Pension Basics Presented by the Pension & Benefits Office
Potential Sources of Income at Retirement Government sponsored pension such as: Canada Pension Plan (CPP) Old Age Security (OAS) Individual Savings such as: Individual Registered Retirement Savings Plan (RRSP) Investments like stocks and/or bonds Property Tax Free Savings account Employer Sponsored Pension Plan such as: Group RRSP Group Registered Pension Plan (RPP) Defined Benefit (DB), Defined Contribution (DC) or Hybrid (combination of DB and DC) 2
Group RRSP An employer-sponsored retirement savings plan, similar to an individual RRSP, but administered on a group basis by the employer Contributions are made by pay-roll deduction, on a pre-tax basis Employee contributions are often matched by the employer typically to a maximum of 3-5% of earnings Contributions by the employer are not mandatory however, contributions by the employer are taxable as income to the employee 3
Group RRSP advantages & disadvantages Advantages of a group RRSP compared to an individual RRSP: Payroll Deduction & immediate tax relief to employee Lower or no administrative costs Minimal government reporting Not subject to provincial pension regulations, therefore flexible in terms of employee eligibility & contribution levels Lower minimum deposits Income splitting is available through spousal contributions Disadvantages of a group RRSP compared to an individual RRSP: Group plan may have limited investment options Employer contributions are a taxable benefit to employees Plan may be cancelled at any time by employer Employer may limit an employee's ability to withdraw funds 4
Defined Benefit (DB) Pension Plan Depending how the plan is set up the employee may or may not have to contribute to the plan The benefit at retirement is based on a preset formula, therefore the pension can be predicted to a certain degree The formula can be: Final average earnings (FAE) i.e. average of last three years, average of highest five years, average of last five years Career Average Earnings i.e. average of all years of salary Flat rate i.e. $50 of pension for each year in the pension plan Employer has all the risk to ensure the pension plan is fully funded 5
Government Reporting When an employer has a Defined Benefit pension plan they must do the following: Most plans are registered with the provincial and federal governments The governments have to approve the pension plan text, which includes such items as the contribution limits, benefit formula, form of pension at retirement, potential for increases after retirement, etc., Changes to the pension plan text must also be approved by the governments At a minimum of every three years the pension plan actuary typically from a consulting firm completes an actuarial valuation report The actuarial valuation report reviews the assets in the plan along with the liabilities (the benefits owed to the employee at termination, retirement or death) The actuarial valuation report determines the funded status of the pension plan on a going concern and solvency basis 6
Funded status Funded status on a going concern basis can be either a positive (surplus) or negative (deficit) position Going concern assumes that the pension plan will continue indefinitely Funded status on a solvency basis can also be either positive (surplus) or negative (deficit) position Solvency basis assumes that the pension plan will close (wind-up) at the date the actuarial valuation report is written 7
Surplus or Deficit If the pension plan is in a surplus position that means there is more money in the pension plan than what is needed to pay for the benefits that have been earned There are very strict rules that must be followed if an employer wants to take some of the surplus out of the pension plan. Very rarely would an employer try to remove surplus out of a pension plan If the pension plan is in a going concern deficit but a solvency surplus then the employer has 15 years to make special payments into the pension plan to fund that deficit If the pension plan is in a going concern deficit and a solvency deficit then the employer has five years to make special payments into the pension plan to fund that deficit. The government is in the process of potentially giving employers a longer time period to fund a solvency deficit 8
Defined Contribution (DC) Pension Plan Depending how the plan is set up the employee may or may not have to contribute to the plan If employee contributes to the plan the employee may or may not determine where the funds are invested Contributions earn interest based on where the funds are invested The benefit at retirement is unknown therefore making it difficult for the employee to plan for their retirement The employee has all the risk and may have to delay retiring if investment strategies do not work out 9
Income Tax Act Limits The Income Tax Act limits how much an individual can tax shelter. The 2010 limit is: 18% of earnings to a maximum of $22,450 Therefore an employee has to take into account what they have contributed to their individual RRSP plus what has been contributed to their Defined Benefit and/or Defined Contribution pension plan 10
Pension Adjustments (PAs) While the Income Tax Act identifies the maximum amount that can be tax sheltered there is a further requirement for an employer to calculate a PA for each employee in a RPP and report it on your T4 The pension adjustment is used to ensure that there is fairness for those who contribute to RRSP s and those who participate in company pension plans. For DB plans the formula for determining the PA is: [(9 x benefit entitlement) - $600] For DC plans it is the total of employee (if any) and employer contributions for the year 11
Past Service Pension Adjustment (PSPA) A PSPA is calculated when an employee wants to transfer the DB funds from their previous employer s pension plan to their new/current employer s pension plan A PSPA is the difference between the new DB pension formula and the old DB pension formula A PSPA is used to reduce the amount of money the employee can contribute to an RRSP 12
Pension Adjustment Reversal (PAR) If an employee terminates or retires and transfers their pension funds out of a RPP the employer completes a PAR calculation A PAR will restore an individual s RRSP contribution room in situations where the PA and/or PSPAs are more than the benefits received from the RPP 13
Pension versus Annuity Pension and Annuity generally mean the same thing however: A Pension is normally paid from a DB pension plan typically on a monthly basis An Annuity is normally purchased from an insurance company and typically paid on a monthly basis. An employer can also purchase an annuity instead of paying a pension directly out of a DB pension plan 14
Considerations There are many different ways an employer can set up a pension plan for their employees if they choose to have a pension plan The employer has to determine what amount of risk they want to take on as opposed to how much risk they want their employees to have There is no simple solution as each employer has their unique circumstances, such as: Age of workforce- younger versus older Number in workforce Amount of money they pay their employees Profitability of company 15
Next steps Today s session was intended to inform you of the type of pension arrangements available The next set of sessions will explain the York Pension Plan and the financial situation of the York Pension Plan We urge you to attend these sessions as well 16
Questions Please contact your Pension & Benefits Counsellor at 416-736-2100 based on the first initial of your last name as follows: Last Name Initial Counsellor Extension Email Address A E Margaret Crowe 20377 crowem@yorku.ca G L Andreea Madaras 20702 amadaras@yorku.ca M R Yvonne Rego 33912 yrego@yorku.ca F, S Z Peter Chakonza 20617 chakp@yorku.ca 17