National Union of Public and General Employees PENSION BASICS · 2016-03-23 · Canada Pension Plan (CPP) oBased on normal age of retirement at 65 oReduction if you start receiving

National Union of Public and General Employees

PENSION BASICSWebinar Series

1

An Overview of the Canadian

Retirement Landscape

Brian SchrammBCGEU

Staff Rep – Pensions

March 18, 2016



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SOURCES OF RETIREMENT INCOME

G O V E R N M E N T P R O G R A M S

P E R S O N A L S AV I N G

O C C U PAT I O N A L P E N S I O N S



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GOVERNMENT PENSIONS

Canada Pension Plan (CPP)Who is eligible?o Compulsory contribution while working to 65 years, voluntary to 71

How is it funded?o Employer and Employee premiums (4.95% each)

o Based on earnings between $3500 and YMPE

Is it secure?o Invested by CPPIB

o Funded until 20??

o Who bears the risk? Government (taxpayers), Contributors



http://www.cppib.com/en/public-media/faq.html

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GOVERNMENT PENSIONS

Canada Pension Plan (CPP)

Plan Design

oReplace about 25% of pre-retirement income

oDepends on how many years you worked, contributions

oMaximum is Year’s Maximum Pensionable Earnings (YMPE)



Years YMPE

2016 $54,900

2015 $53,600

2010 $47,200

2000 $37,600

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GOVERNMENT PENSIONS

Canada Pension Plan (CPP)o Based on normal age of retirement at 65

oReduction if you start receiving at 60 years

- .6% per month – 7.2% per year under age 65

At 60 = 36% reduction

o Increase if you start late

+ . 7% per month – 8.4% per year over age 65

At 70 = 42% increase

o You have to start taking it, or any pension, at 71.


PENSION BASICSWebinar Series 6

GOVERNMENT PENSIONS


Plan Benefits

o 2016 Maximum = $1092.50/month

o Oct. 2015 Average = $629.33

o Increased by Consumer Price Index (CPI) every year



GOVERNMENT PENSIONS


Post Retirement Benefit Account

o Work while you are receiving CPP

o Mandatory contributions to 65

o Voluntary contributions after 65

Maximum increase per additional year of contributions is $27.31 / month



GOVERNMENT PENSIONS


Survivor benefit

Death benefit

Disability benefit

Retirement benefit

http://www.servicecanada.gc.ca/



GOVERNMENT PENSIONS

Old Age Security (OAS)

Who is eligible?o Residents (Minimum 10 years residency)o Maximum benefit requires 40 years residency, otherwise pro-ratedo All Canadians at age 65 (67 - 2029)o April 1, 1958 – Jan 31, 1962 graduated eligibility impact

o Employment not required

How is it funded?o General revenue – Taxpayerso No funds invested

Is it secure? o Depends on the government of the day.



GOVERNMENT PENSIONS

Old Age Security (OAS)

Plan Benefitso Maximum = $570.52 / month ( Jan. 2016) - Average $532.28 /month

o Deferral, .6% /month, 7.2% /year (max 36% at age 70)

o Indexed quarterly to the CPI

o Taxable income

o Claw back threshold is $72,809 – $118,055 (15% of excess)

o 22% of seniors’ total income is OAS

o 41% of seniors’ total income is OAS and CPP



GOVERNMENT PENSIONS

Guaranteed Income Supplement (GIS)

Who is eligible?o Canadian residency

o OAS Recipient

o Low income

o qualify based on tax return

How is it funded?o General revenue – Taxpayers

o No funds invested

Is it secure?. o Depends on the government of the day.



GOVERNMENT PENSIONS

Guaranteed Income Supplement (GIS)

Plan Benefits oNon-taxable benefit

oAmount depends on income and marital status($17,304 single, $22,848 couple with CPP, $41,472 w/o CPP

oMaximum payment amount = $773.60

o1.8 million people receive this benefit



PERSONAL SAVINGS / PENSIONS

What savings?o Bank accounts

o Home equity

o Self owned business

o Assets (investments)

o RRSP

o TFSA




Registered Retirement Savings Plan (RRSPs)

Who is eligible?oMust have earned income

oAnyone who can save

How is it funded?oPersonal contributions (Employer matching?)

Is it secure?oDepends on your investment manager, the economy




Registered Retirement Savings Plan (RSP)

What risks?o Investment loses

o Interest rates

o Longevity

Under contribution

Over contribution





Plan designo Contributions tax deductible

o Investment earnings tax sheltered

o Withdrawals taxable

o Management Expense Ratios – MER’s (Fee’s)

o Annual limit – 18% of prior year income to a limit

2015 maximum = $24,930

Registered Pension contributions count

o Unused room carried forward

o Can take out and put back in next year





Who has them?o About 24% of tax-filers contribute each year

How much?o Median contribution was $3,000 in 2013

o Total value in assets in 2011

$775 billion (Investor Economics stat)

o Total unused RRSP contribution space in 2011

$684 billion (CBC News)




Tax Free Savings Account (TFSA)

Plan design

o Contributions taxable


o Withdrawals not taxed

o Annual limit – $5,500 ($10,000 in 2015 only)

o Unused room carried forward




Tax Free Savings Account (TFSA)

Who has them?o 10.7 million Canadians in 2013 (Financial Post)

o 17% of these had maximum contribution

o 7% of eligible Canadians have made maximum contributions

How much?o Cumulative total a person could have contributed is $46,500 by 2016



Contributions

Investment Earnings

To Pensioners

PENSION

FUND

Contribution

Valve

Expenses

Benefit

Valve

Contributions + Investment Earnings = Benefits + Expenses

Pension Funding Concept

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OCCUPATIONAL PENSION PLANS

Where does the pension money really

come from?

oContributions Employer

Employee

Taxpayers

o Investment returns




Designs of Pension Plans

• Defined Benefit plans (DB)

• Defined Contribution Plans (DC)

• Target Benefit Plans (TB)

• Pooled Registered Pension Plans (PRPP)




Registered Pension Plans (RPPs)

Subject to the provincial Pension Benefits Standards Act

Subject to Income Tax Act

oContributions tax deductible


oPensions are taxed







Defined Benefit Plans – Types

oFlat Dollar

Eg. $25 x 12 months x 35 years = $10,500 /year or $875 /month

oCareer Average Earnings (CAE)

Based on % of average salary over your whole career

oFinal Average Earnings (FAE)

% of earnings for 5 years Highest Average Salary (HAS)

2% X HAS X years = Pension

2% X $60,000 X 35 years = $42,000 / year




A. Multi-Employer plans

B. Single Employer plans

1. Traditional DBo Employer runs the plan, and sometimes is the only party that makes

contributions.

2. Jointly Trusteed DB planso Plan is run by equal partners. Risks are shared. Decisions shared, (depending

on legislation)




Who has DB plans? (2013 statistics)

• 4,402,000 in Canada

• 71.2% of all RPP members

• Decrease of .5% from previous year

• Down from 84% 10 years ago.

• Majority of them (94%) are in the public sector



http://www.statcan.gc.ca/daily-quotidien/150722/dq150722b-eng.htm

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Defined Contribution (DC) Plans – Types

oMoney Purchase Usually a fixed percentage of earnings

Usually a matching contribution by the employer

Sometimes the contribution is linked to company profit

o The member can choose various funds and asset allocations

o The benefit at retirement depends on the contributions and how well the

portfolio performed.




Who has DC plans? 2013

o 1,037,000 Canadians

o Increase of .6% from previous year

o 86% of them are in the private sector




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Target Benefit Plan – Types

o Elements of both DB and DC plans

Defined contributions

Cost – predictable

Target benefit – predictable?

o BC Public Sector Pension Plans Inflation Adjustment is a target benefit account

Contributions determined by negotiations

Target is full CPI indexing

Indexing is not guaranteed

Plans are adopting a “Sustainable Indexing” policy. In short, a cap or threshold.




Pooled Registered Pension Plans (PRPP)

o Similar to DC plans

Employee contributions

Voluntary Employer contributions

Pooled investments – less cost

Pooled plan administration

Cost – predictable




Who has a Registered Pension Plan - RPP? 2013

• 6,185,000 members – 1,037,000 in DC – 16.8% of total

• 37.9% of Canadians

• Unchanged from the previous year

• 51.5% are in public sector

• Male and female are equal

• However women are

o 62.8% of public sector members

o 35.9% of private sector members




How much money is involved?

o $66.7 billion contributed in 2013

o 64% by employers

o 36% by employees

Market value of RPPS - $1.5 trillion

o The pension plan accounts are invested in the Canadian/Global economy.

o A huge source of patient investment capital.




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Impact of pensions?

o 4 BC public sector plans pay pensions of $3.6 billion/year

o DB Pension members in BC save about $2.2 billion more per year for retirement

than RRSP contributors after pension premiums paid

This results in larger pensions which means pensioners pay more taxes,

contribute to the local economy and use less government services

This adds about 8,000 jobs to the provincial economy

Conference Board of Canada statistics




Questions that need to be asked

A. Plan governance?

1. Who makes the pension rules?

2. Who sets the investment policy?

B. Funding?

1. Who sets the contribution rates?

2. Who pays if the plan needs more money?

3. Who gets the surplus if the plan has extra?

4. Efficient?

C. Who takes the risks?

1. Investment risk

2. Longevity risk



PENSION ADEQUACY

How much is enough?

o Depends on who you ask

o 50% - 70% of pre-retirement income

o Low income tend to have high % replacement from Government Programs

o Middle income appears to be a gap as Government Programs only 25%

of YMPE earnings

o High income tend to have the resources to save

o Expansion of the CPP – will it be implemented, what will the rules be?

o How will the ORPP work out trying to address adequate income?

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An Overview of the Canadian Retirement Landscape



This has been:

An Overview of the Canadian Retirement Landscape

This is the first in a series of pension webinars hosted by NUPGE. Please join us for upcoming sessions.

Friday April 8 Webinar #2—Plan funding and the role of the actuary

Friday April 29 Webinar #3—Pension investment

Friday May 20 Webinar #4—Pension law

Friday June 10 Webinar #5—Capital stewardship

Further details, including information about the moderator and the instructor for each webinar, can be found by visiting http://www.share.ca/NUPGE-webinars



Documents

National Union of Public and General Employees PENSION BASICS · 2016-03-23 · Canada Pension Plan (CPP) oBased on normal age of retirement at 65 oReduction if you start receiving