teacher Central Agreement is as follows:
a) A Teacher eligible for a Sick Leave Credit retirement gratuity as per Appendix A shall have the option of receiving a payout of his/her gratuity on August 31, 2016, or on the teacher’s normal retirement date.
b) The Teacher must declare his/her intention to receive the earlier gratuity payout by June 30, 2016.
Pursuant to b) above, the following will apply:
c) The earlier payout shall be equivalent to the present discounted value of the payout as per Appendix A. The present value shall be based on a discount rate of 7.87% and on the average retirement age of fifty-eight (58) less the teacher’s age as at June 30, 2016.
d) If a teacher is 58 years of age or older as at June 30, 2016, the retirement gratuity payout will be discounted by two percent (2%) if they chose the early gratuity payout.
NOTE – Appendix A mentioned in a) above refers to the provisions of the ETFO MOU.
Letter of Agreement #4 in the Central Agreement for ESPs, PSPs and DECEs provides for the same option of a voluntary early retirement gratuity payout for members who are 61 years of age or older as of June 30, 2016. The payment for eligible ESP/PSP/DECE members can be transferred to an RRSP or an OMERS AVC account. The present value of the gratuity amount is discounted at the same rate as the Teacher/Occasional Teacher payout.
Members who are currently eligible for a gratuity have two options – to take the early payout or to do nothing and receive the full amount of the gratuity payment when they formally retire from teaching.
Members who opt to take the early pay-out option will see the vested amount reduced. There is a percentage penalty for each year that a member is away from retirement age. This is based upon the idea that if the money received early were to be invested it would earn a similar amount in interest as the reduction by the time the teacher was 58 or 61 if accessed by an ESP/PSP/DECE member.
ETFO members considering this option should review their gratuity amount that was provided to them in writing by the District School Board in 2012. They should review any recent correspondence received from their District School Board outlining the amount of the early gratuity payout should they opt to take it on June 30, 2016. They should then consult with a financial advisor to determine if this is the best option available to them.
Each ETFO member has different circumstances and it is important for them to consider the options of taking the gratuity payout early or leaving it where it is until their formal retirement.
How does the reduction calculation work?
There are two types of reductions:
If a teacher is 58 years of age or older as of June 30, 2016, the retirement gratuity payout will be discounted by two percent (2%) if they select the early gratuity payout.
Based on a retirement gratuity of $45,000 at age 58: $45,000 – 2 % = $44,100.
For those ETFO members younger than 58 the calculation is more complex. The present value shall be based on a discount rate of 7.87% and on the average retirement age of fifty-eight (58) less the teacher’s age as at June 30, 2016. This calculation is a regressive calculation.
Based on a retirement gratuity of $45,000 at age 58 – If the teacher opting to take it early is age 55 it would be reduced by 7.87 % and a factor of three years. In this example the gratuity payout is discounted by 20%. $45,000 – 20 % = $36,000.
Based on a retirement gratuity of $45,000 at age 58 – If the teacher opting to take it early is age 48 it would be reduced by 7.87 % and a factor of ten years. In this example the gratuity payout is discounted by 53%. $45,000 – 53 % = $21,150.
The same reduction rules apply to those ESP/PSP/DECE members who are 61 years of age or older as of June 30, 2016.
1) Is the calculation discounted for every year that I am below the age of 58 or 61?
Yes. For every year you are below the required age (58 for teachers/occasional teachers or 61 for ESP/PSP/DECE members) your gratuity payout would be reduced by 7.87 %
2) I am a teacher. Do I need my 85 factor in order to consider this option?
No. This option is for members who are not retiring so the 85 factor does not play a role in this situation. Members who have their factor and formally retire would be eligible for the entire amount of their vested gratuity.
3) I am older than the required age; can I access this gratuity pay-out? What am I eligible for?
Yes. As described above your early gratuity payout would be reduced by 2 %.
4) What if I am leaving my board, can I carry my gratuity over to my new board or should I take advantage of this payout?
Your gratuity does not transfer with you from board to board. If you were to resign from your current board and switch to another one you would lose the entire amount. Taking the early pay-out option would allow you to preserve some of the amount.
5) Does this payout mean that the gratuities that were vested in the last round of bargaining will no longer be available upon my retirement?
No. If you chose to not take the early payout option the full amount which was vested in 2012 would be available to you upon your retirement pending no further changes to this collective agreement provision were negotiated or legislated.
6) Are there tax consequences when I am actively employed and take this option?
Yes. Because you are not retiring the amount of the early gratuity payout is reported as taxable income in the year that it is received.
7) Can I transfer this money directly into an RRSP?
An early gratuity payment is taxable income in the year that it is received. You can only transfer some of this money into an RRSP if you have existing room to do so. Members who are part of the OMERS pension plan have the option to transfer the money to an OMERS AVC account. The money is still subject to witholdings in accordance with CRA requirements.
8) If I opt to take the payout will I be excluded from any remedy ETFO might successfully negotiate with respect to members’ retirement gratuities?
ETFO legal counsel has advised that, to the extent that this issue is part of the remedy discussions, members who have opted to take the payout will be included in those discussions.