REPORT ON REDUCTIONS OF SERVICES INCOME SECURITY INSURANCE PLAN LONG TERM DISABILITY BENEFITS

EXECUTIVE SUMMARY 

The Service Income Security Insurance Plan (SISIP) Long Term Disability (LTD) plan is a disability group insurance plan that provides members of the Canadian Forces with 75% of their income when released from the Canadian Forces (CF) as the result of a disabling injury.^([1])  This benefit is usually limited to 24 months, but can be extended in certain circumstances.

Veterans receiving SISIP LTD benefits may also qualify for a Veterans Affairs Canada (VAC) disability pension under the Pension Act,^([2]) for the same injury.  In such cases, any payments received from a Pension Act disability pension cause the SISIP LTD payments to be reduced by an equal amount, so that, in total, the Veteran still receives 75% of his pre-release salary.  Moreover, a Veteran receiving reduced SISIP LTD payments and a Pension Act disability pension for one injury will have his SISIP LTD payments reduced even further, if he subsequently becomes entitled to a second Pension Act disability pension awarded for an unrelated second injury.

These “clawbacks” of SISIP LTD payments are seen by Veterans, as being unfair.  They seem even more unfair given the fact that injured personnel who remain in the CF continue to draw their full salary as well as their full Pension Act disability pension.  Veterans ask why should they have their SISIP LTD benefits reduced by the amount of a Pension Act disability pension, when that same disability pension does not reduce the salary of serving CF members.

The Subcommittee has studied the issue and agrees that the reduction in Veterans’ SISIP LTD benefits is indeed unfair.  We recommend that the government cease the practice immediately.

 

BACKGROUND 

The SISIP LTD insurance policy was created in 1969 to provide CF members with income protection for total disability that was not attributable to military service.  Since 1975, the amount of the SISIP LTD benefit has been equal to 75% of pre-release salary, less applicable reductions.

In 1976, SISIP LTD coverage was expanded to include service-attributable injuries because in certain circumstances, Pension Act benefits alone were inadequate.  As a result, totally disabled members who were awarded a tax-free Pension Act disability pension were also assured of 75% of pre-release salary from all sources under the LTD provisions.

Pension Act pensions were added to the list of applicable SISIP LTD reductions,^([3]) in part because the “stacking” of disability payments from two federally funded sources for the same injury was not consistent with the Treasury Board design for such plans.^([4])  Reducing SISIP payments also ensured that the amount of disability insurance benefits would not exceed employment salary and that the net value of benefits awarded would be comparable whether the disability was attributable to military service or not.  This practice also allowed the insurer to keep both the cost of the LTD program and the cost of premiums, which are co-funded by the Treasury Board (85%) and CF members (15%), as low as possible.

Originally, Pension Act pensions were payable only upon a member’s release from the CF.  In 1971, the Pension Act was amended so that CF members injured in a Special Duty Area (SDA) could receive a disability pension while still serving.  In October 2000, Veterans Affairs sponsored an amendment to the Pension Act that entitled injured CF members, no matter where they were hurt, to a disability pension while still serving.  While this amendment was intended to restore parity among serving members, the unexpected consequence was that the fairness of reducing a veteran’s SISIP LTD benefits became an issue and resulted in an investigation by the DND and CF Ombudsman in October 2003.

 

THE PROBLEM 

Over the years, many Veterans have been medically released from the CF because of injuries attributable to military service.  Some of these injuries have been so debilitating that the Veteran has been unable to work at any civilian job.  If such a Veteran was lucky, he or she would have enrolled in SISIP and received LTD payments designed to provide 75% of their CF salary at the time of release.  These payments continued for two years, after which they could remain in place if needed.

Veterans injured on duty also qualify for a disability pension under the Pension Act, which is administered by VAC.  These disability pension payments vary according to the severity of the injury, but all are tax-free and not considered as employment income by Revenue Canada.

However, SISIP does consider Pension Act disability pensions as income and when an injured Veteran receives a Pension Act disability pension benefit, SISIP reduces the LTD payments by an equal amount.  In this way, the amount of money going into the Veteran’s pocket remains at 75% of their CF salary at the time of release.  Many Veterans have complained that this SISIP “clawback” is unfair.

Moreover, if an injured Veteran receives SISIP LTD benefits for injury X reduced by the amount of any Pension Act disability pension benefits, SISIP LTD benefits will be reduced even further, by amounts equal to separate disability pension payments received for injury Y, which may be entirely unrelated to injury X, the original basis of the SISIP LTD payments.  That is to say, a Veteran who begins to receive Pension Act disability pension payments for hearing loss will have his or her SISIP LTD benefits awarded for bad knees further reduced by the same amount.  This too has been viewed as grossly unfair by Veterans.

There is yet another aspect that aggravates the perception of unfairness.  SISIP LTD contributions are mandatory for serving CF personnel.  Having paid into the insurance plan for many years, Veterans see their benefits, which they claim they have paid for, reduced just when they need them most.

 

DISCUSSION

It should be noted that this issue does not apply to those veterans who fall under the New Veterans Charter.[5]  This then, has the effect of “bracketing” the issue of SISIP LTD reductions between the years 1976 and 2006.

The Treasury Board has governance of SISIP LTD.  Any contractual changes or rate adjustments must be agreed to by the Treasury Board Secretariat, who then makes a submission to Treasury Board as may be appropriate.  The Chief of the Defence Staff (CDS) is the policy owner and as such is ultimately responsible, through his delegated authority, for entering into or terminating any contractual relationship on behalf of the CF with the insurer (Manulife), and monitoring the management of LTD plans.

Applying reductions to LTD benefits is a common and accepted insurance industry practice.^([6])  SISIP LTD guarantees disabled veterans a higher percentage of pre-release salary than most other government plans.  In addition, because the monthly Pension Act benefit is non-taxable and reductions to SISIP LTD are made on a dollar-for-dollar basis, the claimant’s net disability benefit, after tax, actually increases, to exceed 75% of pre-release income.

The 1976 decision to apply LTD benefits to service-attributable disabilities was made to ensure that Pension Act recipients would receive no less than those who received LTD benefits for non-service reasons, not so they would receive more.  That objective was achieved.  While serving CF members who receive a disability pension are financially better off than they would have been before the October 2000 Pension Act amendment, disabled veterans are neither individually better nor worse off, but they do lag behind serving CF members.  This is the source of the perception of “unfairness.”  An injured CF member who continues to serve receives his full salary and the disability pension.  A more gravely injured veteran receives a disability pension and only that amount of his SISIP LTD that brings him up to 75% of his pre-release salary.

 

FINDINGS

This is an exceedingly complex issue, but the Subcommittee worked hard to maintain a focus on the central question as to whether the current method of reducing veterans’ SISIP LTD benefits was fair.  We have concluded it is not.

The DND and CF Ombudsman’s Special Report of October 2003, presents an in-depth study of this issue and we are pleased to note that it comes to the same conclusion as we have.  It too judges the SISIP LTD reductions to be unfair.^([7])  In fact, all witnesses who appeared before us, with the exception of witnesses from the Department of National Defence (DND), felt the reductions were indeed unfair.

The Ombudsman’s report delivered five recommendations, three of which have been implemented.  Regrettably, DND has chosen not to move ahead with the two principal recommendations that call for an immediate end to SISIP LTD reductions and the reimbursement of Veterans who were subject to such reductions since 2000.

During our study of this issue DND was asked to provide two items of background information.  First, they were asked for the average SISIP LTD payment for the past fiscal year.  Second, they were asked to calculate the cost of reimbursing all Veterans whose SISIP LTD benefits had been reduced, since 1976.  Both requests were made when DND witnesses appeared before us on 30 April 2008.  At the time of publication of this report, DND had not yet replied.

 

FUTURE ACTION 

            The Subcommittee is concerned about all the Veterans who, since 1976, have had their SISIP LTD benefits reduced. We will revisit the complex issue of reimbursement later this year, when DND has provided the information requested.

 

RECOMMENDATION 

That the government immediately cease the practice of reducing SISIP LTD benefits awarded to veterans, by the amount received in a Pension Act disability pension.