+
Ian Quigley, MBA
Qube Consulting
FundEX Investments Inc.
#200 Kendall Bldg.
9414 - 91 Street
Edmonton, AB T6C 3P4
Phone: (780) 463-2688
www.qubeconsulting.ca
Canada Pension Plan 2010
+
Conservative John Diefenbaker.

Canceled the Avro Arrow,
accepted nukes from the Yankees
(or did he?) and devised the
concept for the Canada Pension
Plan.

Lived 83 years complying almost
to the minute with his actuary.
+
Establishment of CPP - Pearson

Established in 1966 by Lester
Pearson (Liberal) who also created
the Canadian Flag.

Lived 75 years, almost 7 years shy
of what his actuary
recommended…
+
Canada Pension Plan

Offers basic protection for lost earnings related to death,
disability and/or retirement. Protection is for life.

Changes to CPP require approval of the Parliament of
Canada, as well as 2/3rds of the Provinces representing no
less than 2/3rds of the population.

Started in 1966 as a “Pay as you Go” program and a 1.8%
Contribution Rate! Employees and employers each put in
$79 to the program in 1966. Less than a cup of coffee per
day….
+
RecentMortality Study
+
Mortality Costs.

In 2005, life expectancy at birth in Canada stood at 78 years for males
and 83 years for females. This represents a significant increase in life
expectancy since the start of the 20th century (27 years for males and 31
years for females)

In Canada, most of the increase in life expectancy at birth over the last
thirty years has come from improvements in mortality at age 65 and
over while prior to that time most of the increase in life expectancies at
birth came from mortality improvements at ages under 65. Extending
lifespan has not happened nor expected in the coming decades.

As a result, over the last 30 years, life expectancy at age 65 has
increased from 14 to 18 years for males and from 18 to 21 years for
females. More recently, male mortality improvement rates have been
greater than for females.

Higher income beneficiaries live longer.

Mortality increases were not a major concern on the last valuation
report.
+
1997 Changes to the CPP

Total CPP contribution rates (employer/employee combined)
were increased annually from 6% of pensionable earnings in
1997 to 9.9% by 2003.

The Plan would move towards a hybrid structure (instead of
“pay as you go”) to take advantage of investment earnings on
accumulated assets.

The CPP was expected to be at a 20% funded reserve by
2014, increasing thereafter to 30% by 2075 (funded against its
projected liabilities).

The CPP Investment Board (CPPIB) was created.
+
CPP Investment Board

Created in 1997.

An organization independent of the government to monitor
and invest the funds held by the CPP. It is a crown
corporation and reports performance quarterly.

In turn, the CPP Investment Board created the CPP Reserve
Fund to hold the planned reserves.

The board manages and outsources investment management
of the reserve funds.
+
CPP Investment Fund

Moved from holding
Government Bonds
to a balanced
portfolio with active
equity management
(just after 2002).

Asset mix is 60%
Equity and 40%
Fixed Income.

45% is invested
outside of Canada.
+
Jean-Claude Menard – Chief
Actuary (Oct 13, 2009)
+
24th Actuarial Report (update to 23rd)

The minimum contribution rate (taking into consideration current
economic conditions), which is the lowest rate sufficient to financially
sustain the amended Plan without further increase, is 9.84% for years
2010 and thereafter.

By 2050, annual contributions are $3.3 billion or 1.6% higher than
projected under the 23rd CPP Actuarial Report modified to account for
current economic conditions.

By 2050, annual expenditures are $969 million or 0.4% lower than
projected under the 23rd CPP Actuarial Report modified to account for
current economic conditions.

Under a legislated contribution rate of 9.90% for 2010 and thereafter,
which federal, provincial and territorial finance ministers confirmed at
their May 2009 meeting, Plan assets by 2050 are $219 billion higher than
projected under the 23rd CPP Actuarial Report modified to account for
current economic conditions.

This report confirms that if the current Plan is amended as per Part 2 of
Bill C-51, a legislated contribution rate of 9.90% for years 2010 and
thereafter is sufficient to financially sustain the Plan over the next 75
years.
+
24th Actuarial Report – Bill C-51

To remove the Work Cessation Test for those who opt for their retirement benefit prior to age
65. Effective January 2012, individuals will be able to take their retirement benefit as early as
age 60 without any work interruption or reduction in hours worked or earnings.

To increase the General Drop-Out Provision from 15 percent to 16 percent in 2012 and to 17
percent in 2014.

To require individuals under age 65 who receive a retirement benefit and work, as well as
their employer, to make CPP contributions that will increase their retirement benefit. For
individuals aged 65 to 69, contributing after starting their retirement benefit will be voluntary,
but employers of those opting to participate in the Plan will be required to contribute. As
under the current Plan, contributions are not permitted once reaching age 70.

To change the pension adjustment factors such that for an individual who takes his
retirement pension before age 65 (earliest at age 60), the downward pension adjustment factor
is increased from 0.5% to 0.6% for each month between the start of the pension and age 65.
This reduction is permanent and will be implemented gradually over a period of five years
starting in 2012.

For an individual who takes his retirement pension after the age of 65 (latest at age 70), the
upward pension adjustment factor is increased from 0.5% to 0.7% for each month between
age 65 and the start of the pension. This increase is permanent and will be implemented
gradually over a period of three years starting in 2011.

To require the Chief Actuary to report on the fair level of the pension adjustment factors in
at least every third Actuarial Report (and more frequently, if required) starting in 2016.
+
Intent of CPP Retirement Benefits

Replaces 25% or pre-retirement earnings up to a maximum
amount called the YMPE ($47,200 in 2010).

This means the max. pension in 2010 will translate to $11,210
($934.17/mth).

The contribution rate is 9.9% of earnings over $3,500 but
under $47,200. The amount is split between employer and
employee unless you are self-employed.
+
+
Monthly Pension Estimate:
PV of Pension:
PMT = $11,210 plus 2% inflation
I = 6%
N= 17 Years
PV = $136,377
PV of Premium:
PMT = Actual Deposits Made
I = 6%
N= Last 44 Years
PV = $147,298
+
CPP in 2010
+
Context – Too Small To Care?
Income at $108,091
CPP Benefit,
10%
Uncovered
Amount, 90%
+
Context – Too Small To Care?
Income at $66,732
CPP Benefit, 17%
OAS Benefit, 9%
Uncovered Amount,
74%
+
Context – Too Small To Care?
Income at $37,583
Uncovered
Amount, 33%
GIS Supplement,
21%
CPP Benefit,
30%
OAS Benefit,
16%
+
Disability Benefits

Paid to contributors under the age of 65 whose capacity to work
is affected by a severe and prolonged mental or physical
condition

Paid to those who have made sufficient contributions to the CPP
(contributions in recent years an no less than 10% of the YMPE).

The payout is a combination of a flat amount ($426.13) and a
career average earnings calculation (up to $700.63).

In 2010, the maximum monthly disability benefit is up from
$1,105.99 to $1,126.76/mth. Average amount paid is $803.33.

Disability benefits are higher than the retirement benefits!
+
Survivors Benefits

Paid to a deceased contributor’s surviving spouse or common- law
partner and dependent children. Also a flat plus earnings formula like
disability benefits.

Death benefit is a one-time payment of $2,500 (average paid at
$2,242.97).

Maximum monthly benefit in 2010 is up from $506.38 for individuals
younger than 65 to $516.57

Max benefit is also up from $545.25, in 2009, to those over age 65 to
$560.50 in 2010.

Can also be combined with disability and/or retirement benefits.

Children's benefit is a monthly benefit for dependent children of a
deceased contributor. The monthly max. benefit in 2009 is $213.99 and
in 2010 it is $214.85.

Average amount paid is significantly lower than the maximums.
+
Finance News Release 2009-051
May 25, 2009 (Bill C-51)
+
Transitional Issues?

Paper states in a number of places that, “Changes will not
affect those currently receiving benefits or who will
receive benefits before 2011.”

There is nothing in the legislation that refers to
grandfathering.

Tom Deveany reports serious concerns after he read of the
legislation especially with regards to the working
beneficiaries.

Certainly some decisions about CPP will have urgency in
2010/2011 for your clients!
+
Work Cessation Test

To remove the Work Cessation Test in 2012. Individuals
would be able to take their benefit as early as age 60 without
any work interruption or reduction in hours worked or
earnings.

Allow some to reduce the work schedule allowing the CPP to
supplement their earnings.

Example: Someone making $40,000/yr could reduce work
by 1-2 days per week and use CPP benefits to maintain
income levels.
+
Increase in the Low Earnings Drop Out

The career average formula currently ignores the 15% lowest
earning years (7 years).

One can also drop out years while receiving CPP disability
benefits and rearing children.

Propose to increase to 16% in 2012 (7.5 years) and 17% in
2014 (8 years).

Even in the Finance Paper the examples show this to have a
modest gross value effect on pensioners.
+
Can we really take a CPP holiday?

With 7 years allowed to be “dropped out” since 1966 one
could drop the final 7 years….

We have done over 100 CPP assessments and have only once
seen this to be the case. Alberta is a cyclical economy and
many need the provision to “fix” the 1980’s.

A CPP Holiday is not as easy to “book” as it once was. Read
on.
+
Working Beneficiaries Participate

Currently, those who receive a CPP pension and return to work
do not pay CPP contributions and, therefore, do not continue to
build their CPP pension.

Now it will be required that individuals under the age of 65
who receive a CPP retirement benefit and work, as well as their
employers, make CPP contributions that will increase their CPP
retirement benefit.

This would be voluntary for individuals aged 65 or over, but
employers of those opting to participate in the CPP would be
required to also contribute. These contributions will result in
increased retirement benefits, including persons already
receiving the maximum pension amounts.

The additional benefits would be earned at a rate of 1/40th of
the maximum pension amount per year of additional
contributions.
+
Working Beneficiaries Participate

This is going to change many owner-managers who take CPP
early to prevent further contribution requirements!

A “CPP Holiday” will not be possible for those taking a T4
after age 60 or 65.

One may want to consider a T4PS or T5 in this case.

Allan Greber PC has opened EPSP planning for those willing
to flow income via a separate account. EPSP programs are
simple to administer and can offer planning opportunities to
employees as deferred performance based income.
+
Value of a “Premium Holiday”
• 18 in 1966, 2010 – 2013 are final 4 years under consideration.
• Estimated $17,873 in Total Premiums Saved.
• Estimated $1,168/yr in Pension Lost (ignore the drop out provision)
PV at 20% is $8,784
PV at 6% is $5,136, PV is always positive!
Age 82 assumed for mortality expectation.
+
Adjustments for Early/Late Retirement

The current adjustments reduce the early pension by 0.5% per
month for each month that the pension is taken before an
individual’s 65th birthday to age 60. Thus, if an individual
chooses to take the pension at age 60, the basic amount will be
reduced by 30%.

The late pension is increased by 0.5% per month for each month
that the pension is taken after age 65 up to the age of 70. Thus, if
an individual chooses to take the pension at age 70, the basic
amount will be increased by 30%.

These adjustments have been left unchanged since 1987 despite
significant shifts in the economic and demographic factors that
affect their “actuarially fair” levels. The adjustments of 0.5% per
month no longer ensure actuarial fairness.
+
Adjustments for Early/Late Retirement

The early pension reduction will be gradually increased to 0.6%
per month for each month that the pension is taken before age
65. This will be done over a period of five years, starting in 2012.
Decide in 2010!?

The late pension augmentation would be gradually increased to
0.7% per month for each month that the pension is taken after an
individual’s 65th birthday, up to age 70. This would be done over
a period of three years, starting in 2011.

This would mean that someone who applies for CPP on his 60th
birthday would lose 42% of the amount he would have received
at 65 (30% penalty at present).

However, it is important to remember that the plan will be
phased in over a five-year period from 2012 to 2016. This means
that in 2012 the penalty for drawing CPP before age 65 will be
0.52% a month or 6.24% annually. If you apply in 2012 at age 60,
your penalty will therefore be 31.2% as compared to 30% under
the current rules.
+
24th Actuarial Report (update to 23rd)

Due to the uncertainty about future possible changes in
retirement benefit uptake behavior that would result from the
proposed amendments, two sensitivity tests have been
prepared. If the retirement benefit uptake rate at age 60
were to increase by 20 percentage points, the minimum
contribution rate would decrease from 9.84% to 9.77%.

If, instead, the retirement benefit uptake rate at age 65 were
to increase by 20 percentage points, the minimum
contribution rate would increase to 9.91%.
+
Take it at 60?

$11,217 if you wait, $7,852 old rules, $6,506 new rules.

PV of benefit age 60 – 82 at 6%:


Full Pension $90,754

Old Rules Early $96,601

New Rules Early $80,041
PV of benefit age 60 – 82 at 10%:

Full Pension $57,120

Old Rules Early $69,748

New Rules Early $57,791
+
Conclusions

CPP is in good hands and adequately funded for the next 75
years.

Change to working beneficiaries will cause owner-managers
to consider T5 or T4PS income starting in 2012.

Change to early retirement adjustments will cause many to
take it in 2011 (or soon) in the near future or delay to 65 in
the coming years.