Module 1
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Questions and Answers

How do private sector employers typically adjust pensions for post-retirement cost of living?

  • By offering a lump sum addition to pensions
  • By making regular, fixed commitments
  • By prohibiting any adjustments after retirement
  • By providing a percentage increase on paid pensions (correct)

    • What types of adjustments can pension plan members typically receive after retirement?

  • Flat reduction in paid pensions
  • A combination of different adjustment methods (correct)
  • Minimum pension payments guaranteed
  • Fixed monthly addition to pensions

    • How can Defined Contribution (DC) plan members obtain inflation protection after retirement?

  • By automatically receiving post-retirement pension adjustments
  • By requesting a lump sum payment at retirement
  • By switching to a Defined Benefit (DB) plan after retirement
  • By selecting an annuity with automatic indexing (correct)

    • What are the retirement income alternatives available to retiring DC plan members?

    <p>Using accumulated savings to purchase annuity or establish LIF</p> Signup and view all the answers

    In which jurisdictions do most Private Sector Labor (PSL) regulations allow plan members to receive income directly from the pension plan?

    <p>Jurisdictions that permit variable benefits for retirees</p> Signup and view all the answers

    What is the main feature of an ALDA (Advanced Life Deferred Annuity)?

    <p>Deferral of retirement income until age 85</p> Signup and view all the answers

    What is a key characteristic of Life Income Funds (LIF) for retiring DC plan members?

    <p>Minimum and maximum withdrawal amounts set by legislation</p> Signup and view all the answers

    What is the primary difference between an annuity with automatic indexing and a standard annuity?

    <p>The automatic indexing annuity adjusts payments for inflation, while the standard annuity does not</p> Signup and view all the answers

    What is the significance of amending Private Sector Labor (PSL) regulations for retiring DC plan members?

    <p>It enables retirees to receive variable benefits directly from their pension plans</p> Signup and view all the answers

    DC plan members can automatically obtain inflation protection after retirement.

    <p>False</p> Signup and view all the answers

    Private sector employers always make regular commitments when adjusting pensions for post-retirement cost of living.

    <p>False</p> Signup and view all the answers

    ALDA provides immediate retirement income without any deferral option.

    <p>False</p> Signup and view all the answers

    Life Income Funds (LIF) have no legislated minimum or maximum withdrawal amounts.

    <p>False</p> Signup and view all the answers

    Most Private Sector Labor (PSL) jurisdictions allow plan members to receive income directly from the pension plan even if variable benefits are not permitted.

    <p>False</p> Signup and view all the answers

    Retiring DC plan members cannot establish a Life Income Fund (LIF) for retirement income.

    <p>False</p> Signup and view all the answers

    Post-retirement pension adjustments for DC plan members always include a fixed percentage increase on paid pensions.

    <p>False</p> Signup and view all the answers

    DC plan members are not required to choose a pension form at retirement.

    <p>False</p> Signup and view all the answers

    Plan sponsors commonly offer post-retirement pension adjustments to DC plan members.

    <p>False</p> Signup and view all the answers

    Defined Contribution (DC) plan members have limited retirement income alternatives available to them.

    <p>False</p> Signup and view all the answers

    What does the Life Income Fund (LIF) offer retiring DC plan members?

    <p>Legislated minimum and maximum withdrawal amounts</p> Signup and view all the answers

    What is a common feature of death and termination benefits in pension plans?

    <p>Equal the member's account value</p> Signup and view all the answers

    How can a Defined Benefit (DB) pension plan handle a period of disability for a plan member?

    <p>By offering immediate, unreduced pension during disability</p> Signup and view all the answers

    How do Final Earnings DB and Career Average/Flat Benefit DB plans differ in handling inflation protection before retirement?

    <p>Final Earnings DB provides inflation protection until retirement, unlike Career Average/Flat Benefit DB</p> Signup and view all the answers

    What is the typical method used by large private sector employers to provide post-retirement inflation protection for retirees from their DB pension plans?

    <p>Adjustment of pensions for post-retirement cost of living</p> Signup and view all the answers

    What is the key characteristic of a Flat Benefit Plan in a defined benefit pension plan?

    <p>Pension is a specified number of dollars per year of service</p> Signup and view all the answers

    In a Career Average Plan in a defined benefit pension plan, how is the pension calculated?

    <p>Pension is based on earnings each year</p> Signup and view all the answers

    What is the primary characteristic of a Flexible Plan in a defined benefit pension plan?

    <p>Employee contributions are used to purchase additional ancillary benefits</p> Signup and view all the answers

    How is the pension calculated in a Final Average Earnings Plan of a defined benefit pension plan?

    <p>Pension for each year is a percentage of final average earnings</p> Signup and view all the answers

    In a defined contribution pension plan, what defines the employer's contribution levels?

    <p>Employer's discretion or matching employee contributions</p> Signup and view all the answers

    What distinguishes Flexible Plans from other defined benefit pension plans?

    <p>Employee contributions accumulate to purchase ancillary benefits in Flexible Plans</p> Signup and view all the answers

    What characteristic distinguishes a Hybrid Pension Plan from other types of retirement plans?

    <p>It provides a guaranteed minimum retirement income.</p> Signup and view all the answers

    How is retirement income adequacy typically measured?

    <p>By comparing the employee's income to industry standards.</p> Signup and view all the answers

    What is a key difference in how equity is viewed between Defined Benefit (DB) and Defined Contribution (DC) pension plans?

    <p>In DC plans, pensions are equal value regardless of age.</p> Signup and view all the answers

    What is the purpose of a pension plan document?

    <p>To describe terms and conditions that apply to the pension plan.</p> Signup and view all the answers

    What does the Retirement Age provision in a pension plan document specify?

    <p>The earliest age at which an employee can retire.</p> Signup and view all the answers

    Which type of pension plan provides a core Defined Benefit (DB) pension stacked onto a Defined Contribution (DC) benefit?

    <p>Combination Pension Plan</p> Signup and view all the answers

    In which situation would a Hybrid Pension Plan pay out the Defined Contribution (DC) pension at retirement?

    <p>When the DC pension exceeds the DB pension.</p> Signup and view all the answers

    What is the principal focus when determining retirement income adequacy?

    <p>Maintaining 60-70% of pre-retirement income for same standard of living after retirement.</p> Signup and view all the answers

    What is a distinguishing feature of a Multi-Employer Pension Plan?

    <p>It covers employees of many employers within a single industry or trade.</p> Signup and view all the answers

    What is the main purpose of a Combination Pension Plan?

    <p>To merge elements of Defined Benefit (DB) and Defined Contribution (DC) plans.</p> Signup and view all the answers

    At what age does the ITA permit pensions to be paid from a DB pension plan on an unreduced basis?

    <p>60</p> Signup and view all the answers

    What is a feature of a phased retirement plan?

    <p>Allows gradual transition to retirement</p> Signup and view all the answers

    What are the alternatives available to employers for members who continue employment past NRA?

    <p>Allow pension to start at NRA while member continues working</p> Signup and view all the answers

    Why is it important for a DB pension plan member to know the normal form of pension provided by their plan?

    <p>To know what benefits are payable after their death</p> Signup and view all the answers

    What cash payments are available to a DB plan member at termination of employment or retirement?

    <p>Commuted value generally less than 4-10% of YMPE</p> Signup and view all the answers

    What is required for a DB pension plan to provide in case of a member's death before retirement?

    <p>Preretirement death benefit defined in the plan text</p> Signup and view all the answers

    In the case of termination of employment, what rights are DB plan members entitled to?

    <p>Vesting and locking-in rights defined by the plan</p> Signup and view all the answers

    What is the significance of vesting for terminated DB plan members?

    <p>Rights to a portion of the pension upon termination provided by the employer</p> Signup and view all the answers

    When can a phased retirement end for an employee in a DB pension plan?

    <p>With employment termination or plan termination</p> Signup and view all the answers

    What is the purpose of a bridge benefit in a Defined Benefit pension plan?

    <p>To provide retirement income before and after the commencement of a government pension plan</p> Signup and view all the answers

    In a Defined Contribution pension plan, how are pension benefits at retirement determined?

    <p>By allocating contributions to a member account and determining the accumulated value at retirement</p> Signup and view all the answers

    What does pensionable service refer to in pension plans?

    <p>The defined period of service for which pension benefits are earned</p> Signup and view all the answers

    What distinguishes a contributory Defined Benefit pension plan from a noncontributory one for the employer?

    <p>A contributory plan involves sharing costs with employees, potentially lowering employer costs</p> Signup and view all the answers

    What factor influences the level of plan member contributions to a Defined Benefit pension plan?

    <p>The sponsor's willingness to pay and the benefits provided</p> Signup and view all the answers

    What does the 50% rule apply to in Defined Benefit pension plans?

    <p>Employers must cover at least 50% of a plan member's pension benefits</p> Signup and view all the answers

    What is normal retirement age (NRA) in relation to pension plans?

    <p>The standard age at which individuals can start receiving full pension benefits from their employer's plan</p> Signup and view all the answers

    What is the most common requirement for eligibility in a pension plan according to the provided text?

    <p><em>Two years of employment</em></p> Signup and view all the answers

    Study Notes

    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

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