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Canadian Retirement System

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Instructor: Karen Chen

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Canada Pension Plan (CPP) Retirement Pension Disability Benefit Survivor Benefit Old Age Security (OAS) OAS Pension Guaranteed Income Supplement (GIS) Allowance/Allowance for Survivors

Government Pension Programs

Funded by Employer & Employee contributions

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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) = $2,301.75

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How much do you receive?

 Designed to replace ~25% of the average pre-retirement earnings up to a maximum

Canada Pension Plan

Year YMPE 2009 46,300 2010 47,200 2011 48,300 2012 50,100 2013 51,100 2014 52,500

 Maximum based on:

 25% of the average YMPE for the last five years x 1/12

 2014: $1,038.33 per month

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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): $610.57

 Indexed annually by Canadian CPI

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Canada Pension Plan

Payable at age 65

 Reduced by 0.56% per month if taken between ages 60-65 (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%

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Canada Pension Plan

If taken between ages 65-70

 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%

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Canada Pension Plan

 Post-Retirement Benefit Account (PRB) – Work while receiving CPP

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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)

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OAS Pension

How much do you receive?

 Maximum (Jan – Mar 2015): $563.74 per month  Actual:

1. Depends on how long you have lived in Canada after age 18

2. 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

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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

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Guaranteed Income Supplement (GIS)

As of January 1, 2015: Maximum monthly payment amount Maximum annual income Single $764.40 $17,088

Spouse/common-law partner of someone who: Does not receive an

OAS pension $764.40 $40,944 (combined)

Receives an OAS

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 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

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

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• Benefit defined

• Contribution unknown • Assets are pooled

• Employer bears most risk

Defined Benefit (DB)

• Contribution defined • Benefit unknown

• Individual accounts

• Employee bears most risk

Defined Contribution (DC)

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Types of Defined Benefit Plans

- Benefit formula defined

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)

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• Flat Dollar: $ 40/month per year of service

• CAE: 1% of earnings • FAE: 1% FAE 3 year • Annual Pension

$20 x 12 x 5 = $1,200

Flat Dollar

• Annual Pension:

(1% x $32,000)+ (1% x $32,500) + (1% x $36,000)+ (1% x $42,000)+ (1% x $45,000) = $1,875

Career

Average

Earnings

• Annual Pension:

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• Flat Dollar: $ 40/month per year of service • CAE: 1% of earnings

• FAE: 1% FAE 3 year

• Annual Pension $40 x 12 x 5 = $2,400 Flat Dollar • Annual Pension: (1% x $32,000)+ (1% x $32,500) + (1% x $36,000)+ (1% x $42,000)+ (1% x $45,000) = $1,875 Career Average Earnings • Annual Pension: 1% x ($36,000 + $42,000 + $45,000)/3 x 5 = $2,050

Final Average Earnings

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Types of Defined Contribution Plans:

- Contribution formula defined

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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

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If John’s workplace pension: 1%, FAE3.

Earnings Replacement Rate: 1% x FAE3 x (65-45) ~ 20%

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RRSP

Registered Retirement Savings Plan

Contribution tax-deductible Withdrawals taxable

Investment earnings tax-sheltered Annual limit:

18% prior year income up to limit1

Unused room carried forward

TFSA

Tax Free Savings Account

Contribution not tax-deductible Withdrawals not taxable Investment earnings tax-sheltered

Annual limit: $5,5002

Unused room carried forward

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PRPP

Pooled Registered Pension Plan

Similar Defined Contribution Plan Voluntary Employer contributions Pooled investments – less admin cost

Contribution tax deductible Withdrawals taxable

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John’s sources of retirement income

CPP OAS GIS

Occupational Pension Plan RRSP

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Instructor: Karen Chen

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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 30th.

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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.

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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-to-day 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

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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

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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.

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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

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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

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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

References

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