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
National Union of Public and General Employees
PENSION BASICSWebinar Series
2
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
National Union of Public and General Employees
PENSION BASICSWebinar Series
3
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
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PENSION BASICSWebinar Series
http://www.cppib.com/en/public-media/faq.html
4
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)
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PENSION BASICSWebinar Series
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.
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PENSION BASICSWebinar Series 6
GOVERNMENT PENSIONS
Canada Pension Plan (CPP)
Plan Benefits
o 2016 Maximum = $1092.50/month
o Oct. 2015 Average = $629.33
o Increased by Consumer Price Index (CPI) every year
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GOVERNMENT PENSIONS
Canada Pension Plan (CPP)
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
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GOVERNMENT PENSIONS
Canada Pension Plan (CPP)
Survivor benefit
Death benefit
Disability benefit
Retirement benefit
http://www.servicecanada.gc.ca/
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PENSION BASICSWebinar Series 9
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.
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PENSION BASICSWebinar Series 10
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
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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.
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PENSION BASICSWebinar Series 12
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
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PERSONAL SAVINGS / PENSIONS
What savings?o Bank accounts
o Home equity
o Self owned business
o Assets (investments)
o RRSP
o TFSA
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PERSONAL SAVINGS / PENSIONS
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
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PERSONAL SAVINGS / PENSIONS
Registered Retirement Savings Plan (RSP)
What risks?o Investment loses
o Interest rates
o Longevity
Under contribution
Over contribution
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PERSONAL SAVINGS / PENSIONS
Registered Retirement Savings Plan (RSP)
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
National Union of Public and General Employees
PENSION BASICSWebinar Series 17
PERSONAL SAVINGS / PENSIONS
Registered Retirement Savings Plan (RSP)
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)
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PENSION BASICSWebinar Series 18
PERSONAL SAVINGS / PENSIONS
Tax Free Savings Account (TFSA)
Plan design
o Contributions taxable
o Investment earnings tax sheltered
o Withdrawals not taxed
o Annual limit – $5,500 ($10,000 in 2015 only)
o Unused room carried forward
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PENSION BASICSWebinar Series 19
PERSONAL SAVINGS / PENSIONS
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
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PENSION BASICSWebinar Series 20
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
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PENSION BASICSWebinar Series 22
OCCUPATIONAL PENSION PLANS
Designs of Pension Plans
• Defined Benefit plans (DB)
• Defined Contribution Plans (DC)
• Target Benefit Plans (TB)
• Pooled Registered Pension Plans (PRPP)
National Union of Public and General Employees
PENSION BASICSWebinar Series 23
OCCUPATIONAL PENSION PLANS
Registered Pension Plans (RPPs)
Subject to the provincial Pension Benefits Standards Act
Subject to Income Tax Act
oContributions tax deductible
o Investment earnings tax sheltered
oPensions are taxed
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PENSION BASICSWebinar Series 24
OCCUPATIONAL PENSION PLANS
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OCCUPATIONAL PENSION PLANS
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
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PENSION BASICSWebinar Series 26
OCCUPATIONAL PENSION PLANS
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)
National Union of Public and General Employees
PENSION BASICSWebinar Series 27
OCCUPATIONAL PENSION PLANS
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
National Union of Public and General Employees
PENSION BASICSWebinar Series
http://www.statcan.gc.ca/daily-quotidien/150722/dq150722b-eng.htm
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OCCUPATIONAL PENSION PLANS
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.
National Union of Public and General Employees
PENSION BASICSWebinar Series 29
OCCUPATIONAL PENSION PLANS
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
National Union of Public and General Employees
PENSION BASICSWebinar Series
http://www.statcan.gc.ca/daily-quotidien/150722/dq150722b-eng.htm
30
OCCUPATIONAL PENSION PLANS
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.
National Union of Public and General Employees
PENSION BASICSWebinar Series 31
OCCUPATIONAL PENSION PLANS
Pooled Registered Pension Plans (PRPP)
o Similar to DC plans
Employee contributions
Voluntary Employer contributions
Pooled investments – less cost
Pooled plan administration
Cost – predictable
National Union of Public and General Employees
PENSION BASICSWebinar Series 32
OCCUPATIONAL PENSION PLANS
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
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PENSION BASICSWebinar Series 33
OCCUPATIONAL PENSION PLANS
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.
National Union of Public and General Employees
PENSION BASICSWebinar Series
http://www.statcan.gc.ca/daily-quotidien/150722/dq150722b-eng.htm
34
OCCUPATIONAL PENSION PLANS
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
National Union of Public and General Employees
PENSION BASICSWebinar Series 35
OCCUPATIONAL PENSION PLANS
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
National Union of Public and General Employees
PENSION BASICSWebinar Series 36
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
National Union of Public and General Employees
PENSION BASICSWebinar Series 38
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
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PENSION BASICSWebinar Series 39