Canada Pension Plan 2010

1. Ian Quigley, MBAQube ConsultingFundEX Investments Inc.#200 Kendall Bldg.9414 - 91 StreetEdmonton, AB  T6C 3P4Phone: (780) 463-2688www.qubeconsulting.ca Canada Pension Plan 2010

2. Conservative John Diefenbaker. • Canceled the Avro Arrow, accepted nukes from the Yankees (or did he?) and devised the concept for the Canada Pension Plan. • Lived 83 years complying almost to the minute with his actuary.

3. Establishment of CPP - Pearson • Established in 1966 by Lester Pearson (Liberal) who also created the Canadian Flag. • Lived 75 years, almost 7 years shy of what his actuary recommended…

4. Canada Pension Plan • Offers basic protection for lost earnings related to death, disability and/or retirement. Protection is for life. • Changes to CPP require approval of the Parliament of Canada, as well as 2/3rds of the Provinces representing no less than 2/3rds of the population. • Started in 1966 as a “Pay as you Go” program and a 1.8% Contribution Rate! Employees and employers each put in $79 to the program in 1966. Less than a cup of coffee per day….

5. RecentMortality Study

6. Mortality Costs. • In 2005, life expectancy at birth in Canada stood at 78 years for males and 83 years for females. This represents a significant increase in life expectancy since the start of the 20th century (27 years for males and 31 years for females) • In Canada, most of the increase in life expectancy at birth over the last thirty years has come from improvements in mortality at age 65 and over while prior to that time most of the increase in life expectancies at birth came from mortality improvements at ages under 65. Extending lifespan has not happened nor expected in the coming decades. • As a result, over the last 30 years, life expectancy at age 65 has increased from 14 to 18 years for males and from 18 to 21 years for females. More recently, male mortality improvement rates have been greater than for females. • Higher income beneficiaries live longer. • Mortality increases were not a major concern on the last valuation report.

7. 1997 Changes to the CPP • Total CPP contribution rates (employer/employee combined) were increased annually from 6% of pensionable earnings in 1997 to 9.9% by 2003. • The Plan would move towards a hybrid structure (instead of “pay as you go”) to take advantage of investment earnings on accumulated assets. • The CPP was expected to be at a 20% funded reserve by 2014, increasing thereafter to 30% by 2075 (funded against its projected liabilities). • The CPP Investment Board (CPPIB) was created.

8. CPP Investment Board • Created in 1997. • An organization independent of the government to monitor and invest the funds held by the CPP. It is a crown corporation and reports performance quarterly. • In turn, the CPP Investment Board created the CPP Reserve Fund to hold the planned reserves. • The board manages and outsources investment management of the reserve funds.

9. CPP Investment Fund • Moved from holding Government Bonds to a balanced portfolio with active equity management (just after 2002). • Asset mix is 60% Equity and 40% Fixed Income. • 45% is invested outside of Canada.

10. Jean-Claude Menard – Chief Actuary (Oct 13, 2009)

11. 24th Actuarial Report (update to 23rd) • The minimum contribution rate (taking into consideration current economic conditions), which is the lowest rate sufficient to financially sustain the amended Plan without further increase, is 9.84% for years 2010 and thereafter. • By 2050, annual contributions are $3.3 billion or 1.6% higher than projected under the 23rd CPP Actuarial Report modified to account for current economic conditions. • By 2050, annual expenditures are $969 million or 0.4% lower than projected under the 23rd CPP Actuarial Report modified to account for current economic conditions. • Under a legislated contribution rate of 9.90% for 2010 and thereafter, which federal, provincial and territorial finance ministers confirmed at their May 2009 meeting, Plan assets by 2050 are $219 billion higher than projected under the 23rd CPP Actuarial Report modified to account for current economic conditions. • This report confirms that if the current Plan is amended as per Part 2 of Bill C-51, a legislated contribution rate of 9.90% for years 2010 and thereafter is sufficient to financially sustain the Plan over the next 75 years.

12. 24th Actuarial Report – Bill C-51 • To remove the Work Cessation Test for those who opt for their retirement benefit prior to age 65. Effective January 2012, individuals will be able to take their retirement benefit as early as age 60 without any work interruption or reduction in hours worked or earnings. • To increase the General Drop-Out Provision from 15 percent to 16 percent in 2012 and to 17 percent in 2014. • To require individuals under age 65 who receive a retirement benefit and work, as well as their employer, to make CPP contributions that will increase their retirement benefit. For individuals aged 65 to 69, contributing after starting their retirement benefit will be voluntary, but employers of those opting to participate in the Plan will be required to contribute. As under the current Plan, contributions are not permitted once reaching age 70. • To change the pension adjustment factors such that for an individual who takes his retirement pension before age 65 (earliest at age 60), the downward pension adjustment factor is increased from 0.5% to 0.6% for each month between the start of the pension and age 65. This reduction is permanent and will be implemented gradually over a period of five years starting in 2012. • For an individual who takes his retirement pension after the age of 65 (latest at age 70), the upward pension adjustment factor is increased from 0.5% to 0.7% for each month between age 65 and the start of the pension. This increase is permanent and will be implemented gradually over a period of three years starting in 2011. • To require the Chief Actuary to report on the fair level of the pension adjustment factors in at least every third Actuarial Report (and more frequently, if required) starting in 2016.

13. Intent of CPP Retirement Benefits • Replaces 25% or pre-retirement earnings up to a maximum amount called the YMPE ($47,200 in 2010). • This means the max. pension in 2010 will translate to $11,210 ($934.17/mth). • The contribution rate is 9.9% of earnings over $3,500 but under $47,200. The amount is split between employer and employee unless you are self-employed.

15. Monthly Pension Estimate: PV of Pension: PMT = $11,210 plus 2% inflation I = 6% N= 17 Years PV = $136,377 PV of Premium: PMT = Actual Deposits Made I = 6% N= Last 44 Years PV = $147,298

16. CPP in 2010

17. Context – Too Small To Care?

18. Context – Too Small To Care?

19. Context – Too Small To Care?

20. Disability Benefits • Paid to contributors under the age of 65 whose capacity to work is affected by a severe and prolonged mental or physical condition • Paid to those who have made sufficient contributions to the CPP (contributions in recent years an no less than 10% of the YMPE). • The payout is a combination of a flat amount ($426.13) and a career average earnings calculation (up to $700.63). • In 2010, the maximum monthly disability benefit is up from $1,105.99 to $1,126.76/mth. Average amount paid is $803.33. • Disability benefits are higher than the retirement benefits!

21. Survivors Benefits • Paid to a deceased contributor’s surviving spouse or common- law partner and dependent children. Also a flat plus earnings formula like disability benefits. • Death benefit is a one-time payment of $2,500 (average paid at $2,242.97). • Maximum monthly benefit in 2010 is up from $506.38 for individuals younger than 65 to $516.57 • Max benefit is also up from $545.25, in 2009, to those over age 65 to $560.50 in 2010. • Can also be combined with disability and/or retirement benefits. • Children's benefit is a monthly benefit for dependent children of a deceased contributor. The monthly max. benefit in 2009 is $213.99 and in 2010 it is $214.85. • Average amount paid is significantly lower than the maximums.

22. Finance News Release 2009-051May 25, 2009 (Bill C-51)

23. Transitional Issues? • Paper states in a number of places that, “Changes will not affect those currently receiving benefits or who will receive benefits before 2011.” • There is nothing in the legislation that refers to grandfathering. • Tom Deveany reports serious concerns after he read of the legislation especially with regards to the working beneficiaries. • Certainly some decisions about CPP will have urgency in 2010/2011 for your clients!

24. Work Cessation Test • To remove the Work Cessation Test in 2012. Individuals would be able to take their benefit as early as age 60 without any work interruption or reduction in hours worked or earnings. • Allow some to reduce the work schedule allowing the CPP to supplement their earnings. • Example: Someone making $40,000/yr could reduce work by 1-2 days per week and use CPP benefits to maintain income levels.

25. Increase in the Low Earnings Drop Out • The career average formula currently ignores the 15% lowest earning years (7 years). • One can also drop out years while receiving CPP disability benefits and rearing children. • Propose to increase to 16% in 2012 (7.5 years) and 17% in 2014 (8 years). • Even in the Finance Paper the examples show this to have a modest gross value effect on pensioners.

26. Can we really take a CPP holiday? • With 7 years allowed to be “dropped out” since 1966 one could drop the final 7 years…. • We have done over 100 CPP assessments and have only once seen this to be the case. Alberta is a cyclical economy and many need the provision to “fix” the 1980’s. • A CPP Holiday is not as easy to “book” as it once was. Read on.

27. Working Beneficiaries Participate • Currently, those who receive a CPP pension and return to work do not pay CPP contributions and, therefore, do not continue to build their CPP pension. • Now it will be required that individuals under the age of 65 who receive a CPP retirement benefit and work, as well as their employers, make CPP contributions that will increase their CPP retirement benefit. • This would be voluntary for individuals aged 65 or over, but employers of those opting to participate in the CPP would be required to also contribute. These contributions will result in increased retirement benefits, including persons already receiving the maximum pension amounts. • The additional benefits would be earned at a rate of 1/40th of the maximum pension amount per year of additional contributions.

28. Working Beneficiaries Participate • This is going to change many owner-managers who take CPP early to prevent further contribution requirements! • A “CPP Holiday” will not be possible for those taking a T4 after age 60 or 65. • One may want to consider a T4PS or T5 in this case. • Allan Greber PC has opened EPSP planning for those willing to flow income via a separate account. EPSP programs are simple to administer and can offer planning opportunities to employees as deferred performance based income.

29. Value of a “Premium Holiday” • 18 in 1966, 2010 – 2013 are final 4 years under consideration. • Estimated $17,873 in Total Premiums Saved. • Estimated $1,168/yr in Pension Lost (ignore the drop out provision) PV at 20% is $8,784 PV at 6% is $5,136, PV is always positive! Age 82 assumed for mortality expectation.

30. Adjustments for Early/Late Retirement • The current adjustments reduce the early pension by 0.5% per month for each month that the pension is taken before an individual’s 65th birthday to age 60. Thus, if an individual chooses to take the pension at age 60, the basic amount will be reduced by 30%. • The late pension is increased by 0.5% per month for each month that the pension is taken after age 65 up to the age of 70. Thus, if an individual chooses to take the pension at age 70, the basic amount will be increased by 30%. • These adjustments have been left unchanged since 1987 despite significant shifts in the economic and demographic factors that affect their “actuarially fair” levels. The adjustments of 0.5% per month no longer ensure actuarial fairness.

31. Adjustments for Early/Late Retirement • The early pension reduction will be gradually increased to 0.6% per month for each month that the pension is taken before age 65. This will be done over a period of five years, starting in 2012. Decide in 2010!? • The late pension augmentation would be gradually increased to 0.7% per month for each month that the pension is taken after an individual’s 65th birthday, up to age 70. This would be done over a period of three years, starting in 2011. • This would mean that someone who applies for CPP on his 60th birthday would lose 42% of the amount he would have received at 65 (30% penalty at present). • However, it is important to remember that the plan will be phased in over a five-year period from 2012 to 2016. This means that in 2012 the penalty for drawing CPP before age 65 will be 0.52% a month or 6.24% annually. If you apply in 2012 at age 60, your penalty will therefore be 31.2% as compared to 30% under the current rules.

32. 24th Actuarial Report (update to 23rd) • Due to the uncertainty about future possible changes in retirement benefit uptake behavior that would result from the proposed amendments, two sensitivity tests have been prepared. If the retirement benefit uptake rate at age 60 were to increase by 20 percentage points, the minimum contribution rate would decrease from 9.84% to 9.77%. • If, instead, the retirement benefit uptake rate at age 65 were to increase by 20 percentage points, the minimum contribution rate would increase to 9.91%.

33. Take it at 60? • $11,217 if you wait, $7,852 old rules, $6,506 new rules. • PV of benefit age 60 – 82 at 6%: • Full Pension $90,754 • Old Rules Early $96,601 • New Rules Early $80,041 • PV of benefit age 60 – 82 at 10%: • Full Pension $57,120 • Old Rules Early $69,748 • New Rules Early $57,791

34. Conclusions • CPP is in good hands and adequately funded for the next 75 years. • Change to working beneficiaries will cause owner-managers to consider T5 or T4PS income starting in 2012. • Change to early retirement adjustments will cause many to take it in 2011 (or soon) in the near future or delay to 65 in the coming years.