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.

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, or retirees may have their benefits cut. 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.


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Withdrawals from Pension Plans Due to Financial Hardship or Medical Disability Costs

Did you know that you (or members of your Canadian pension plan – if registered under the Pension Benefits Standards Act, 1985) may be able to make one or more withdrawals from your pension plan for financial hardship or disability?

For financial hardship, the amount that can be unlocked depends on your expected income. If your income is projected to be zero, you can make a withdrawal up to 50% of the YMPE (Year’s Maximum Pensionable Earnings). In 2020, the YMPE is $58,700. If your projected income is 75% of the YMPE, you are not eligible to unlock or withdraw for financial hardship.

Note that you can make more than one withdrawal for financial hardship in a calendar year, but you only have 30 days after the first withdrawal to make another withdrawal.

You can also unlock for medical or disability costs, if those costs are expected to be 20% or greater of your expected income in the calendar year. If they are, you can withdraw an amount up to the full medical disability cost, to a maximum of 50% of the YMPE.

There are a number of forms to fill out to make a withdrawal for financial hardship or medical costs, which are reviewed for approval by the relevant regulator.


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80 Million People in Caribbean and Latin America at Risk of Poverty in Old Age if Pension Changes Not Made

Angel Gurria of the OECD launched the first edition of “Pensions at a Glance: Latin America and the Caribbean” at the Inter-American Development Bank (IDB) in Washington DC. The Pensions at a Glance report provides detailed comparative indicators of pension structures in 26 countries.

One key finding is that 63 to 83 million people in the region will be at risk of living in poverty by 2050 due to inadequate savings and pensions, as a result of only 45 per cent of workers contributing to any kind of retirement plan.

IDB president Luis Alberto Moreno, speaking at the April 20 meeting, said that governments in the region must act now to take advantage of “a demographic dividend that cannot be missed. If we get more people to contribute to our pension systems, and if we adjust the systems to rising life expectancy, we will be able to provide adequate coverage to future generations.”

One key finding of Pensions At a Glance is that today there are eight people of working age for every person in retirement, but that rate will drop to 2.5 to 1 by 2050, which underlines the need for governments to act now to ensure that workers are steered into adequate schemes while there is still time.


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Should Workplace Pension Plans be More Mandatory?

Governments everywhere are trying to nudge people to save more through various incentives such as tax-exempt pension contributions and structures such as automatic pension accounts (though in most cases members can opt-out). But what about employers? What is their view on providing pensions and, in particular, auto-enrolment plans? One would think that employers’ self-interest would tend to push them away from any mandate to provide retirement savings mechanisms and responsibility to collect and remit deductions from payroll.

Well, some data just came in and it appears that in the UK at least, employers think it is a good idea to provide retirement savings accounts and in fact expand their availability. A recent survey conducted by CBI (Confederation of British Industry) and Scottish Widows found wide support for auto-enrolment plans and a desire to extend enrolment to more workers. In the UK, an auto-enrolment framework for worker pension accounts was phased in between 2012-2016, where each employer was required to set up a plan with payroll deductions and automatically enrol each worker. However, workers are exempt from auto-enrolment if they earn less than GBP-10,000 or if they are self-employed contract workers.

In the “Future Savings” survey of 240 employers, 74% wanted to eliminate or reduce the GBP-10,000 earnings trigger and to also make pension accounts available to self-employed workers. As well, 71% of the companies think that employers need to make more contributions to workers’ pension accounts to help them provide needed retirement income.

Because the auto-enrolment scheme was just recently introduced, the CBI/Scottish Widows survey also asked if company leadership supported employer-provided workplace pensions. Ninety-eight percent agreed there is a business case to do so, and 95% agreed there is a moral case.

In Canada, meanwhile, Québec is the only provincial jurisdiction to mandate workplace pension plans. Starting in 2014, employers without other pension vehicles were required to enrol in the VRSP (Voluntary Retirement Savings Plans) program. The VRSP is a variant of the PRPP (Pooled Registered Pension Plans). Administration and fund management of PRPPs and VRSPs is outsourced to the financial institutions that provide the plans, so individual employers don’t get bogged down with running pension plans.

Meanwhile, other countries also have mandatory pension plans for workers. For example, in 2004 Nigeria launched a national contributory scheme for employers with three or more workers. Perhaps the UK and Québec thought this was a good idea and therefore followed suit a few years later. What about the other Canadian provinces or other countries?


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2020 YMPE Announced

On November 1st, the Canada Revenue Agency (CRA) announced the maximum pensionable earnings for 2020 will be $58,700, up from $57,400 in 2019.

Contributors who earn more than $58,700 in 2020 are not required or permitted to make additional contributions to the Canada Pension Plan (CPP).

The basic exemption amount for 2020 remains as $3,500.

The CRA announced the increase in YMPE reflects the growth in average Canadian weekly wages and salaries, calculated using a CPP legislated formula.

The 2020 contribution rate for employees and employers has increased to 5.25% from 5.1% in 2019. The 2020 contribution rate for self-employed has increased to 10.5% from 10.2% in 2019.

The increase in contribution rate is due to the CPP enhancement implemented in January 2019 as reported by the CRA.

The 2020 maximum employer and employee contribution has increased to $2,898 from 2,748.90 in 2019.

The 2020 maximum self-employed contribution has increased to $5,796 from $5,497.80 in 2019.


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2019 YMPE Announced

On November 1st, the Canada Revenue Agency announced that the maximum pensionable earnings for 2019 will be $57,400, up from $55,900 in 2018.

Contributors who earn more than $57,400 in 2019 are not required or permitted to make additional contributions to the Canada Pension Plan.

The basic exemption amount for 2019 remains $3,500.

The 2019 contribution rate for employees and employers has increased to 5.10% an increase of .15%.

The 2019 contribution rate for self-employed will also increase to 10.2%.

The 2019maximum employer and employee contribution to the plan will be $2,748.90, up from $2,593.80 in 2018.

The 2019 maximum self-employed contribution will be $5,497.80, up from $5,187.60 in 2018.

Check out our website for a breakdown of these rates and others.



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OHIP Plus May be a Negative

OHIP+ has a great premise, but the devil may be in the details.

The program was created so that children and young people under age 25 get free prescription meds. As good as the universal program is in Canada, one area of concern has always been access to medications. A person who needs medical attention gets free access to doctors, emergency rooms, hospital stays, surgery, cancer treatments, etc. Also, when they are in the hospital, their medications are provided. However, as soon as they go home, they need to pay for their own meds (with some exceptions), which some people are unable to do. So, you get the best doctors in the best facilities, but once you leave the doctor’s office, you are on your own.

Until OHIP+ came along in Ontario, that is. Finally kids are covered in Canada’s largest province.

Seems great, right?

Not so fast.

It turns out that the program has two very serious issues that is actually interfering with the healthcare of young people.

First, if a family has a personal supplementary health insurance plan (to top up the things the universal health system does not cover), then they will very likely have difficulties with OHIP+ coverage. If they have a child who needs regular medication, their personal health insurance will no longer cover that medication. The insurers now tell them to get their meds through OHIP+. But OHIP+ may not cover the specific medication that the doctor has been prescribing. OHIP+ has a list of 4,000 or so approved medications, and they release approval to use some of these drugs in order, from cheapest to most expensive. So, if your doctor prescribes a medication, you are required to try the cheapest drugs first to see if those work. If not, OHIP+ will move you up to the more costly drugs.

Consider what that means for a child who is currently being successfully treated with one of the “more expensive” drugs. OHIP+ now requires them to stop taking that drug, thereby risking making them sick (or sicker), in order to experiment on their bodies with a cheaper alternative. If that cheaper alternative does not work, then they can go back to the more expensive drug.

OHIP+ is doing this, despite warnings from physicians that the care of patients is being put at risk. If a doctor prescribes Medication A and knows that it works, OHIP+ is second-guessing the doctor and forcing them to experiment with Medications X, Y, and perhaps Z, to save money. If those don’t work, then the patient can go back to Med A.

As you can imagine, parents are not pleased. Neither are doctors.

For parents, they simply don’t want to put their children at risk of trying different drugs when the current ones are working. They also don’t understand why their personal insurance companies will no longer cover the prescribed medications when their premiums have not gone down. The insurers still charge them for insurance but will no longer pay for meds! Let OHIP+ cover the meds, they say.

The second major issue is with the doctors. To get a child on the more expensive drugs (which actually work), they have to spend hours filling out forms justifying their decisions. Then, to make matters worse, they need to fill out those forms at the beginning of every year, to justify the medications for another 12 month period. So much for trusting doctors to make the best health care decisions!

OHIP+ is still a new program that covers over 3 million young people. We will monitor and let you know if the government finds ways to streamline things for parents in this situation.

For more on this topic, check out this article from CBC. Click to open article …


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Will Sears Fall Short of Pension Obligations?

Here is an amazing story.

First, Sears Canada closed on January 14, 2018 after sixty-five years of operations in Canada. 14,140 employees lost their jobs at Sears over the past year, and hundreds of retail locations were shut down. This of course represents a dramatic hollowing out of the Canadian retail landscape, following on similar closings of Target and Zellers in recent years.

What is happening to retail in Canada? Is it a coincidence that the newly anointed “richest man in the world” is Jeff Bezos, the found of Amazon.com and Amazon.ca (the Canadian branch of Amazon). People still need to buy stuff for everyday living, but it appears that the rapid move to online shopping is taking down the retail giants one by one.

Note that these developments are ironic. Sears Canada was formed when Simpsons Sears bought out the storied Eaton’s retail chain in 1999. Eaton’s of course started in the late 19th century as a revolutionary catalog mail-order business in Canada, which is also how Sears started in the USA. Both brands eventually moved into retail and came to dominate their respective countries. It was only after a long successful run that Eaton’s surrendered to Sears in the Canadian market.

Then along comes Jeff Bezos and online shopping. What is online shopping if not a new version of a mail-order catalog? So, where Eaton’s and Sears put general stores out of business 100 years ago with their eye-catching catalogs featuring extensive selections and low prices and home delivery, now the modern mail-order catalog is doing the exact same thing to Eaton’s and Sears!

In the midst of this carnage, questions remain regarding the obligations of the Sears Canada pension plan. News reports on CBC.ca and other outlets have reported that the pension plan is underfunded by hundreds of millions of dollars and that retirees may be shortchanged nearly 20% on their monthly pension payments for the rest of their lives. People are in an uproar, because Sears Canada allocated over half-a-billion dollars in dividend payments to shareholders in the past five years.

Looks like a corporate rip-off by greedy shareholders!

Actually, the truth beyond the headlines isn’t nearly so exciting.

First, Sears Canada is still in the process of selling off assets in bankruptcy, so the pension shortfall will probably get a chunk of those funds to top up to solvency.

Second, it appears that the pension shortfall is NOT the $266 million reported by the CBC and others. That total amount covers some group life and health funding obligations, but the Defined Benefit pension obligation is more in the $110 million range. Still a lot, but representing just 10% of the pension plan’s total obligations. So, even if the asset sales did not make the pension plan whole, members would still only lose perhaps 10% of their pension payments, rather than the 19% number trumpeted in the press.

Next, it appears that the Sears Canada board of directors did NOT rip off the pension plan by paying dividends to shareholders. Yes, the pension plan was in deficit at the time (as were many DB pension plans after the 2007-8 financial crisis), but it was paying down its obligations according to a schedule agreed to by the pension regulator (The Financial Services Commission of Ontario). Sears Canada was a viable, profitable business (“going concern”) when it paid out the dividends in question. The problem with Sears Canada was that their business strategy over the past 2-3 years did not work out and they started burning through significant cash, which is what forced the bankruptcy. There was no way they could foresee this result five years ago when they paid some dividends out of a healthy, profitable business with very little debt. Yes, bad things sometimes happen to businesses, and sometimes pension plan retirees get stuck holding the bag. But in this case, the story behind the headlines is not nearly as nefarious as the headline writers would have you believe.

Here is a link to the original CBC story.

Here is a link to a blog post on Sunday by Eddie Lampert, the Sears shareholder who gets skewered in the CBC article.Facebooktwitterredditlinkedinmail

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CPBI Workshop: DB Pension Plans – Is Sustainability a Myth?

The following notes were taken at Forum 2017, the annual convention of CPBI (Canadian Pension and Benefits Institute) held June 5-7 at the Delta Hotel in Winnipeg with the theme: “Thriving In a Climate of Change”.

Presenter: Paul Lai Fatt, Partner, Morneau Shepell

Key Points

Sustainability is simply about making adjustments.
-change the money coming in,
-change future benefits (e.g., water down benefits for future cohorts)
-change past benefits

If you do all of these, almost any DB plan can be sustainable. However, that does not mean the stakeholders will all be happy!

The fact is, pension plan members all have different expectations about what payments they will be required to make and what benefits they will receive, but in the real world, nothing is carved in stone.

Therefore, the key is “right process”, where you adequately explain the risks and changes to stakeholders. It is not about measuring risk, but planning for it.

There are still a few new DB plans coming online from time to time, but most plan sponsors are moving to Target Benefit Plans.


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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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