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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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PRPP and ORPP: Huge Pension Developments in Canada Reflect Political Divide

***UPDATE August 12, 2015****

As an update to the article below, the Ontario Ministry of Finance announced yesterday that Defined Contribution plans that meet certain thresholds WILL be classified as “comparable plans” for the purposes of exemption from the ORPP. The full announcement is available by clicking here.

The basic threshold is that the “DC plan must:

  • Have a minimum annual contribution rate of 8 per cent
  • Require at least 50 per cent matching of the minimum rate from employers.”

In the meantime, the ORPP has become a major political football in the current federal election campaign. Prime Minister Harper has come straight out to accuse the ORPP of being nothing but a job-killing tax (despite the fact that 100% of the contributions go directly to the workers and not into government coffers like any other tax).

The Ontario government has responded by pointing out that the ORPP is designed to ensure that Ontario workers are saving sufficiently for retirement, and that they are disappointed that Ottawa was unwilling to amend the CPP to increase savings rates and thereby make the ORPP unnecessary.

Here is our full article on the ORPP and PRPP as published in June ….

 

PRPP and ORPP: Huge Pension Developments in Canada Reflect Political Divide

Exciting developments are underway in the Canadian pension world as governments take steps to help Canadians save for retirement, but behind all the new programs are some very strong philosophical differences.

As most readers of this magazine will be acutely aware, Defined Benefit (DB) pension plans have suffered a precipitous decline in Canada and most other countries in the past twenty years. The costs of administering plans and providing actuarial services climbed higher and higher to the point where only the larger plans with around 1,000 members and above could reasonably absorb the costs.

The other problem of course was that many pension plan members in the 1990’s wanted to opt-out of their boring old DB plans and use their pension funds to make huge gains in high flying tech stocks like Nortel … so they begged their employers to let them out of the company DB plans so they could transfer their assets to Defined Contribution (DC) plans where they could keep all the gains for themselves – which they did, until the tech bubble burst and DC funds cratered for years.

In Canada, thousands of DB plans were either frozen to new members or closed all together, especially amongst smaller businesses (DB plans are still thriving in the benefit architecture of large unions and governmental organizations.) The result was that millions of workers needed to turn to alternatives such as employer-sponsored DC plans  (if they existed at the employer), or do without employer-sponsored schemes altogether and simply try to personally save for retirement through RRSPs, TFSAs, and the vagaries of personal investments such as home equity or playing the stock market.

What a boondoggle! A primary pillar of pension savings was pulled out from under the collective feet of millions of Canadians and nothing was put in place to replace it (though Group RRSPs, a form of DC plan for small businesses, made an admirable effort). As a result, many people are now finding themselves ill-prepared for retirement and with no reasonable prospects for improving the situation anytime soon (unless they win big at the casino or work at Walmart until they are around 80 years old).

While this was going on, the governments of the country were NOT standing idly by (thank goodness!). They knew that the government has a key role to play to gently nudge or outright push people towards being able to take care of themselves in the future (otherwise the government may be expected to do it!), and so they set about thinking up initiatives that would help to prevent millions of elderly Canadians from spending their golden years pushing brooms at fast-food restaurants.

So, what “Big Idea” did the smarties in Ottawa and provincial capitals come up with?

Well, there were actually two, one which came from the right of the political spectrum, and the other from the left. In Ontario, both ideas were just passed into law (as pension programs for workers) in May of this year, but that does not mean that both will catch on in actual practice in the marketplace where small employers will need to make these savings programs a reality (you know, where the rubber hits the road).

Pooled Registered Pension Plans

The first idea, Pooled Registered Pension Plans (PRPPs) was proposed during the 2011 federal election. After the election, the government moved ahead quickly to lay the foundations for PRPPs at both the federal and provincial levels, with a number of provinces following suit and reading PRPPs into law in the past two years (Ontario being the most recent). However, there is still a ways to go as nobody except the feds has completed a regulatory framework (it takes time to create this once the legislation is passed).

In general, the idea behind the PRPP is very well thought out and creates a framework for people to really start to take care of their retirements. Under this model, an employer can contact a financial services company and have a PRPP set up for their employees. The process is supposed to be so easy that one financial services provider, Manulife, claims a pension plan can be set up in less than thirty minutes, after which the employer’s role is mostly complete (compare this simplified setup to the ghastly process of setting up a DB plan and you can see that some very clever people put a lot of thought into streamlining the process so that small employers could set up company pension plans with minimal discomfort).

Once the PRPP is created, the financial services company would then automatically enroll every employee in the company, and each employee would then begin to see deductions taken from their paystubs as a small percentage of their salary was set aside for their retirement.

To avoid any resistance from employees, they were given the option to opt out of the plan after it was set up. In addition, employers were given the option to also make matching contributions to the pension plans of the employees (but they were NOT mandated to do so).

Unlike Group RRSPs (another form of pension savings plan for small employers), contributions to a PRPP do not count as taxable income. Also, unlike Group RRSPs, if an employer decides to make contributions on the behalf of the employees, these contributions are deductible as a business expense, AND the employer does NOT have to pay CPP, QPP and other payroll taxes on the contributions.

The genius part of the equation was the “P for Pooled”, in that administration and investment management would be handled by a financial services company which would pool the millions of account holders for efficiency and economies of scale, rather than the old DB model where every small pension plan needed its own investment manager, administration contract, and actuarial services provider. The pooled approach is also expected to be much more efficient than the Group RRSP approach, where fees have typically been quite high.

Manulife got so excited at the prospect of signing up all these millions of account holders and collecting and managing all of their pension savings that they went out and purchased the web address: www.prpp.com so that they could get ready for the wave of employers signing up for these new savings vehicles.

It has taken a few years, but finally things seemed to be falling into place for PRPPs as the provinces get closer to finalizing the rules, which would allow financial services companies to start selling PRPPs (they are already available to some federal workers).

But remember what I said about the source of this program? I.E., the federal government? Well, lo and behold, guess which party was in power when PRPPs were proposed? The Progressive Conservative party (which is centre-right, for those who are reading this article in faraway lands and might naturally be confused by the concept of a conservative who also claims to be progressive).

PRPPs met several important conservative ideological criteria, namely:

• Employers were NOT mandated to offer OR contribute to PRPPs (many small business owners would view such a mandate as a job-killing tax).
• Employees could opt out if they so desired (conservative governments are generally loathe to force people to save their money if they don’t want to).
• Administration and investment management would be handled by the private sector (because conservatives believe that the free market is the most efficient provider of any kind of services – except, of course, services provided by military, police, fire, healthcare, social security, and government itself).

Meanwhile, as the PRPP program was wending its way through the setup process, a provincial government with a different political philosophy was cooking up an alternative program to compete with PRPPs.

Ontario Retirement Pension Plan (ORPP)

While the Conservative party had ruled in Ottawa since 2006, the centre-left Liberal party had ruled in Ontario during the same time period. And while the Ontario Liberals played nice and passed the legislation to allow PRPPs to move forward, they also came up with their own program to promote pension savings, the ORPP (Ontario Retirement Pension Plan), which takes a very different approach to PRPPs.

• Unlike PRPPs, employers ARE mandated to BOTH offer AND contribute to the ORPP, unless the employer offers an approved comparable alternative such as a DB plan, DC plan, a Group RRSP, or a PRPP. This means that virtually ALL workers in Ontario will be covered by some kind of pension plan.
• Employees CANNOT opt out (the big bad government forces them to save for their retirement, just like with the Canada Pension Plan).
• Administration and investment management of this massive pension plan (it is projected to cover around 3.5 million workers) will NOT be handled by the private sector but will be managed by a corporation specifically created for that one task of managing the ORPP, with the expectation that an entity focused on providing the lowest possible cost of service rather than the highest possible profits to shareholders will do a better job of keeping administration costs down.

In addition, the ORPP is in effect a Defined Benefit plan, whereas PRPPs are DC plans. Employees who make the mandated contributions to the ORPP will receive a guaranteed pre-determined benefit for life, unlike PRPPs where the employees own their contributions, plus interest, and can use this amount to purchase an annuity at retirement or withdraw a lump-sum.

As an example of the scheduled benefit for an ORPP member, a person with a salary of $45,000 would contribute $2.16/day. At retirement, they would stand to collect $6,410/year for life. Not enough to live on, but this benefit will help fill the gaps in the Canada Pension Plan and the Old Age Security program.

Comparing the two programs, one cannot help but wonder, who in Ontario will ever use PRPPs?

At this point, it is impossible to say, but many people expect that most small employers will end up in the ORPP, while PRPPs will likely appeal to a few self-employed people and not many others. While that might happen in Ontario due to the introduction of the ORPP, in other provinces that have not set up ORPP-equivalents, PRPPs could still become a significant savings vehicle as they are a big improvement on Group RRSPs.

At public hearings about Ontario PRPPs in April of this year, Wynne Hartviksen, executive assistant to the president of CUPE Ontario (Canadian Union of Public Employees) said that CUPE was against PRPPs being offered in Ontario for a number of reasons: “We know that private investment vehicles like RRSPs and PRPPs have higher financial service costs and frankly seem designed to deliver investment returns into the hands of banks and the financial services industry rather than into workers’ pockets at retirement.”

The Liberal government of Ontario went ahead in spite of opposition from unions and passed legislation for PRPPs into law, but by also passing legislation to allow the creation of ORPPs, it is likely that the final word will be spoken by the marketplace: will small Ontario employers adopt the mandatory ORPP or will they opt for an approved alternative such as a PRPP?

Only time will tell. Whatever happens, Penad will be there to report on new developments (so stay tuned!).

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