3 Pillars of Canadian Pensions
- Government Pension Programs
- Employer-Sponsored Programs
- Personal Savings Programs
List Government Pension Programs
- CPP
- OAS
- GIS
List Employer-Sponsored Programs
- RSP
- Defined Benefit
- Defined Contributions
- Hybrid
List Personal Savings Programs
- RRSP
- TFSA
- Non-Registered
2 Formal Pension Features
- States how the pension and other benefits are determined, together with terms and conditions under which benefit is payable
- Financial arrangements are made to provide funds needed when benefits are due. Usually built up through a trust or insurance contract
CRA Registration Benefits
- Allows employers and employees to deduct contributions from income for tax purposes
- Exempts the plan’s investment income from taxation
Employer Reason’s for Pension Plan
- RPP allows a company to expense its pension cost in years which the pensions were earned and credited to employees
- Easier to retire employee’s in an orderly way
- Can be used to increase employee’s interest in the company
Employer Reason’s for NOT having Pension Plan
- Employers prefer to invest funds in their own enterprises, where the potential return is higher
- May cause clawback of government-sponsored programs such as OAS
- Employers may feel the pay is high enough for employees to build their retirement savings themselves
Describe Defined Benefit Plans
- Plan specifies the formula for the determination of benefit entitlements
- Cost of plan determined on an actuarial basis
- FLAT or UNIT Benefit Plans
What is Flat Benefit Plan
Provide fixed benefit under formula that disregards level of income
Ex.) ($20/month)(Years of work) = Annual Retirement Income
Career Average Earnings Pension Plan
(Percentage Provided)(Average Salary)(Years of Work)
Describe Defined Contributions Plan
- Specifies level of contributions of employer & employee
- Contributions invested and accumulated to retirement
- Investment & Longevity risk is on the employee
Define Old Age Security (OAS)
Provides monthly benefits to those who reach 65 and meet residency requirements (subject to clawback)
Define Guaranteed Income Supplement (GIS)
Provides monthly benefits to OAS recipients and is subject to income test and residency requirements
Define Allowance and Survivor’s Allowance
Provide monthly benefits to the living or deceased pensioner’s spouse/common-law. Paid to those between ages 60-64. Subject to income test and residency requirements
Financing of OAS
- Paid by Government Tax Revenue
- Total of OAS expenditures to GDP was 2.25% (as of 2012)
What is “clawback”
A tax implemented to lower OAS benefits to those with high pension income.
Clawback Calculation
- 15*(Income-Given Excess Income)
- Income includes OAS for the given year
Describe CPP/QPP
- Funded through contributions from employers/employees/investment earnings on contributions
Employee CPP Contribution Formula
ContributionRate*[Min(YMPE,Earnings)-YBE]
Actuarial Liability (AL)
Portion of PVFB that is attributed to past service
Normal Cost (NC)
Portion of PVFB that is attributed to current year of service
Present Value of Future Normal Cost (PVFNC)
Portion of PVFB that is attributed to future years of service
