Canadian Retirement System

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1 Canadian Retirement System Instructor: Karen Chen Actuary, PBI Actuarial Consultants

2 John 55 years old Lived in Canada his whole life Worked since age 25 Current employer offers a pension plan With current employer for 10 years Makes $50,000 a year

3 Sources of Retirement Income Government Pension Programs Occupational Pension Plans Personal Savings

4 Government Pension Programs Funded by Employer & Employee contributions Canada Pension Plan (CPP) Old Age Security (OAS) Funded by general tax revenue Retirement Pension OAS Pension Disability Benefit Guaranteed Income Supplement (GIS) Survivor Benefit Allowance/Allowance for Survivors

5 Canada Pension Plan (Quebec Pension Plan) Who is eligible? Have contributed to CPP At least 60 years of age How is it funded? Based on employer and employee contributions 4.95% employee, 4.95% employer Based on earnings between: Minimum amount ($3,500) Maximum amount (2014 YMPE* = $52,500) John: 4.95% x ($50,000 - $3,500) = $2, *YMPE = Year s Maximum Pensionable Earnings

6 Canada Pension Plan How much do you receive? Designed to replace ~25% of the average preretirement earnings up to a maximum Maximum based on: 25% of the average YMPE for the last five years x 1/ : $1, per month 25% x ($52,500 + $51,100 + $50,100 + $48,300 + $47,200)/5 x 1/12 Year YMPE , , , , , ,500

7 Canada Pension Plan CANADIAN RETIREMENT SYSTEM How much do Canadians receive? Actual: Based on how much contributed and for how long If Average career earnings >= Average YMPE5 Maximum CPP If Average career earnings < Average YMPE5 Less than Maximum CPP Average career earnings: age 18 to retirement age Low earning periods are dropped out (up to 8 years) Average (October 2014): $ Indexed annually by Canadian CPI

8 Canada Pension Plan Payable at age 65 Reduced by 0.56% per month if taken between ages (gradually increases to 0.60% per month by 2016) Example: John will receive a monthly pension of $1,000 at age 65. If he elects early retirement at age 60, what will be his monthly pension? Reduction: 0.56% x 12 x 5 = 33.6% Monthly Pension: $1,000 x (1 33.6%) = $664

9 Canada Pension Plan If taken between ages Increased by 0.7% per month Example: John will receive a monthly pension of $1,000 at age 65. If he elects postponed retirement at age 70, what will be his monthly pension? Increase: 0.7% x 12 x 5 = 42% Monthly Pension: $1,000 x (1 + 42%) = $1,420

10 Canada Pension Plan Post-Retirement Benefit Account (PRB) Work while receiving CPP Contributions mandatory between ages Contributions voluntary between ages 65 70

11 Old Age Security (OAS) Canada Pension Plan (CPP) Old Age Security (OAS) *Indexed quarterly by Canadian CPI Retirement Pension OAS Pension Disability Benefit Guaranteed Income Supplement (GIS) Survivor Benefit Allowance/Allowance for Survivors

12 OAS Pension Who is eligible? Residency requirement All Canadian at least age 65 Gradually increases to 67 from April 2023-January 2029 Deferral option Up to 5 years (to age 70) Increase to pension by 0.6% per month

13 OAS Pension How much do you receive? Maximum (Jan Mar 2015): $ per month Actual: 1. Depends on how long you have lived in Canada after age Clawback (Recovery tax) 2015 threshold: $72,809 If net income exceeds threshold, must repay 15% of excess up to full OAS amount OAS is fully eliminated if net income $117,909 or above Example: ($80,000 - $72,809) x 15% = $1, repayment Average (October 2014) : $532.28

14 Guaranteed Income Supplement (GIS) For low income seniors Must be: Canadian legal resident OAS recipient Low income earner Non-taxable Amount received depends on income and marital status Renewed annually based on filed income tax return

15 Guaranteed Income Supplement (GIS) As of January 1, 2015: Maximum monthly payment amount Maximum annual income Single $ $17,088 Spouse/common-law partner of someone who: Does not receive an OAS pension Receives an OAS pension $ $40,944 (combined) $ $22,560 (combined)

16 CPP + OAS + GIS =?

17 Sources of Retirement Income Government Pension Programs Occupational Pension Plans Personal Savings

18 Occupational Pension Plans Registered Pension Plans (RPPs) Plan is registered with applicable Regulator Contributions are tax deductible Investment income earned is tax sheltered Subject to pension standards legislation and Income Tax Act

19 Working Canadians Covered by an RPP in 2011 By Sector Sources: Statistics Canada, Office of the Superintendent of Financial Institutions Canada

20 Pension Funding Concept Contribution Valve Investment Earnings Contributions PENSION FUND Benefit Valve Expenses To Pensioners Contributions + Investment Earnings = Benefits + Expenses

21 Types of Pension Plan Defined Benefit (DB) Benefit defined Contribution unknown Assets are pooled Employer bears most risk Defined Contribution (DC) Contribution defined Benefit unknown Individual accounts Employee bears most risk Combination of DB & DC CANADIAN RETIREMENT SYSTEM

22 Types of Defined Benefit Plans - Benefit formula defined CANADIAN RETIREMENT SYSTEM Flat Dollar $ amount for each year of credited service Career Average Earnings (CAE) % of earnings for each year of credited service Final Average Earnings (FAE) % of earnings for a defined period for each year of credited service

23 Example: Flat Dollar Career Average Earnings Final Average Earnings Flat Dollar: $ 40/month per year of service CAE: 1% of earnings FAE: 1% FAE 3 year Annual Pension $20 Annual x 12 Pension: x 5 = $1,200 (1% x $32,000)+ (1% x $32,500) + (1% x $36,000)+ (1% Annual x $42,000)+ Pension: (1% x $45,000) 1% x ($36,000 = $1,875 + $42, ,000)/3 x 5 = $2,050

24 Example: Flat Dollar: $ 40/month per year of service CAE: 1% of earnings FAE: 1% FAE 3 year Flat Dollar Career Average Earnings Final Average Earnings Annual Pension $40 x 12 x 5 = $2,400 Annual Pension: (1% x $32,000)+ (1% x $32,500) + (1% x $36,000)+ (1% x $42,000)+ (1% x $45,000) = $1,875 Annual Pension: 1% x ($36,000 + $42,000 + $45,000)/3 x 5 = $2,050

25 Types of Defined Contribution Plans: - Contribution formula defined CANADIAN RETIREMENT SYSTEM Money Purchase Contribution defined % of earnings Fixed dollar amount Profit Sharing Contribution linked to company profit

26 Plans with both DB and DC Features Target Benefit Plan Like DB Target benefit Benefit predictability Pooling of longevity risk & investment risk Like DC Defined contribution Cost predictability Employee also bears investment risk

27 Sources: Statistics Canada, Office of the Superintendent of Financial Institutions Canada

28 If John s workplace pension: 1%, FAE3. Earnings Replacement Rate: 1% x FAE3 x (65-45) ~ 20% Final Salary

29 Sources of Retirement Income Government Pension Programs Occupational Pension Plans Personal Savings

30 Personal Savings

31 RRSP TFSA Registered Retirement Savings Plan Tax Free Savings Account Contribution tax-deductible Contribution not tax-deductible Withdrawals taxable Withdrawals not taxable Investment earnings tax-sheltered Investment earnings tax-sheltered Annual limit: 18% prior year income up to limit 1 Annual limit: $5,500 2 Unused room carried forward Unused room carried forward 1: RRSP limit: $24,930, increased annually 2: Indexed annually (rounded to nearest $500)

32 PRPP Pooled Registered Pension Plan Similar Defined Contribution Plan Voluntary Employer contributions Pooled investments less admin cost Contribution tax deductible Withdrawals taxable Annual limit: RRSP deduction limit

33 John s sources of retirement income CPP OAS GIS Occupational Pension Plan RRSP TFSA PRPP

34 Pension Plan Terminology Instructor: Karen Chen Actuary, PBI Actuarial Consultants

35 PENSION PLAN TERMINOLOGY Roles and Responsibilities The RetireHappy Pension Plan is provided to all members of the WeProtectOurMembers Union in the Retail Food Industry. The Plan was designed and implemented with the help of WeKnowWhatMightBe Actuarial Consultants, who also conducts actuarial valuations of the Plan on a regular basis. The assets of the Plan, which are invested by InvestwithMe Ltd. are held by IHoldMoney Ltd. Each year, IKnowWhatYouDid Ltd. reviews the Plan s financial records to verify the transactions in the Plan s accounts. The Board of Trustees of the Plan is responsible for making investment and funding decisions for the pension fund as a whole. The day-to-day operation of the Plan is delegated to ExcellentAdministration Ltd. John, a new member of the union, recently joined the Plan and wanted to find out what benefits he and his spouse were entitled to. ExcellentAministration happily provided John with an overview of the Plan benefits and informed him that he would be receiving an annual statement regarding his pension benefits by June 30 th.

36 PENSION PLAN TERMINOLOGY Roles and Responsibilities Plan member Current and former employees entitled to benefits under a pension plan. Beneficiary A person who is entitled to benefits under the pension plan. Plan sponsor The entity that establishes and maintains a benefits plan. The plan sponsor is usually an employer, but may also be the union. If the plan is a multi-employer plan, the committee or other entity that established the plan is considered the plan sponsor.

37 PENSION PLAN TERMINOLOGY Roles and Responsibilities Trustee A person given control of property held in trust with a legal obligation to administer it solely for the purposes specified Plan administrator An individual, group or body named in the plan document as responsible for day-today operations; generally the plan sponsor if no other entity is named Actuary A professional responsible for calculating the liabilities of pension plans and the costs of providing plan benefits

38 PENSION PLAN TERMINOLOGY Roles and Responsibilities Investment manager a person who invests some or all of the plan s funds under the direction of the trustees Custodian a financial institution that holds stock certificates and other assets of a plan Auditor an accounting firm hired to examine and verify a plan s accounts

39 PENSION PLAN TERMINOLOGY Roles and Responsibilities Advisors experts hired to provide independent advice in areas where they have special knowledge Other stakeholders other parties who may have an interest in decisions or actions relating to a plan such as marriage partners, bargaining or employee associations, employers and regulators.

40 Single and Multi-Employer Plans PENSION PLAN TERMINOLOGY Single Employer Only one employer makes contributions Common among large employers where long-term employment is normal Usually governed and administered by the plan sponsor without input from plan members Multi-Employer Two or more unrelated employers make contributions Usually established in unionized industries by a collective agreement Trustees determine benefits the plan can afford

41 PENSION PLAN TERMINOLOGY Contributory or Non-Contributory Plans Contributory Employers and employees contribute to fund pensions Employees share in surplus, but must contribute to fund deficit Common in public sector plans Non-Contributory Only employers contribute to fund pensions Employer funds any deficit, may contest ownership of surplus Some private sector plans use this type

42 PENSION PLAN TERMINOLOGY Integrated or Non-Integrated Plans Integrated Pension calculated including CPP May be additional bridging calculations if early retirement Common in public sector pensions Non-Integrated Pension paid in addition to CPP Not affected by early retirement More common in private sector plans

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