Mod 2 set 2 - Employer Plans - Old Age

Question 1

What are the two types of employer plans that help attack the problem of old age?

Answer 1

Pension Plans

Group RRSPs

Question 2

Are employees required to offer an RPP to their employees?

Answer 2

no, many don’t

Question 3

What are some arguments for pension plans made by the government?

Answer 3

– social utility
– reduce gov’t pressure to increase income security benefits
– cash invested
not strongly argued against, but
– taxreliefgranteddoesleadtolossoftaxrevenue(timingissue
only–e.g. pension payments when received are fully taxed)

Question 4

What are some arguments for pension plans made by the employers?

Answer 4

– expensing of pension costs
– contributions are a tax deductible expense
– help attract(recruit) and retain employees
– contributory plans(reduce employer costs)
– incentive (e.g. contribution tied to company’s profits)

Question 5

What are some arguments against pension plans made by the employers?

Answer 5

– could reinvest in own business (“higher return”)
– admin. costs & complexities
– employee should assume responsibility for retirement- e.g.
can provide higher salaries without the RPP (compensate
more and offload risk to employees)

Question 6

What are some arguments FOR pension plans made by the employees?

Answer 6

– e’es view RPP as essential leg of the ‘3 legged stool (or pillar)
– pension security
– tax sheltered savings

Question 7

What are the 3 different types of RPPs?

Answer 7

(A) Defined Contribution Plans (DCP)
(B) Defined Benefit Plans (DBP)
(C) Combination of DB and DC Plans

Question 8

Give a brief overview of Defined Contribution Plans

Answer 8

The amount of contributions to be made by the employer (er) is clearly defined. If it is a contributory plan, the employee(ee) contributions are also clearly defined.
- the employee who assumes 100% of the investment risk

Question 9

What are the two types of DCPs? briefly describe them

Answer 9

Money Purchase: employer contribution is a fixed % of earnings
Profit Sharing-employer contributions linked to company profits subject to a minimum 1% of earnings

Question 10

Give a brief overview of Defined Benefit Plans

Answer 10

• plan member(employee) is promised a “defined” amount of annual pension (retirement income payment)
• RPP defines the formula for determining the pension amount
• plans can be contributory or non-contributory, but if it is a contributory plan, employee contributions are clearly defined
• the cost of the plan to the employer is the total amount of money required to provide the given level of benefits for all plan members

Question 11

What are the 4 types of DBP plans?

Answer 11

(i) Flat Benefit
(ii) Career Average
(iii) Final Average Earnings
(iv) Flexible plans

Question 12

Describe the Flat Benefit DBP.

Answer 12

– these plans are popular with unions

Flat Benefit Plans (represent about 15% of all DBP plans)

– the retirement pension for this type of plan is a specified number of dollars for each year (or month) of service
o there is no earnings recognition in benefit calculation

Question 13

What are the advantages and disadvantages of Flat Benefit DBP?

Answer 13

– Advantage historically with this plan type was that it was simple to administer, easy for employees to understand
– Disadvantage: flat amount per year of service based on wage levels at time level is established, but pension will be paid in future when wages/prices have ↑(lack of inflation protection)

Question 14

Describe the Career Average Earnings Plans

Answer 14

– Annual pension benefit is calculated as a certain percentage of earnings in each year of plan membership(equal weight is given to each years earnings)

Question 15

What are the advantages and disadvantages of Final Career Average Earnings DBP?

Answer 15

– Advantages:
o Easy to administer and understand o more manageable employer costs

– Disadvantages:
ogives equal weight to employment earnings in each year of an ee’s
working lifetime, which is not good for ee’s that have made significant advancements over their career (lower pension relative to income at retirement in these cases)

Question 16

Describe the Final Average Earnings Plans (DBP)

Answer 16

– most popular salary based DBP category, esp. with public plans
– Annual pension is based on their average earnings for a stated number of years before retirement

Question 17

Is the Final Average Earnings plan (DBP) good for protection against inflation?

Answer 17

yes because it uses ur salary average over recent years.

Question 18

Describe Flexible DBP.

Answer 18

• employer(er) pays for the basic pension benefit
  o employee(ee) pays for additional ancillary benefits (ee has the
  option to buy supplemental benefits)

Question 19

What are the advantages and disadvantages of Flexible DBP?

Answer 19

– Advantages:
o additional ancillary benefits can be purchased without increasing
the e’ees Pension adjustment(PA)
– Disadvantages:
o members(ee’s) require a high level of understanding of the plan
and the ancillary benefits offered

Question 20

What are some examples of ancillary benefits?

Answer 20

• enhanced final average earnings (ex. 2% of earnings vs 1.5%)
• indexing of pension benefits

Question 21

What does it mean if the Flexible DBP is “front end” vs. “back end”?

Answer 21

– ‘front end’: plan member chooses ancillary benefits in advance (in
exchange for his contributions)
– ‘back end’: e’ee makes contributions and they accumulate. Ancillary
benefits chosen at termination or retirement

Question 22

Explain how the Hybrid is a combination of both DB and DC. Provide an example.

Answer 22

– hybrid plan operates as DC plan but valued (annual actuarial valuation) like a DB plan to ensure funding adequacy
– these tend to be contributory plans

Ex. DB min benefit=1.5% earnings per y.o.s. Also you know calculated minimum. annual pension=$50,000 for a retiring e’ee

Question 23

How is a Combination plan an example of a DB & DC plan?

Answer 23

– Pension benefit is the sum of pension provided through the DB component and pension provided through DC component

Question 24

How is a Cash Balance plan example of a DB & DC plan?

Answer 24

o Ee’s are assigned annual credits based on earnings during year o credits deposited into a ‘hypothetical’ account for each ee
o they accumulate with interest until retirement or termination
o the employer(er) makes the investment decision

Question 25

What are some advantages to Cash Balance plans?

Answer 25

o These plans tend to provide a much higher benefit upon
termination (e.g. hypothetical account value vs. a DB commuted value) than regular DB plans, which appeals to some employees

Question 26

Explain how a Multi-Employer Plan (MEP) is an example of a DC & DB plan?

Answer 26

– Established by union negotiation with two or more non- affiliated employers(ers) in a related industry
– all employers (that are part of MEP) contribute to the plan
– benefits typically determined using a flat benefit formula
– unlike single employer plans, benefits may be reduced if they cannot be supported by current level of contributions and/or employers are unwilling to increase contributions

Question 27

How does a Target Benefit Plan work? How is it a combination of DB & DC?

Answer 27

– similar to design of multi-employer plans, but they are established by a single employer
– designed to deliver a targeted benefit but administrators can adjust benefit benefits (reduce if funding issues)

Question 28

How does one become eligible for a PP?

Answer 28

– when an employer(er) offers an RPP all employees(ee’s) within a similar class must be eligible to join the plan
– most provinces require ee’s be eligible within 2 years of employment(maximum) but many require less time and some companies allow membership on employment start date
– part-time ee’s are eligible for plan membership if in same class as full time ee’s (that are covered by a plan)

Question 29

Is the Pension formula calculated differently for each plan type?

Answer 29

Yes.
– Formula varies by plan type.
o DC- contributions amounts, investment options
o DB- flat benefit, career average, final average etc….

Question 30

What is the Credited or Pensionable service?

Answer 30

– defines period of service for which e’ee will earn pension benefits(maternity leave must be included by law)

Question 31

In canada, which plan type is more popular?

Answer 31

– In Canada
o most union plans are non-contributory
o about half of private section plans are contributory o all public plans are contributory

Contributory plans are more common in canada.

Question 32

What is the NRA?

Answer 32

o NRA is the age specified in the RPP contract at which the ee has
the right to retire on a full unreduced pension.
o for most plans, the NRA age is 65
o employees can, and often do, retire before the NRA

Question 33

When is an individual able to retire early?

Answer 33

o Legislation allows an unreduced pension to be paid as early as age
60 or when years of service(yos) is 30 or when age + yos = 80
o Otherwise, person retiring before NRA receives a reduced pension o a plan will ordinarily allow the ee to retire anytime within 10
years of NRA, but with a reduced pension

Question 34

How is a reduced pension calculated? (what are the two ways to calculate it?)

Answer 34

(i) An actuarial equivalent reduction

(ii) A reduction that is less than the full actuarial adjustment

Question 35

What is a “Normal Form” of pension?

Answer 35

defined in every pension plan and this determine what benefits will be received when employee (plan member) dies after retirement

Question 36

What is an “Optional form” of pension?

Answer 36

can be elected before pension payments start and payment amount for the ‘optional’ form would be determined on an actuarial equivalent basis

Question 37

Does a PP provided by an employer require pre-retirement death benefits?

Answer 37

yes, the pre-retirement benefits must be clearly defined in the plan
document

Question 38

What are some of the termination benefits outlined by a PP?

Answer 38

– ee always gets back his own contributions
– if ee is fully vested he/she can receive either
o A deferred annuity
o The commuted value of the deferred annuity, which then must
be transferred to a locked-in vehicle

Question 39

Is inflation protection required by the PP?

Answer 39

No, there is no absolute requirement for inflation protection.

– some plans have implicit protection-eg. Final average earnings DB
– with DC plans, as long as returns rise with or exceed inflatioN the ee is protected
– for other plan types (DB-career average plan, flat benefit plan)
only ‘protection’ is benefit enhancements/updates

Question 40

What does Vesting mean?

Answer 40

If a plan member is vested, this means that they are entitled to the portion of the pension benefit provided by er contributions.

Question 41

What is the max time to be fully vested?

Answer 41

24 months, but most plans require less time/immediate vesting.

Question 42

What does “Locked in” mean in terms of employer PP?

Answer 42

“Locked in” means that the vested entitlement must provide retirement income That is the ee can’t withdraw any contributions or portion of the pension benefit in cash prior to retirement

– the benefit at termination can only be received in the form of retirement income

Question 43

When an individual is fully vested and locked in, what does this mean?

Answer 43

This means if you terminate after being fully vested (and locked in), you cannot access your RPP money until you retire and have reached NRA. That is, the money is ‘locked in’

Question 44

What are 2 benefits to being locked in?

Answer 44

o provides for income at retirement

o plus creditors cannot seize locked in money.

Question 45

What does Portability mean?

Answer 45

Portability means that the commuted value of a terminating employees pension may be transferred, on a locked in basis, to another RPP or some other locked in Retirement savings arrangement (and there are no tax consequences)

Question 46

With portability, what can the commuted value of your pension be transferred to?

Answer 46

• Another RPP (if the other plan allows)
• Locked in RRSP
• Locked in Retirement Account (LIRA)
• LIF- life Income Fund (age 55 or higher)

Question 47

If the retiree has a spouse, what type of pension must the individual have?

Answer 47

• The pension must be a joint and survivor annuity
• These annuities are such that payment drops to usually 60% of the initial amount if the plan member dies first
• Ee can opt out of joint and survivor annuity only if spouse signs a waiver

Question 48

What happens if the plan member dies before retirement?

Answer 48

If he/she dies before being vested
• only eee contributions are refunded with interest to the beneficiary

If he/she dies after being vested
• Most provinces require 100% of commuted pension value to be paid to the spouse or beneficiary(or estate) if no spouse

Question 49

How can the spouse take the commuted value of the pension if the plan member dies before retirement and is fully vested?

Answer 49

(i) a lump sum(locked in)
(ii) deferred pension
(iii) immediate pension

Question 50

What happens if the plan member dies after retirement?

(differences between type of pension form was elected: J&S, guaranteed life annuity, and life annuity with no guarantee)

Answer 50

If joint and survivor annuity was the pension form:
• payments will drop from 100% to (usually) 60% and spouse will receive these payments for as long as they live

If a guaranteed life annuity was the pension form:
• if death occurs after guarantee period, nothing is paid
• if death occurs dring the guarantee period, remaining guarantee payments paid to the beneficiary

If a life annuity with no guarantee was the pension form:
• nothing is paid

Question 51

What is another type of Employer Pension Plant?

Answer 51

Group RRSPs

Question 52

What are some advantages to group RRSPs?

Answer 52

o No locking-in of contributions
o More flexibility to vary contributions among plan members
o No restriction on who can be the beneficiary
o Do not have to buy a life annuity on retirement

Question 53

What are some disadvantages to Group RRSPs?

Answer 53

(i) Employer contributions are considered salary to the ee and this can
increase employer’s payroll costs (CPP, employment insurance, etc)
(ii) Employer cannot be certain that the accumulated funds in a group RRSP will be used by the ee to provide a retirement income
(iii) Employer contributions are immediately vested

Question 54

Why are group RRSPs favourable to individuals? (rather than individual RRSPs)

Answer 54

(i) group RRSP contributions are done by payroll deduction (convenience)
(ii) ee can benefit from the greater purchasing power and investment opportunity of a larger group(e.g. lower investment management fees than on individual RRSPs)