MODULE 11: UNIT 2 Defined Benefit Pension Plans Flashcards
Three Benefit Formulas
- Final Earnings or Best Average
- Career Average
- Flat Benefit
Final Earnings / Best Average
Percentage of the members earnings x participation years
Usuallly 1%-2% of annual earnings
Career Average
pensionable earnings for each year of participation in the plan when calculating the total retirement benefit
percentage Average of x amount of years x participation years
Flat Benefit
fixed dollar amount for each year of pensionable service
Contributions: Employer
- there is a commitment on the part of the plan sponsor, usually the employer, to fund the cost of pension benefits
- They know how much the pension benefit will be, but they dont know how much the pension will cost the employer
Contributions: Expenses
The cost of managing the plan is incorporated into the assumptions, but tends to be reasonably predictable
Contributions: Life Expectancy
- Assumptions are made regarding the life expectancy of the plan members as it relates to members reaching retirement age
Actual life expectancy varies from life expectancy assumptions alter the plan’s expected performance
Contributions: Other Items
Commitment with a Registered Pension Plan comes with a minimum requirement “50% rules”
Contributions: Employee (Current Service)
- Employers cost is reduced with employee contribution
- Employer retains responsibility for overall cost of the plan
- Employer ensures plan remains funded to meet liabilities
- Contribution is esablished as a percentage of pensionable or contributory earnings
Contributions: Employee (Past Service)
- Within defined benefit pension plans, specific circumstances give the opportunity to made additional contributions that are used to purchase pension benefits applicable to past service.
- For new pension plans, it is common to allow employees to purchase pension credits for previous years worked before establishment of the pension plan
Benefits: Entitlement
“Benefit entitlement”
- Accrued benefits that the individual has earned
Benefits: Calculations
Retirement income can be from a flat benefit formula or career average
Benefits: Maximum Benefit Accrual Rate
- career average and final/best average benefit calculation formulas are based specifically on a member’s earnings
- If formula is earning based, the annual benefit accrual rate cannot exceed 2%
Benefits: Maximum Pension Rule
as of 2006
the maximum annual entitlement is limited to a lifetime maximum based on the lesser of:
- $2,111 multiplied by the member’s years of pensionable service
- 2% per year of service multiplied by the average of the best three years (three non-overlapping 12-month periods) of pensionable earnings
Benefits: Integration With Government Benefits (Step Rate) (Direct Offset)
- “Step Rate”, where a lower benefit is paid on earnings up to the YMPE (year maximum pensionable earnings)
- “Direct Offset”, where a percentage of the Canada/Quebec Pension Plan benefit is offset against the employer’s pension plan
Retirement: Normal Retirement
- Normal Retirement age is 65
The normal form of pension is an annuity type of payment, and may include:
-Life Income Pension
Retirement income to the retiree for his lifetime until death
-Life Income with a Guarantee Period
If the plan member should die during the guarantee period, the selected beneficiary will be paid to the beneficiary for the remainder of the guarantee period
-Joint and Survivor
The survivor of the plan will be paid the pension benefit
-Joint and Survivor Option with a Guarantee Period
If both spouses die during guarantee period, the remaining pension payments are paid to the beneficiary
Retirement: Early Retirement
- Anytime within 10 years of Normal retirement age
- “Actuarial Reduction”
- Less contributions than what he would have at normal retirement age
- Less on assets who leaves prior to retirement age
- longer period payout
Retirement: Qualifying Factor
for unreduced early pension (defined-benefit plan)
- has attained age 60 by the date that the pension commences
- has at least 30 years of pensionable service
- the member’s age plus years of qualifying service is 80 or more
Earliest Retirement Age = (Members age at time of joining the plan + qualifying factor) / 2
Retirement: Bridging Benefits
Supplementary benefits for early retirement until they reach the age of 65:
OAS and full CPP benefits are payable
Benefit reduced:
0.25% for each month prior to age 60
10% for each year less than 10
Retirement: Postponed Retirement
Most jurisdictions and registered defined benefit pension plans allow members to work beyond normal retirement age and to continue to accrue additional pension credits
No later than age 71
Retirement: Termination of Employment
- Upon termination of employment before retirement, the member is entitled to specific benefits that must adhere to pension standards legislation, usually
- A lump-sum payment (unless the pension is vested or locked-in by law)
- Transfer of the value to another registered pension plan, if allowed by both the transferring and receiving plans
- A deferred life annuity commencing before the end of the year the employee reaches age 69
- A lump-sum transfer to a locked-in RRSP or Locked-In Retirement Account (LIRA)
-A lump-sum transfer to a Life Income Fund (LIF) or, if allowed in the jurisdiction, a Life Retirement Income Fund (LRIF)
A combination of the above
Retirement: Death of a plan member
-Pre-Retirement Death
There is no uniformity in the standards applied to pre-retirement death benefits across the various jurisdictions
-Post-Retirement Death
Where a plan member dies after having initiated his retirement pension, the form of pension originally selected at retirement will determine what benefits, if any, will be payable subsequent to the member’s death
Relationship Breakdown -Pre-Retirement The division of pension assets upon marriage breakdown crosses pension and family law --payment from RPP lump sum --- RPP, RRSP, RRIF
Income Tax Implications: Contributions
- Tax deductible expense for employer
- Not Taxable benefit for employee
Income Tax Implications: Benefit Payout
Amounts paid into a registered pension plan as contributions have not yet been taxed
amounts paid out to employees on a periodic basis are generally taxable to the recipient
Income Tax Implications: RRSP Contribution Room
-The value of the benefits earned under a registered pension plan is approximated by the “Pension Adjustment” (PA), which is subtracted from the RRSP contribution room for the plan member
-Past Service Pension Adjustment (PSPA)
Where a registered pension plan member becomes entitled to past service benefits or improvements to benefits for service after 1989 under a defined-benefit plan
“Pension Adjustment Reversal” (PAR)– Where a registered pension plan member does not eventually acquire a vested interest in a benefit under a plan
