Module 1

Pension Plans Overview

• Past service benefits provide pension benefit credits to employees for service before the establishment of a new pension plan.
• CPP and OAS together provide 30-35% of average wage.
• An employer pension plan that provides 30 to 40% of pre-retirement earnings is adequate for middle-income employees.

Canadian Pension Plan Regulatory Regimes

• There are two main regulators of Canadian pension plans: Income Tax Act (ITA) and various Pension Legislation (federal and provincial).
• ITA sets upper limits for pension plans and is permissive, not prescriptive.
• Pension legislation in each jurisdiction generally sets the lowest limit for pension plans.

Income Tax Act (ITA) and Registered Pension Plans (RPPs)

• Registration under ITA allows plan members/sponsors to deduct pension contributions from income for tax purposes.
• ITA exempts pension fund's investment income from taxation.

Pension Standards Legislation and RPPs

• Pension standards legislation governs:
  • Terms and conditions of pension plans
  • Minimum funding requirements
  • Investments of plan assets
• Pension standards legislation sets out to protect plan members.
• Pension commitments must be funded by advance payments under an accepted method.

Employer and Employee Attitudes towards Employer-Sponsored Retirement Plans

• Employers may perceive pros and cons of implementing a registered pension plan (RPP):
  • Pros: Competitive edge in labor, tax-deferred contributions, expense pension contributions annually, structured employee retirement, and increased plan members' interest in profit objectives.
  • Cons: Preference to use plan funds for investing in the company, rising administration costs, time and effort needed to comply with regulatory regimes, and pre-conceived belief that employees need to save for their own retirement.
• Employees may see advantages of participating in an RPP compared to a non-registered arrangement because RPPs are under Pension Standards Legislation (PSL) and ITA, which protects plan members' interests, provides favorable tax treatment for contributions and earnings in registered plans, and offers investment earnings that accrue tax-free.

Types of Employer-Sponsored Pension Plans

• Defined Benefit (DB) Pension Plan: specifies the pension benefit amount or formula to calculate the benefit.
• Defined Contribution (DC) Pension Plan: specifies the employer contribution amount to the plan.
• Combination/Hybrid Pension Plan: combines elements of DB and DC plans.

Registered Pension Plan (RPP) Categories

• Defined Benefit (DB) Pension Plan:
  • Flat Benefit Plan: annual pension is a specified number of dollars for each year of service.
  • Career Average Plan: calculated as a certain percentage of earnings in each year of plan membership.
  • Final Average Earnings Plan: based on the length of service and average earnings for a stated period before retirement.
  • Flexible Plan: employer provides a basic level of benefits, and employee contributions accumulate until retirement.
• Defined Contribution (DC) Pension Plan:
  • Specifies employer and employee contributions, and funds accumulate with earnings; retirement income is uncertain until retirement.

Retirement Income Arrangements

• Retirement income adequacy is ensuring that employees have enough retirement income, typically 60-70% of pre-retirement income.
• Adequacy is measured as a ratio of employees' income from all sources to their pre-retirement income.

Pension Plan Design and Equity

• Pension plan equity is ensuring fairness among plan members with differing employment histories.
• Equity is viewed differently for DB and DC pension plans:
  • DB plans: equal value based on age and service history.
  • DC plans: equal value regardless of age (based on service).

Pension Plan Document Provisions

• A pension plan document outlines the terms and conditions of the plan, including promises, payments, and obligations of the plan sponsor and members.

• Principal provisions included in an RPP:

  • Eligibility requirements
  • Pension formula
  • Pensionable service period
  • Plan member contributions
  • Retirement age
  • Normal and optional forms of pension
  • Death benefits before retirement
  • Termination benefits
  • Disability benefits
  • Inflation protection mechanism### Pension Standard Legislation

• Governs terms and conditions of pension plans

• Minimum funding requirements

• Investments of plan assets

• Protects plan members

• Pension commitments must be funded by advance payments under accepted method

• Applies to all Canadian provinces except Prince Edward Island

• Plan must be registered in province where majority of plan members reside

• Federal PSL has jurisdiction for federal workers and workers in Yukon, NWT, and Nunavut

Employer-Sponsored Retirement Plans

• Competitive edge in labor
• Tax-deferred contributions
• Expense pension contributions annually
• Structured employee retirement
• Increase plan members' interest in profit objectives
• Cons:
  • Preference to use plan funds for investing in company
  • Rising administration costs
  • Time and effort needed to comply with regulatory regimes
  • Pre-conceived belief that employees need to save for their own retirement

Registered Pension Plans (RPPs)

Types of RPPs

• Defined Benefit Pension Plan
• Defined Contribution Pension Plan
• Combination/Hybrid Pension Plan

Defined Benefit Pension Plans

• Flat Benefit Plan
  • Annual pension is a specified number of dollars for each year of service
  • Pension does not depend on earnings – only on length of service of employee
• Career Average Plan
  • Calculated as a certain percentage of earnings in each year of plan membership
  • Pension for each year is a percentage of earnings in that year
• Final Average Earnings Plan
  • Based upon the length of service and average earnings for a stated period before retirement
  • Pension for each year is a percentage of final average earnings (or best average earnings)
• Flexible Plan
  • Employer provides basic level of benefits – employee contributions accumulate until retirement
  • Two ways that a flexible pension plan can work:
    • Front-end or back-end ancillary benefit selection

Defined Contribution Pension Plans (DCPPs)

• Specifies employer and employee contributions
• Funds accumulate with earnings
• Retirement income uncertain until retirement
• Projected income based on assumptions
• Employer contribution methods vary:
  • Money Purchase Pension Plan
    • Fixed percentage or dollar amount
    • Specified amount per year, service, or hours worked
  • Profit-sharing Plan
    • Ties contributions to company profitability
    • May be based on point system
    • CRA mandates minimum 1% contribution, regardless of profit

Hybrid Pension Plan

• Pension of one type (e.g., DC) is subject to a minimum equal to the pension of the other type (e.g., DB)
• If at retirement: DC pension < DB pension, DB pension is paid
• DC pension > DB pension, DC pension is paid

Combination Pension Plan

• Merges elements of defined benefit (DB) and defined contribution (DC) plans
• commonly designed as a DC benefit stacked onto a core DB pension amount
• Paid on termination, death, or retirement is amount earned under DB plan + account balance of DC plan
• Sometimes created when employer wishes to cease operation of DB and instead sponsor a DC for future years

Multi-Employer Pension Plan (MEPP)

• Covers employees of many employers within a single industry or trade
• Created through collective bargaining
• Specifies both the level of contribution and the level of benefits

Target Benefit Pension Plan

• Similar to MEPP but sponsored by single employer
• Benefits can be reduced if not supported by current level of contributions
• Give targeted benefits while admin have flexibility to adjust benefits in response to plan's funding

Retirement Income Adequacy

• Ensuring that employees have enough retirement income
• Adequacy typically determined by comparing to industry standards
• Measured as ratio of employees' income from all sources/level of earnings just prior to retirement
• Most individuals need 60-70% of pre-retirement income for same standard of living after retirement
• 30-35% replaced by CPP/OAS
• Adequate employer plan replaces 30-40% of pre-retirement income

Pension Plan Equity

• Should be equitable among plan members with differing employment history

• Should pensions be equal in value or amount?

• DC plans – equal value regardless of age (based on service)

• DB plans – equal value based on age and service history### Pension Standard Legislation

• Governs terms and conditions of pension plans

• Minimum funding requirements

• Investments of plan assets

• Protects plan members

• Pension commitments must be funded by advance payments under accepted method

• Applies to all Canadian provinces except Prince Edward Island

• Plan must be registered in province where majority of plan members reside

• Federal PSL has jurisdiction for federal workers and workers in Yukon, NWT, and Nunavut

Employer-Sponsored Retirement Plans

• Competitive edge in labor
• Tax-deferred contributions
• Expense pension contributions annually
• Structured employee retirement
• Increase plan members' interest in profit objectives
• Cons:
  • Preference to use plan funds for investing in company
  • Rising administration costs
  • Time and effort needed to comply with regulatory regimes
  • Pre-conceived belief that employees need to save for their own retirement

Registered Pension Plans (RPPs)

Types of RPPs

• Defined Benefit Pension Plan
• Defined Contribution Pension Plan
• Combination/Hybrid Pension Plan

Defined Benefit Pension Plans

• Flat Benefit Plan
  • Annual pension is a specified number of dollars for each year of service
  • Pension does not depend on earnings – only on length of service of employee
• Career Average Plan
  • Calculated as a certain percentage of earnings in each year of plan membership
  • Pension for each year is a percentage of earnings in that year
• Final Average Earnings Plan
  • Based upon the length of service and average earnings for a stated period before retirement
  • Pension for each year is a percentage of final average earnings (or best average earnings)
• Flexible Plan
  • Employer provides basic level of benefits – employee contributions accumulate until retirement
  • Two ways that a flexible pension plan can work:
    • Front-end or back-end ancillary benefit selection

Defined Contribution Pension Plans (DCPPs)

• Specifies employer and employee contributions
• Funds accumulate with earnings
• Retirement income uncertain until retirement
• Projected income based on assumptions
• Employer contribution methods vary:
  • Money Purchase Pension Plan
    • Fixed percentage or dollar amount
    • Specified amount per year, service, or hours worked
  • Profit-sharing Plan
    • Ties contributions to company profitability
    • May be based on point system
    • CRA mandates minimum 1% contribution, regardless of profit

Hybrid Pension Plan

• Pension of one type (e.g., DC) is subject to a minimum equal to the pension of the other type (e.g., DB)
• If at retirement: DC pension < DB pension, DB pension is paid
• DC pension > DB pension, DC pension is paid

Combination Pension Plan

• Merges elements of defined benefit (DB) and defined contribution (DC) plans
• commonly designed as a DC benefit stacked onto a core DB pension amount
• Paid on termination, death, or retirement is amount earned under DB plan + account balance of DC plan
• Sometimes created when employer wishes to cease operation of DB and instead sponsor a DC for future years

Multi-Employer Pension Plan (MEPP)

• Covers employees of many employers within a single industry or trade
• Created through collective bargaining
• Specifies both the level of contribution and the level of benefits

Target Benefit Pension Plan

• Similar to MEPP but sponsored by single employer
• Benefits can be reduced if not supported by current level of contributions
• Give targeted benefits while admin have flexibility to adjust benefits in response to plan's funding

Retirement Income Adequacy

• Ensuring that employees have enough retirement income
• Adequacy typically determined by comparing to industry standards
• Measured as ratio of employees' income from all sources/level of earnings just prior to retirement
• Most individuals need 60-70% of pre-retirement income for same standard of living after retirement
• 30-35% replaced by CPP/OAS
• Adequate employer plan replaces 30-40% of pre-retirement income

Pension Plan Equity

• Should be equitable among plan members with differing employment history
• Should pensions be equal in value or amount?
• DC plans – equal value regardless of age (based on service)
• DB plans – equal value based on age and service history