OAS Retirement and Pension Fund

2. 1 1 1 Association of Pensioners of the OAS Retirement and Pension Fund (ASPEN) OAS Retirement and Pension Fund 1 1 1 1 1 1 1 OAS Staff Association Department of Human Resources of the OAS 1 PRE-RETIREMENT LECTURE SERIES 1 1 1 OAS Staff Federal Credit Union Association of Retirees of the OAS (AROAS) 1 1 1 1 1 1 1 1 1 1 1 1 1

3. For participants close to retirement Pre-Retirement Lecture Series:I. Retirement Benefit Options Presents: OAS Retirement and Pension Fund and Association of Pensioners of the OAS Retirement and Pension Fund November 9, 2006 Washington, DC

4. Retirement ¿Beneficiaries? ¿Benefits? ¿Administration? ¿Life style? Future Retiree

5. Chronology: 10 years before retirement 5 years before retirement Separation Retirement Formulate some financial planning Adjustment More serious planning Medical examination Assessment of retirement options 80% - 100% of net income for a similar life style Accumulation Period Distribution Period

6. Considerations • Only the future retiree knows what is the best for him* and her beneficiaries (if there are beneficiaries) • After retirement, the retiree will need a periodic source of income to sustain her during the rest of her life *To facilitate the lecture, throughout this presentation masculine and feminine terms will be alternated

7. Considerations (continued) • Assets • Desired life style • Civil status • Spouse retirement benefits (if she has...) • Health (own and beneficiaries) • Knowledge and will to manage assets • Family expectations • Be realistic with the assessment of the situation • Feel comfortable with the final decision taken

8. Starting point Retirement benefits have the objective to provide for a safe and reliable source of income for the remainder of the retiree life and that of his beneficiaries, when applicable

9. Assessment of the participant situation • The retiree must compare the available financial resources under the different retirement options with the desired life style after retirement • Be open minded to carry out this process > = <

10. Personal situation (and family situation): • Obtain the most complete possible image of your situation and that of your beneficiaries. Consult your: Financial analyst Lawyer Accountant Doctor

11. Retirement Benefits

12. Retirement Benefits: • The participant must perform a very careful analysis of the different benefit options for her retirement • Be careful, avoid external influences (even good natured ones). It is YOUR retirement. And each case is different!!

13. Payment of a cash lump sum DB Participant retiring or separating DC R&P Fund Retirement Options A pension determined by a Defined Benefit Formula The proportion the participant can take in cash depends on the elected scheme. If the participant decides to acquire an annuity, the annuity must respect certain minimums. An annuity acquired with the funds in the participant’s account

14. Participant Retiring or separating R&P Fund Retirement Options: A pension determined by a Defined Benefit Formula Alternative minimum pension reduced in proportion to the cash taken An alternative minimum pension determined by the participant’s basic salary Up to 1/3 in cash A participant that had a low income level, may opt to take an alternative minimum pension, if that is better for him. This benefit can be divided in up to 1/3 in cash and 2/3 in a pension

15. 15 years or more of participation in the Plan 55 years or more of age Eligibility to take annuity or pension Less than 15 years of participation Less than 55 years of age Participant qualifies for Pension or Annuity Participant receives benefit in cash

16. What happens if you DO NOT qualify for Pension or Annuity?

17. Participation < 7 years Participation < 15 years o Age < 55 years Separation If the employee participation is less than 7 years, her account will be liquidated as per the vesting scale. Separation is not considered retirement. If the participation is between 7 and 15 years or if the age is less than 55 years (but the participants has more than 7 years of participation), his account will be liquidated with 100% of the vesting. However, this participant cannot retire because he does not comply with the minimum retirement requirements.

18. If the participant DOES qualify for Pension or Annuity there are several options

19. Pension through the 2% Formula (Defined Benefit)

20. Defined Benefit: depending on the situation it can be pension, cash or combination Benefits Retirement Age Retirement Age Compulsory Retirement No actuarial reduction Voluntary Retirement No actuarial reduction Retirement Age = 65 years Retirement Age Age: End of participation Deferred Retirement No actuarial reduction Early Retirement Actuarial reduction

21. Defined Benefit: depending on the situation it can be pension, cash or combination Benefits 2/3 or more dedicated to a pension Defined Benefit Formula Actuarial Reduction? No. of years of Participation in the Plan Annual Pension Average Pensionable Remuneration (best 3 of last 5 years) Life actuarial value of a pension Actuarial Tables Age Up to 1/3 can be taken in cash

22. Defined Benefit: Computation of a Pension under the 2% Formula Benefits • It is a life pension with automatic spouse survivorship benefit (50%) • Based on number of years of participation • Considers the Average Pensionable Remuneration (ξ) during the best 36 consecutive months within the last 5 years of participation • It is 2% of ξ times the number of years of participation up to a maximum of 30 years. If employee participated more than 30 years, adds 1⅔% of ξ for each additional year during the next 10, up to a total of 40 years (years 31 to 40) • A participant with 40 or more years of participation will receive a maximum pension of 76.67% of ξ

23. Defined Benefit: Example of computation of pension under the 2% Formula Benefits year 31 year 32 year 33 year 34 year 35 3500 3600 3900 4200 3800 3500 3600 3900 4200 3800 3500 3600 3900 4200 3800 3500 3600 3900 4200 3800 3500 3600 3900 4200 3800 3500 3600 3900 4200 3800 3600 3900 4000 4200 3500 3600 3900 4000 4200 3500 3600 3900 4000 4200 3500 3600 3900 4000 4200 3500 3600 3900 4000 4200 3500 3600 3900 4000 4200 3500 ξ = (3900*12+4000*6+4200*12+3800*6)/36 = 4000 Pension = 4000*0.02*30 + 4000*0.0166667*5 = 2733.33 Actuarial reduction factors will be applied in case of age below 65 or non compliance with rule of 85

24. Annuity (Defined Contribution)

25. Defined Contribution: depending on the situation it can be pension, cash or combination Benefits Can be taken as a cash lump sum Can be totally dedicated to acquire an annuity Funds in Participant’s Account Can be taken part in an Annuity, part in Cash Acquisition is offered to participants that entered the Plan before January 1st, 1982 and under certain conditions to participants that entered the Plan after that date

26. Defined Contribution: Determination of Annuity Benefits Participant’s Age Spouse’s Age (if married) Funds in Participant’s Account Funds to acquire Annuity Actuarial Tables Level of Spouse’s protection (0, 50, 100%) Funds taken in Cash Annuity These are Life Annuities adjusted by Cost of Living

27. Defined Contribution: Example of Annuity Determination Benefits Participant’s Age: 65 Male Spouse’s Age: 65 Female Funds: $1,000,000 For Annuity: $600,000 Actuarial Factor: 14.159 Level of Protection: 50% Cash: $400,000 Annuity*: $42,376 per year $3,531 per month These are Life Annuities adjusted by Cost of Living *The value of the annuity at the OAS Retirement and Pension Fund is obtained using the actuarial factors in force as of November 9, 2006

28. Defined Contribution: Acquisition of Annuity Benefits • The Office of the Retirement and Pension Fund will calculate if this option is better than taking a pension through the 2% formula • Generally, this option will be more convenient for participants that: • Are not married (do not have to set aside funds for protection of spouse) • Whose accounts are larger than the actuarial value of the pensions calculated through the 2% formula • Whose spouses have a good pension • This option can combine cash distribution

29. Advantages shared by Pensions and Annuities

30. Pensions and Annuities: Pros, cons and considerations Benefits Provides diversification Representation in the Committee Priority claim Health (own and spouse) Cost of living adjustments No worries! on financial and market risks Life pensions and life annuities Legal protection Premature death

31. Cash Lump Sum

32. Cash Lump Sum It is a unique payment in cash For the amount on the account Of the future retiree at the Moment of retirement. All these decisions are irreversible

33. Cash Lump Sum: Considerations Benefits • Once retired, the retiree will have to invest her assets to generate income • The retiree will have to make this option as comparable as possible to a pension or annuity: • Identify investment instruments that provide a level of safety as close as possible to security of a pension • Identify the kind of asset diversification that will provide the same level of income as a pension (beware of risks!) • The retiree has to design an investment policy that allows for capital preservation and provides an adequate return for the risk taken • The retiree should consider his beneficiaries: • Capital should last enough to provide benefits for beneficiaries (ex. as the survivorship protection of a pension)

34. Cash Lump Sum: Pros, cons and considerations Benefits Knowledge, will and character to manage assets Health of retiree and spouse Spouse’s retirement benefits Pay debts (including mortgage) Long life without resources Make a large investment (second home) Financial and market risks Legacy to family (even before death) Possible lost of initial capital Premature death No legal protection

35. Combination of Annuity or Pension and Cash Distribution

36. Combination of annuity/pension & cash • Hybrid option combining the advantages of previous options • Provides safe base of monthly income through a reduced pension or annuity • Provides the possibility to make a major expense: • Pay out a mortgage • Buy a second house • Leave a legacy to children or other beneficiaries • Pension or annuity received in this way will be reduced proportionally according to the cash taken

37. Comparing benefits offered by the Fund and those obtained in the market

38. Financial comparison • Compare income with responsibilities to be covered • Discriminate between the cost of living and the desired life style.

39. Comparison between the Fund’s annuity and that purchased from an external bank

40. Annuities, R&P Fund vs. Banks • The following text was extracted from an article that appeared on October 31, 2006 in the Business section of the Washington Post, by Allan Sloan and entitled: Cost-of-Living Increases Don’t Come Cheap, • “…Vanguard and AIG,…last year began offering lifetime income protection annuities that let you buy an inflation adjustment similar to Social Security’s…” “…Here’s a for-instance. Take $100,000. Seems like a lot. But if you’re a single male born in 1941 … it will produce only $703 of lifetime monthly income from Vanguard/AIG. Buy the inflation-adjusted version, and you get only $501 to start”

41. Annuities, R&P Fund vs. Banks (continued) $1,000 13 12 11 $963 $900 10 9 8 7 $800 6 5 4 3 13 2 12 $700 1 11 10 $714 $717 $703 9 8 $673 $676 7 $600 6 5 4 3 2 1 $500 $501 *In both cases of inflation adjusted annuities the annual rate of inflation assumed was 3%. #The values of annuities obtained at the OAS Retirement and Pension Fund were obtained using actuarial factors in force on November 9, 2006 “…Here’s a for-instance. Take $100,000. Seems like a lot. But if you’re a single male born in 1941 … it will produce only $703 of lifetime monthly income from Vanguard/AIG. Buy the inflation-adjusted version, and you get only $501 to start” $400 $300 $200 $100 $0 Retirement and Pension Fund Annuity adjusted by inflation*# Banks Annuity w/o adjust. Banks Annuity adjusted by inflation*

42. Comparing an Annuity at the Fund and Investing in the Market

43. each 50% prob. surv. one 25% prob. surv.

44. No Financial Aspects Health Legal aspects Miscellaneous Character Assessment of these aspects together with the financial ones and feeling comfortable with the final decision can make a big difference

45. Questions and Comments?

46. Presentation of Experiences: By Manuel Metz and Pedro Turina