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Has Your Pension Plan Filed U.S. Form W-8BEN-E?

That’s right, there is now another filing for Canadian pension plan sponsors, this time having to do with American tax rules.

American citizens, unlike citizens of most other countries, are required to pay taxes on all income worldwide, regardless of where it is earned and regardless of where the citizen was living at the time. To track and enforce compliance, Uncle Sam passed the Foreign Account Tax Compliance Act (FATCA) as of July 1, 2014, which requires financial institutions worldwide to report on investment income credited to any of their clients who are US citizens.

As an aside, many financial institutions in Europe and elsewhere find this requirement so onerous that they have actually closed the accounts of US customers. Fortunately, registered pension plans in Canada are exempt from the requirement, but they are NOT exempt from filing exemption forms with EACH financial institution holding pension fund assets, where that institution is itself a “foreign financial institution” under FATCA.

Pension plan administrators must file Form W-8BEN-E with each such financial institution, including financial institutions located outside of Canada (such as investment managers based in France, for example). In addition, if any of the filing information changes, the plan administrator must notify all financial institutions where it has filed Form W-8BEN-E of any such changes within 30 days.

Because the pension plan administrator is certifying required information, we strongly advise that pension plan sponsors confer with their counsel to ensure they have met the requirements of FATCA. Contact Penad for more information on how to ensure you are in compliance with this requirement.

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US State Pension Shortfalls Get Worse

A new report from the PEW Charitable Trust shows that funding for public sector retirement plans in states across the US is getting worse, a situation which has been compounded by weak investment returns in 2015.

New Jersey, for example, has only set aside 38% of what it needs to meet its pension commitments. Because public sector workers’ plans are guaranteed by state constitutions, this means taxpayers will be on the hook for any future shortfalls. At current levels in New Jersey, this works out to USD $10,648 per person. Only two states in the union, South Dakota and Wisconsin, are in surplus positions. The other 48 states have a combined shortfall of approximately $1 trillion.

Compounding the problem is the fact that many states have also made commitments to cover retiree healthcare needs. These healthcare and other post retirement benefits get even lower funding priority than the retirement plans, generally, and unlike the retirement plans, post retirement benefits are not guaranteed by state constitutions. This means that pensioners could be left without coverage if states decide to rewrite the rules when they can no longer afford to pay the benefits.

http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2016/08/the-state-pension-funding-gap-2014

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Letter to Canada Post: How to Pull $8.1 Billion Out of Thin Air

The federal government initiated a Canada Post review soon after coming into power in 2015. The review committee plans to hold hearing across the country but has already identified many of the issues that need to be addressed.

A big problem for the Corporation is the high cost of providing services. By its very charter, Canada Post is committed to providing door-to-door delivery to virtually every address in Canada, five days per week. Add to that the commitment to keep open 3,700 rural post offices which may or may not be financially self sufficient (many require subsidisation). Next, add the high cost of labour and the inability to outsource services to parallel providers such as Purolator due to collective agreements.

And the biggie, as seems to be the case with many large legacy organizations, is the cost of meeting pension funding requirements to avoid future shortfalls. But this last point is where the story has an interesting twist.

The Canada Post pension plan has a solvency deficit of $8.1 billion. That sounds bad, and it is bad because current law requires the Corporation to make payments to erase that deficit. The solvency measure calculates how much would be needed to meet all pension obligations if the plan were to be wound up immediately. For the Corporation to make up this shortfall, it is impossible to balance the annual budget, even if they find ways to cut costs and increase revenue (they are working on both of these). Because of this situation, the federal government gave Canada Post a break from making solvency payments from 2013-2018 to try to sort things out.

But here is where things get interesting.

Does Canada Post really need to make up the solvency deficit? After all, they are a crown corporation and therefore they will never need to wind up the plan, unless the government itself goes out of business.

By another measure, the Pension Benefits Standards Act assesses the funding of a pension plan as a “going concern”. This calculation assesses the financial cost of operating a pension plan indefinitely. By this measure, Canada Post actually has a $1 billion surplus. Therefore, some people are arguing that the rules need to be changed so that Canada Post is no longer bound by the solvency rule and instead can operate by the going-concern rule.

Will those people be heeded? Stay tuned …

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Gold-Plated MP Pensions?

Now that Stephen Harper has retired, the Canadian Taxpayer Federation calculates that he will receive approximately $5.5 million in pension payments if he lives to age 90 (he is currently 58). Jason Kenney, who is currently 49, will receive around $6.3 million to age 90. That is $331,578 for every year he was an MP.

Both Harper and Kenney ran on the platform that the MP pension plan was “gold plated” and should be seriously reformed or eliminated. Harper did in fact bring in reforms during his time in government that will reduce his pension by nearly $2 million from the $7 million he would have otherwise received under the old rules.

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Canada Pension Plan Touts $14B Gain Last Year. Now What?

Assets in the CPP grew from $264.6 billion to $278.9 billion in the year ending March 31, 2016, reported the Canada Pension Plan in May.

That doesn’t sound like much, when you consider the fund grew by $45.5 billion or 18.3 per cent in the previous 12 months. However, keep in mind that a large portion of CPP assets are invested outside of Canada, and in 2015 things were not too rosy in the international investment world. The Dow for example lost 2.2% in 2015, and the S&P 500 was down 0.7%. That makes the CPP’s 3.4% rate of return (net nominal) look pretty good, by comparison.

But is it? Remember that a large portion of CPP assets are invested outside of Canada. This means that the value of those assets rise when the Canadian dollar declines against foreign currencies where the CPP holds investments. Because the Canadian dollar had one of its worst years ever in 2015, any CPP gains from actual investments would be therefore negligible at best.

But that is all water under the bridge. We are coming up to the close of the current fiscal year and should find out in a few months where things have landed. Considering the run up in the US stock market, can we expect a good year?

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2017 YMPE Announced

The Canada Revenue Agency announced on November 3rd that the maximum pensionable earnings for 2017 will be $55,300—up from $54,900 in 2016.

Contributors who earn more than $55,300 in 2017 are not required or permitted to make additional contributions to the CPP.

The basic exemption amount for 2017 remains $3,500.

The employee and employer contribution rates for 2017 will remain unchanged at 4.95%, and the self-employed contribution rate will remain unchanged at 9.9%.

The maximum employer and employee contribution to the plan for 2017 will be $2,564.10 each and the maximum self-employed contribution will be $5,128.20.

For a breakdown of these and other rates check out our website

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2016 YMPE Announced

The Canada Revenue Agency announced on November 2nd that the maximum pensionable earnings for 2016 will be $54,900—up from $53,600 in 2015.

Contributors who earn more than $54,900 in 2016 are not required or permitted to make additional contributions to the CPP.

The basic exemption amount for 2016 remains $3,500.

The employee and employer contribution rates for 2016 will remain unchanged at 4.95%, and the self-employed contribution rate will remain unchanged at 9.9%.

The maximum employer and employee contribution to the plan for 2016 will be $2,544.30 each and the maximum self-employed contribution will be $5,088.60. The maximums in 2015 were $2,479.95 and $4,959.90

 

For a breakdown of these and other rates check out our website

 

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New Report Says that Investment Returns Will Stay Low for Decades

Prior to the 2007 financial crisis, investment managers could reasonably expect to obtain returns above 8% over the long-term, using a mix of investments. After 2007, while some investment managers have made excellent returns on the 2007 stock price rebound and then the energy run-up, the basic structure of the investment world has changed for the worse.

And it may well not get better for a long time.

According to a new report issued last week by Steve Ambler and Craig Alexander of the C.D. Howe Institute, the fact of an ageing global population is resulting in slower growth worldwide. This creates a cascade effect that will make it very difficult to get returns above 4% in the coming decades.

This of course can effect the viability of pension funds to pay out their defined benefit obligations. For people who have their principal investments in defined contribution type plans, they face a related problem in that their retirement projections may be way off, which could require them to work much longer than planned or scale back on their retirement plans and budgets.

You can read the full report, “One Percent? For Real? Insights from Modern Growth Theory
about Future Investment Returns” by clicking this link (which will open the report in a new window) …

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Reduce Pension Liability by Firing People before they Retire?

Taking care of the pension plan and the needs of retirees is a sacred trust for all people involved, from pension administrators to investment managers to the people in charge of structuring and managing the plan. But now a teacher in the City of Angels has initiated a class action lawsuit for $1 Billion that accuses the people in charge of systematically firing teachers near retirement so that they can reduce the number of pensioners on the rolls and thereby improve the financial position of the pension plan.

Wow.

That is an incredible accusation. I can imagine that this will lead to years of court battles to sort out this mess.

You can read all about it by clicking here (opens article in new window) …

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Pensions for Canadians At Issue in Federal Election

Well, the Canadian federal election of 2015 is moving towards its inevitably exciting finish as the two left of centre parties hammer away at each other with essentially identical platforms, much to the delight of the Conservatives who have every opportunity to stay in power thanks to the Liberals and New Democrats splitting the centre-left vote, which accounts for 59% of the electorate.

You read that right. The Conservatives, with just 29% support in the latest poll, can take the country because the Liberals and New Democrats insist on pretending that they offer different platforms.

But that is only a side-note to this blog post, which is about saving for retirement in Canada and how this has become an election issue.

For a little background, all of the major political parties in Canada agree that Canadians are not doing enough to prepare for retirement. The latest survey of Canadian pension participation, released by the Feds in July of this year, shows that only 37.9% of Canadian workers are covered by any kind of workplace RPP (Registered Pension Plan). That means the other 62.1% of Canadian workers will need to rely more heavily on the Canada Pension Plan, the Quebec Pension Plan, Old Age Security payments, and personal savings.

Government studies show that workers who are not in RPPs generally end up working longer, face higher rates of poverty, and naturally have less financial security in old age. As a result, both federal and provincial governments are actively looking for ways to encourage or mandate Canadians to save more during their working years.

The ruling Progressive Conservative party, which has been in power for a decade, has made their philosophy known as they have taken steps over the past ten years to further their vision of encouraging the private sector to create savings vehicles and then gently nudging Canadians to take advantage of these. You can read our fairly comprehensive blog post on the topic BY CLICKING HERE.

Now both the Liberals and New Democrats are taking aim at the Conservative plans by promising to look at ways to expand the Quebec and Canada Pension Plans considerably. Their belief is that the “private sector” approach is simply not working, and that Canadians need more than a “gentle nudge” to ensure that they save sufficiently for retirement.

As usual, there is virtually no difference between the Liberal and New Democrat positions on the topic. Liberal leader Justin Trudeau promises to engage the provincial leaders in talks about how to address the problem within 90 days of taking office (if elected). Tom Mulcair of the New Democrats has promised to convene a First Ministers conference on pensions within 180 days of being elected. Stephen Harper, meanwhile, says that any effort to expand the Canada Pension Plan is a terrible idea because it burdens employers with making additional matching contributions, which amounts to a job-killing tax, in his view.

Pensions are an incredibly important topic for everyone and are naturally on the minds of Baby Boomers (who do most of the voting in any election), so it is good to see that our political leaders are openly debating the issue and forcing Canadians to give some thought to how they will live in retirement. Now it is up to the voters to decide which party to entrust with the task of boosting retirement savings for Canadians.

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