Pension and Benefits Exam Ch. 1, 2, 3, 5, 26, 27, 28, 29 (PDF)

Ch 1 majority is in notes in book: Type of pension plans : Flexible Pension: - Employer provides basic level of benefit. - Employee contributions accumulate until retirement at which point they are used to purchase additional ancillary benefits from the plan Final Earnings: - Pens...

Ch 1 majority is in notes in book: Type of pension plans : Flexible Pension: - Employer provides basic level of benefit. - Employee contributions accumulate until retirement at which point they are used to purchase additional ancillary benefits from the plan Final Earnings: - Pension for each year is a percentage of final average earnings or best average earnings Career Average: - Pension for each year is a percentage of earnings in that year (unless the plan is updated) Flat Benefit: - Pension does not depend on earnings only on length of service of employees Defined Contribution Plans: Money Purchase: - Employer contribution is a fixed percentage of earnings - Pension is what the accumulated contributions will buy Profit Sharing: - Employer contribution depends on profits of the company subject to a minimum of 1% of earnings - Pension is what the accumulated contributions will buy. Combination of Defined Benefit and Defined Contribution Plan Characteristics Hybrid/Combination: - Pension of one type is subject to a minimum of the other type or pension is the sum of the two different types Cash Balance: - Credits based on defined benefit principles are allocated to member accounts and converted to annuities at specific rates Multi-Employer: - Level of contributions and level of benefits are set out in collective agreement. - Benefits may be reduced if contributions are insufficient to provide current level of benefits Chapter 2: Government Pension Programs In Canada, the three-tiered retirement income system consists of three main components: 1. The First Tier: Old Age Security (OAS) This is a universal, non-contributory program that provides a basic income to all Canadian seniors aged 65 and older, regardless of their work history or income level. The rationale behind OAS is to ensure a basic standard of living for seniors, helping to reduce poverty among older Canadians. 2. The Second Tier: Guaranteed Income Supplement (GIS) The GIS is an income-tested program that provides additional financial support to low-income seniors who are already receiving OAS. The rationale for the GIS is to address income inequality among seniors, particularly those without sufficient personal savings or pension income. 3. The Third Tier: Employer-Sponsored Pension Plans and Personal Savings This includes workplace pension plans (such as Defined Benefit or Defined Contribution plans) and individual savings (e.g., RRSPs). The rationale behind this tier is to encourage Canadians to save for retirement, providing supplementary income to maintain a comfortable standard of living after retirement. Tax advantages (e.g., tax deferral on RRSP contributions) are designed to incentivize saving. Evaluation of the Effectiveness of These Policies: 1. OAS and GIS: ○ Strengths: OAS ensures a basic income for all seniors. GIS helps reduce poverty for low-income seniors. ○ Weaknesses: OAS may not provide enough for a comfortable living, especially in high-cost areas. GIS only assists low-income seniors, leaving moderate-income seniors at risk. 2. Personal Savings (Third Tier): ○ Strengths: RRSPs and other savings plans encourage additional retirement savings.  ○ Weaknesses: Many Canadians, particularly lower- and middle-income earners, may struggle to save enough. Market risks and complex investment options can undermine savings effectiveness. 3. Overall: ○ Strengths: The system provides a balanced approach to income security, poverty reduction, and savings incentives. ○ Weaknesses: The system may not provide adequate retirement income for all, particularly middle-income earners. Reliance on personal savings creates disparities among different income groups. Chapter 3: Employer pension plans – Terms and Conditions 50% rule - In contributory defined benefit plan designs, the cost sharing objectives may have been determined based on the entire membership group. - Pension standard legislation introduced in the late 1980s and early 1990s requires that the employer fund at least 50% of the value of the benefits that are paid to each individual plan member with request to their membership after the date the legislation came into effect. - However, the 50% rule does not apply to CAPs. Employee Contributions Pension plans may be either contributory or non-contributory Contributory: The employees are required to contribute and the employer pays the balance of the cost. Non-contributory: Employer pays the full cost. Trends in Employer Pension Plans in Canada: 1. Shift to Defined Contribution (DC) Plans: Many employers are moving from Defined Benefit (DB) to Defined Contribution (DC) plans due to lower cost and risk for employers. DB plans require employers to guarantee benefits, whereas DC plans shift investment risk to employees. 2. Hybrid and Target Benefit Plans: Some employers are adopting hybrid plans (mix of DB and DC) or target benefit plans, which provide some guaranteed benefits but with more limited payouts depending on investment performance.  3. Focus on Flexibility: Employers are offering more flexible pension options, allowing employees greater control over investments and easier portability when changing jobs. Why Mobile Employees Prefer DC Plans: 1. Portability: DC plans are easily transferable between jobs, making them ideal for employees who frequently change employers. 2. Control over Investments: Employees have more control over their retirement savings, appealing to those who are financially savvy. 3. Predictable Contributions: Contributions are fixed, providing clarity and simplicity compared to DB plans, which rely on complex formulas. 4. No Long-Term Commitment: DC plans don't require long tenure, making them more attractive to mobile employees. Why Employers Prefer DC Plans: 1. Cost Predictability: Employers know exactly what they will contribute, with no risk of underfunding as with DB plans. 2. Reduced Liability: Employers aren't responsible for investment outcomes or longevity risks. 3. Scalability: DC plans are easier to administer and more flexible for varying workforces. 4. Attraction and Retention: Employers can offer competitive matching contributions, appealing to employees without the complexity of DB plans. Conclusion: DC plans are becoming the norm for both employers and mobile employees due to their flexibility, cost predictability, and ease of administration. (Ch.5) Design, Registration, And Administrations of Pension Plans Plan Design A pension plan operates with significant constraints: Member needs and goals Maximums in the Income Tax Act Economic Realities Minimum Benefits in the pension legislation Plan sponsor goals and constraints  Other legislations Chapter 26: Flexible Benefits Overview of Flexible Benefits Allow employees to choose from a package of benefits offered by the employer, tailored to their needs. Began in Canada in 1983; gained popularity in the 1990s due to affordable administrative technologies. Aim to balance cost-effectiveness with the diverse needs of a workforce. Elements of Flexible Benefits Cost Sharing: Contributions based on a percentage split between employer and employee. Defined Contribution: Employer’s commitment level determines contributions. Credit Structure: Employees receive credits to cover benefit costs, with any overages deducted from payroll. Design Themes 1. Modular Plans: Pre-packaged options with simplicity and limited choice, ideal for smaller, risk-averse organizations. 2. Core Plus Option Plans: Basic core coverage with credits for additional options; more complex in administration. 3. Cafeteria Plans: High flexibility with no core coverage, not commonly used in Canada due to risks of adverse selection. Implementation Process 1. Align benefit plan objectives with business goals. 2. Evaluate current plans and develop alternatives. 3. Test prototypes to ensure alignment with plan objectives. 4. Consider administrative needs for enrollment, life events, and claims processing. Communication and Anti-Selection Mitigation Use direct contact, print, and electronic channels. To prevent anti-selection: step-up/step-down rules, lock-in provisions, and proof of insurability for certain changes. Tax Considerations  Flexible benefits must adhere to Income Tax Act conditions to avoid tax penalties. Plan members’ benefit choices are generally irrevocable for a year, except in life events or employment changes. Chapter 27: Employee Assistance Programs (EAPs) Purpose and History Started in the 1950s to address alcohol and drug issues in the workplace. Provide confidential support for physical and mental well-being, benefiting both employer and employee. Confidentiality Core to EAP success; aggregate data is shared with employers to demonstrate usage without revealing personal details. Benefits of EAPs For business: Reduces costs linked to personal issues affecting productivity and turnover. For employees: Offers a proactive approach to wellness and is part of the rewards package. Key Services 1. Counseling: ○ Family, individual, crisis, couple, career, fitness, and mandated services. 2. Access Modes: ○ In-person, tele-counseling, e-counseling, video sessions, and online chat groups. 3. Support Programs: ○ Family support, legal and financial services, nutritional counseling, etc. 4. Onsite and Organizational Support: ○ Includes trauma interventions, intercultural programs, wellness seminars, workplace coaching, and conflict resolution. Quality Management EAPs ensure quality through credential verification, internal training, continuous improvement, and accreditation. Employee Wellness Programs  Focus on improving health and productivity through wellness activities like stress management, flu clinics, and fitness memberships. Work Environment Enhancements Includes flexible work arrangements (telecommuting, job-sharing, phased retirement, etc.), dependent care, and domestic partner benefits. Training, Development, and Leaves Training programs support employee retention and skill enhancement. Leaves include educational, personal care days, bereavement, sabbaticals, and vacation. Additional Benefits and Perquisites Critical illness coverage, long-term care insurance, and group legal insurance. Non-cash perquisites include company cars, business club memberships, medical exams, and financial planning for executives. Chapter 28: RETIREMENT PLANNING The Strategic Communication process - Setting objectives - Analyzing the audience - Developing a content inventory - Branding and key messages - Evaluating/Selecting media - Planning and executing - Measuring success The strategic communication process for benefits and retirement savings plans is essential for ensuring that employees fully understand their rights and options. Clear, accurate, and legally compliant communication helps avoid misunderstandings and potential legal issues, fostering trust and ensuring that the employer meets its regulatory obligations. Legal Aspects of Benefits and Retirement Saving Plans Communication When communicating about employee benefits and retirement saving plans, several legal considerations must be kept in mind to ensure compliance with relevant laws and protect both the employer and employees: 1. Clarity and Transparency ○ Accuracy: Employers must ensure that all communications about benefits and retirement plans are accurate and clear to avoid misleading employees.  ○ Disclosure Requirements: Employers must disclose all relevant details about retirement plans, including eligibility, contribution rates, vesting schedules, and potential risks. 2. Compliance with Employment Laws ○ In Canada, benefits communication must align with employment standards, such as those outlined in the Canada Labour Code and provincial legislation. Employers must clearly explain the terms of any benefits, pension plans, and retirement savings programs. ○ Privacy Laws: Personal information about employees, including pension plan participation or contributions, must comply with privacy laws like the Personal Information Protection and Electronic Documents Act (PIPEDA). Employee consent is required for sharing or using personal data. 3. Equity and Non-Discrimination ○ Communication regarding benefits must be non-discriminatory. Employers must provide equal access to retirement plans and benefits for all eligible employees, as required under the Canadian Human Rights Act and other equity laws. 4. Notice of Plan Changes ○ Employers must notify employees in advance about any changes to their retirement plans, pension benefits, or policies, including the Canada Pension Plan (CPP), RRSPs, or Employer-Sponsored Pension Plans. Legal regulations often require a specific notice period and method of communication for plan changes. 5. Employer Liabilities ○ Employers must ensure they communicate any legal responsibilities and potential risks regarding retirement plans. Miscommunication or failure to meet legal standards can lead to liabilities, including fines, lawsuits, or reputational damage. 6. Plan Portability ○ Employers must communicate the rules regarding the portability of benefits and retirement savings (e.g., transferring funds from one employer's plan to another), in accordance with Pension Benefits Standards Act or similar provincial legislation.