Understanding Your
Investment and
Retirement Income Options
Lorraine Heseltine
January 28, 2016
UBC Faculty Pension Plan
Agenda
•
•
•
•
Plan Overview
Retirement Income Options
Investment Choices
Navigating the Faculty Pension Plan
Website / Sun Life Website
Faculty Pension Plan
2
Money Accumulation Plan
EE$
ER$
EMPLOYMENT YEARS
Investment Fund(s)
PRODUCES
Lump-sum $ amount
RETIREMENT
Exchange
Stay invested
Flexible income
payment
Lifetime
annuity
3
Board of Trustees
• Eight Trustees
• Four elected by members of the Plan
• Four appointed by the Board of Governors
• Faculty Members
4
Board of Trustees
Mr. Joost Blom
Chair
Faculty of Law
Dr. Robert Heinkel
Vice Chair
Sauder School of Business
Dr. Joy Begley
Member
Sauder School of Business
Dr. Joyce Boon
(Professor Emeritus)
Member
Barber Arts & Sciences, UBCO
Dr. R. Kenneth Carty
(Professor Emeritus)
Member
Political Science
Dr. Joanne Emerman
(Professor Emeritus)
Member
Department of Cellular and
Physiological Sciences
Dr. Lorenzo Garlappi
Member
Sauder School of Business
Mr. Vijay Verma
(Researcher Emeritus)
Member
TRIUMF
5
Plan’s Mission Statement
The main purpose of the Plan is to provide a wellmanaged, cost-effective retirement plan, designed
to assist members in meeting their financial
responsibilities, both leading up to retirement and,
if members choose, through retirement.
6
Plan Principles for
Investment Management
• Maximize returns at a level of risk suitable
for each Investment choice
• Risk should be managed through broad
diversification
• Costs should be kept to a minimum
7
Cost of Investing
• Investment manager expertise in security
selection, research
• Operating expenses (custodial charges,
banking fees)
• How are these fees charged?
8
Fees & Expenses as of December 31, 2015
Management Expense Ratio (MER)
Expenses (%) *
Balanced
Fund
Annualized
Percentage
0.51
Bond
Fund
0.37
Canadian
Equity Fund
0.49
Foreign
Equity
Fund
Short Term
Investment
Fund
0.51
0.20
*includes Fund Management Fees & Operating Expenses
9
Online – Your Sun Life Account
10
Management Expense Ratio
$100,000 @ 6% per year for 20 years
MER
0.50%
1.50%
2.50%
Average Cost
Per Year
$1,447
$3,977
$6,087
$291,776
$241,171
$198,979
Net Value
After Fees
11
Growth of $10,000 over 50 years
8.0% Annual Return Less 2.5% Fees
Gross Investment Return
$196,974
Portion to Investor
$135,420
Portion to Fees
$61,554
(45% of what Investor receives)
12
Fees: Things to Consider
Fees have a major impact on your net return, so
make sure you know what you are paying.
• MERs, Administrative Fees, Buy/Sell
Transactions, Termination Fees, etc.
• Reduced MER for higher account value
• Fees are necessary and appropriate if they reflect
the returns, advice, and service you receive
13
Registered Pension Plans
• Canada Revenue Agency
- Income Tax Act
• Provincial Pension Legislation
- BC Pension Benefits Standards Act
14
Account Balances
• Non-Locked-In funds (pre-1993)
– No restrictions on withdrawals after
termination or retirement
– Includes RRSP, Voluntary Contributions
• Locked-In funds (post-1992)
– Must be used to provide an income for your
lifetime
15
Why Provide Retirement Options?
•
Trustees’ belief that their responsibilities to
members do not end at the date of retirement
•
Investment Objective of the Plan
to earn a real return on the Balanced Fund such
that a “typical” member would be able to achieve
a reasonable income replacement ratio (i.e.
60%-70%) based on their final year’s salary.
16
UBC Retirement Income Options
FPP Account
Applicable to all or part of your total account balance
Defer Decision
Variable Payment
Life Annuity
Flexible Income Options
RRIF/LIF-Type Payments
17
Leave Funds in the Plan
Defer Decision
• Applicable to all or part of account balance
• You continue to choose investment fund(s)
• Okay until Dec. 1st of the year you reach age 71
• Elect any of the other options at anytime
• Full Account balance is paid on death
• Cash withdrawals from non-locked-in
18
Leave Funds in the Plan
Defer Decision
Things To Consider:
• Gives time to evaluate your retirement lifestyle
and need for income
• A good way to defer taxes
• Continue to build your account balance by taking
advantage of tax sheltered investment growth
• Enjoy the plan’s low management and
administration fees
19
Leave Funds in the Plan
Defer Decision
Things To Consider:
• Withdrawals do NOT qualify for:
(a) $2,000 Pension Income Tax Deduction
(b) Spousal Pension Income Splitting
20
UBC Retirement Income Options
FPP Account
Applicable to all or part of your total account balance
Defer Decision
Variable Payment
Life Annuity
Flexible Income Options
RRIF/LIF-Type Payments
21
Understanding Annuities
Fixed Payment Life Annuity
vs.
Variable Payment Life Annuity
22
Understanding Annuities
What determines the monthly payment?
1. The purchase amount $ (dollars exchanged)
2. An actuarial factor
 Your age (your spouse’s age) at commencement
 Form of pension elected
 Future investment rate of return assumption
• Long term interest rate environment (insurance company)
23
Illustration of the Relationship Between Market
Interest Rates and the Annuity Amount
Interest Rate
Monthly Annuity
7%
3,676
6%
3,378
5%
3,087
4%
2,805
3%
2,534
Based on a joint annuity, member and spouse both age 65 and using
a lump sum of $500,000, payable for as long as either is alive.
24
Fixed Payment Life Annuity
• Monthly payment amount never changes
• Retiree risk – purchasing power
• Interest rates at time of purchase impacts
amount of monthly pension
• Insurance Company reaps the rewards of excess
investment/interest earnings
25
Fixed Payment Life Annuity
• Fixed payment – no opportunity for you to reap the
rewards for excess investment earnings
********
• Variable payment – opportunity to reap the rewards
for excess investment earnings
26
Variable Payment Life Annuity
How It Works!
1. Your Purchase Amount is invested in the
Balanced Fund for the Retiree Group
27
Variable Payment Life Annuity
How It Works!
2. You choose:
• the future investment rate assumption in
determining the initial monthly amount
(4% or 7%); and
• the form of pension payment
28
Variable Payment Life Annuity
How It Works!
3. Your monthly pension amount will be adjusted
once per year (each April 1st) by the difference
between:
– the previous year’s ACTUAL rate of return in
the Balanced Fund*; and
– the ASSUMED rate of return (4% or 7%)
*Note: there is also an adjustment to reflect the mortality experience of the group.
29
How do annual increases/decreases work?
You choose a 4% or 7% future annual growth rate assumption.
Investment Return +
Mortality Experience
4%
7%
12%
8%
5%
9%
5%
2%
2%
-2%
-5%
-2%
-6%
-9%
30
2015 Adjustment – 4% Option
2014 ACTUAL Balanced Fund Return less
adjustment for mortality experience
10.03%
ASSUMED Return when pension started
- 4.00%
Pension increase on April 2015
6.03%
Monthly pension at April 1, 2014
$1,000.00
Monthly pension at April 1, 2015
$1,060.30
31
Comparison of 4% & 7% VPLA - Payment History
from 1996- $500,000 Purchase Price
4% Annuity
1996
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
ACCUMULATED:
# of Years payment decreased:
$3,207
$4,536
$4,162
$4,476
$4,646
$4,958
$5,397
$5,277
$4,355
$4,607
$4,794
$4,682
$4,904
$5,290
$5,609
$1,088,001
5
7% Annuity
$4,118
$4,909
$4,378
$4,575
$4,614
$4,785
$5,062
$4,812
$3,860
$3,969
$4,015
$3,811
$3,880
$4,068
$4,193
….
$1,066,665
6
32
Decisions To Make When
Choosing the VPLA
• Do I use all or a portion of my account balance
to purchase the VPLA?
• Future Investment Return Assumption?
(4% or 7%)
• Payable during your lifetime only or during your
spouse’s as well?
33
Choose An Annuity Option
Options
Single Life
Initial Monthly
Payment
$3,965
Joint & Survivor
•
60% to Spouse on your death
$3,630
•
100% to Spouse on your death
$3,435
Based on a 7% Annuity choice with a lump sum of
$500,000 at age 65 - Spouse is same age
34
What Happens When my
Spouse and I die?
• An annuity is an insurance type of
arrangement
• Normally payments cease on death - those
who die early subsidize those who live longer
35
What Happens When my
Spouse and I die?
35
30
25
20
15
10
5
0
Mortality Forecast
5 YRS
30 YRS
36
How Long Will I Be Retired?
2015 Melbourne Mercer Global Pension Index
37
What Happens When my
Spouse and I die?
• However, you can take a reduced pension to
guarantee that a minimum # of years payments
will be made.
• Options are a minimum guarantee of 5, 10, or 15
years of payments in event of early death
• Regardless, the pension would never cease while
you are living
38
Choose An Annuity Option
Adding a 15 Year Guarantee Period
Options
With No
Guarantee
15 Years
Guarantee
Cost
$3,965
$3,690
$275
60% to spouse on your death
$3,630
$3,615
$15
100% to spouse on your death
$3,435
$3,415
$20
Single Life
Joint & Survivor Form
Based on a 7% Annuity choice with a lump sum of $500,000 at age 65 - Spouse is same age
39
Planning your Retirement Income:
Thinking Outside the Box
Who is your Pension For?
•
You?
•
You and your Spouse?
•
You, your spouse and your children?
40
Probability of a healthy
65-year old living until…
Age
Chance that at Least One Member of
A Couple will survive until age:
80
91%
90
45%
Source: Statistics Canada Catalogue No.84-537-XIE
41
VPLA: Things to Consider
• Security – you know your income is for life
• Simplicity – doesn’t require active management on your
part
• Allows you to participate in the performance of the
Balanced Fund to gain inflation protection
• You can choose between a conservative or aggressive
investment assumption
***
• No opportunity to make changes during severe market
downturns
• Early death could result in less than your account value
being paid
42
QUICKIE QUIZ
• If there are 3 apples and you take away
2, how many do you have?
43
UBC Retirement Income Options
FPP Account
Applicable to all or part of your total account balance
Defer Decision
Variable Payment
Life Annuity
Flexible Income Options
RRIF/LIF-Type Payments
44
Flexible Income Options
Source of Funds
RRIF-Type
LIF-Type
Payment Accounts
Payment Accounts
Non-Locked–In
Locked-In
Who makes
Investment Decisions
You
You
Minimum Withdrawal
Yes
Yes
Maximum Withdrawal
No
Yes
Remaining Account
Remaining Account
Balance
Balance
Death Benefit
45
Statutory Minimum / Maximum
Age
Minimum
RRIF + LIF
REVISED
Minimum
(2015 Federal
budget)
Maximum
LIF
REVISED
Maximum
(BC PBSA)
65
4.00%
n/a
7.20%
7.38%
70
5.00%
n/a
7.90%
8.22%
71
7.38%
5.28%
8.10%
8.45%
75
7.85%
5.82%
9.10%
9.71%
80
8.75%
6.82%
11.50%
12.82%
85
10.33%
8.51%
16.00%
22.40%
90
13.62%
11.92%
20.00%
100.00%
46
How Do RRIF/LIF-Type
Payments Work?
• Think of a bank account - you have a balance in your
account
• Investment/Interest earnings added, withdrawals
deducted
• You determine the monthly income you want to draw
• You can change your monthly income payments
• (LIF has both yearly minimum and maximum)
47
How Do RRIF/LIF-Type
Payments Work?
• You can use your spouse’s younger age to calculate
minimums
• You choose payment frequency—monthly, quarterly,
semi-annually or annually
• Special lump sum withdrawals are possible
throughout the year
• You can convert all or part of your balance to annuity
at any time
48
Features of FPP RRIF/LIF-Type
Payments
• You can use all or a portion of your account
balance
• Your funds remain in the UBC Faculty Pension
• Payments are by direct deposit – you choose
 the 1st of the month
 the 15th of the month
 the last day of the month
49
Features of FPP
RRIF/LIF-Type Payments
• A spouse can continue payments from the plan
after death
• Statements of Account are produced quarterly
• Ad hoc withdrawals and changes to scheduled
payments can be made
50
RRIF/LIF-Type Payments:
Things to Consider
• A way to lower taxes by taking only the minimum
• Gain flexibility to vary your income according to your
changing needs
• Continued compound growth with you choosing the
investment fund
• Full account balance is paid upon your death to your
heirs
51
RRIF/LIF-Type Payments:
Things to Consider
• Management and administrative fees are modest
• You can change to another option at any time
• Could exhaust your funds:
• Investment Risk plus Longevity Risk
52
RRIF/LIF-Type Payments:
Things to Consider
Investment Allocation
• You control investment of your funds and assume
the risk
• What is your Investment Time Horizon?
• Lower risk tolerance as we get older
• Will my money last if I allocate to investments with
no risk?
53
What is the best Asset Mix Strategy for
making your assets last through retirement?
• Would people retiring in previous periods have
run out of money?
• Which asset mix would have been the best
strategy to fund retirement?
From Study by Alliance Bernstein, December 2008
54
A 60/40 Portfolio Also Delivered Better Real Outcomes
Than Bonds. Cash (Short Term) never lasted 30 Years
Lasted 30 Years
74%
15%
60/40 Strategy
Bond Strategy
Based on a hypothetical portfolio; actual fund performance may differ.
Assumed 5% withdrawal for 30 years. Not inflation adjusted.
55
Long-Term Risk
• LESS RISKY
– Equities combined with Long-term bonds
• MORE RISKY
– GIC’S
– Treasury bills
Does not meet retirement objectives
(i.e., insufficient returns)
56
Think about your Investment Time Horizon
and select your Investment Type
Short Term Investment Time Horizon
• Money Market or Treasury Bills
Medium Term Investment Time Horizon
• Government, Corporate Bonds or GICS
Long Term Investment Time Horizon
• Mutual Funds – Stocks and Bonds
57
Does It Matter?
(How Long Will our Money Last?)
Assumptions:
Initial Investment: $500,000
Monthly Withdrawal: $3,000
Annual Rate of
Return
From Age 65
Until Age
7.25%
100+
6.25%
94
5.00%
87
4.00%
84
3.00%
81
58
Balanced Fund NET
Returns Over 30 Years
•
•
•
•
Using net returns from 1986-2015
Initial Balance $500,000
5% withdrawal from 65-70 and per minimum* withdrawal
schedule thereafter (*using new minimum rates)
Total payments to age 94 = $1,764,370
AGE
WITHDRAWAL ANNUAL
DATE
WITHDRAWAL
ACCOUNT
BALANCE
65
5.00%
$25,000
$531,900
71
5.28%
$32,787
$633,701
80
6.82%
$66,752
$918,286
85
8.51%
$76,736
$947,435
94
18.79%
$79,673
$487,517
59
Balanced Fund Annual Returns (Net)
30 Year Track Record - 8.37%
1986-1995
1996-2005
2006-2015
11.38%
18.58%
13.58%
2.33%
14.54%
2.66%
9.00%
6.79%
-13.45%
14.62%
10.90%
11.93%
-0.46%
4.77%
9.37%
16.29%
0.64%
2.62%
7.33%
-3.07%
9.58%
22.19%
12.36%
13.18%
-0.54%
8.09%
10.86%
17.03%
11.79%
6.09%
60
Balanced Fund NET
Returns Over 30 Years
•
•
•
•
Using net returns in reverse order from 2015-1986
Initial Balance $500,000
5% withdrawal from 65-70 and per minimum* withdrawal
schedule thereafter (*using new minimum rates)
Total payments to age 94 = $1,485,847
AGE
WITHDRAWAL A
WITHDRAWAL B
ACCOUNT
BALANCE
65
$25,000
$25,000
$505,450
71
$32,787
$32,565
$657,781
80
$66,752
$37,350
$536,430
85
$76,736
$55,617
$709,234
94
$79,673
$100,439
$494,925
61
Strategy for Dealing with Market
Downturn Early in Retirement
• A strategy to deal with having the stock market drop
substantially just before or just after you start drawing
your income.
• Take your cash flow requirements out of a fund that is not
market related. i.e. Take it out of Short Term or GIC
funds
• Taking money out of a fund that is already decreasing in
value due to a market correction can be distressing
62
Decumulation Phase
RRIF
Allocation your asset value
($500,000)
Majority of asset ($425,000)
3 Years Income ($75,000)
BALANCED FUND
GUARANTEED FUNDS
63
Annuity or RRIF/LIF-type?
Annuity
•
•
•
•
•
Capital exchanged
Lifetime income
Sense of security
Enhancements
No investment choice
during economic
tsunami
• Can’t change
RRIF/LIF-type
• Capital retained
• Growth potential
• Investment flexibility
• Flexible income
• Cash withdrawals (RRIF)
• Can convert to an annuity
but not required
• Longevity risk (RRIF)
64
What Some Advisors Suggest
• Start with RRIF/LIF ( Active Phase)
• Consider changing part to Life Annuity in late 70’s
(Passive Phase)
• Interest rates have less impact on annuity pricing
than mortality at higher ages
• It is best to consult your financial planner who can
develop a personalized plan for you
65
Government-Administered Benefits
www.servicecanada.gc.ca
Old Age Security at age 65
Canada Pension Plan
•
•
•
•
•
•
Minimum 10 years in Canada
Max = $570.52 per month
Can defer to age 70
40 years in Canada = Max
Indexed quarterly
Non-Resident rules – at least 20
years in Canada
•
Maximum $1,092.50 Monthly
•
Indexed annually
Clawback on OAS - Net Income
•
•
Starting at $73,756
Ending at $119,398
* new online application
Special features
•
Available from age 60
•
Defer until age 70
•
Split payment with your spouse
(at source)
*My Service Canada Account
66
It is NOT all about Income in
Retirement!
• We need to have access to capital, too!
• Where is this money going to come from?
67
Sources of Retirement Income
and Capital
Home
Non-RRSP
Savings
RRSP Savings
Registered Pension
Plan (RPP)
CPP
OAS
68
Accessing Capital
•
•
•
•
•
•
Tax-Free Savings Accounts
Non Registered Savings Plan
RRSPs
RRIFs
Voluntary contributions to a Faculty Pension Plan
Home – Downsize, Home Equity, Credit Line Loan or
Reverse Mortgage
69
Tax-Free Savings Accounts
• Investment earnings and withdrawals are never taxed
• Can invest in Stocks & Bonds, Mutual Funds, GIC’s, etc.
• Could help eliminate or reduce clawbacks
• Help pay medical expenses in retirement
• Fund vacations
• A ‘rainy day” fund
• A place to invest Age 71 RRIF/LIF minimums
*2016: $5,500
70
Reverse Mortgages
• Access equity in our home without selling our home
• We can receive up to 40% of the value of our home
• Home must be fully paid for
• Take as a lump sum and/or a monthly income
• No tax implications
• Repayment is not required until the home is sold
71
Reverse Mortgages - Cautions
• High interest rate
• Amount owing compounds very quickly, and can
significantly reduce your estate
• We may need capital from our home to fund nursing/
retirement care home later in life and it may not be there if
we have taken a reverse mortgage
• Could be most beneficial where time frame is relatively
short such as an elderly person/couple wanting to stay at
home in later years but need capital to live on.
72
Accessing Capital
A separate investment fund for travel expenses will help budget
for capital needs in retirement and provide for laddering
investments to mature when they are needed
(CONTINGENCY
SAVINGS)
(TRAVEL SAVINGS)
-NEW CARS
-TRAVEL EXPENSES
-HEALTH CARE
-UNPLANNED
EXPENSES
73
Planning Your Retirement Income
What are the Risks?
• Longevity
• Market Volatility
• Insufficient Access to Capital for
Contingencies
• Inflation
74
Inflation Reduces Purchasing
Power Even at Only 2% Per Year
Number of years
retired
Value in today’s
dollars
0
$38,500
10
$31,457
20
$25,702
30
$21,000
75
Do We Need 100% Inflation
Protection?
• 100% is nice to have but is it necessary for retirees?
• (child care, rent, tuition fees, mortgage interest,
furnishings, entertainment, dining)
• BUDGET =
• CPP/OAS =
• % Indexed =
$4,000
$2,000
50%
$6,000
$2,000
33%
76
How Much Income Do We Need
at Retirement?
The goal should be to maintain the same
standard of living in retirement as we had
before retirement.
77
% of Pre-Retirement Income Needed
• It is different for each of us.
• How much is the NET Salary Deposit to your bank each
month?
• What % is being used for living expenses. Do a budget
showing your current expenses.
• Do another budget estimating your expenses in retirement
• The key is to have little or no debt when you retire. It then
becomes very easy to adjust your lifestyle to the income
you will receive.
78
Tax and Other Savings In
Retirement
• Lower income means lower taxes
• Age 65 tax deduction credit - $7,125 (reduced for
earnings from $35,927 and eliminated at $83,427)
• $2,000 Pension Income tax deduction credit ($1,000
Provincial)
• Deem your pension income to be split with your
spouse to reduce taxes
79
Pension Income Splitting
• Shift up to 50% of eligible pension income to
spouse in a lower tax bracket
• Impacts federal income taxes only
• Make the election each year when you file your
previous year’s tax return
• A deemed transfer for tax calculation purposes
only
• Either or both spouse’s can make the election
80
Income Taxation (BC)
Approximate Rates for 2016
•
•
•
•
•
•
•
•
•
•
0% tax on the first $11,474 of income
20.06% on income between $11,474 and $38,210
22.70% on income between $38,210 and $45,282
28.20% on income between $45,282 and $76,421
31.00% on income between $76,421 and $87,741
32.79% on income between $87,741 and $90,563
38.29% on income between $90,563 and $106,543
40.70% on income between $106,543 and $140,388
43.70% on income between $140,388 and $200,000
47.70% on income above $200,000
Only 50% of capital gains are included into income
Dividends receive special income tax credits when earned in a taxable account
81
How Federal Taxes Can Be
Reduced
• Lower overall marginal tax rate
• Clawbacks can be reduced or eliminated
• Old Age Security Pension
• Age 65 Tax Credit ($7,125 in 2016)
• Pension Income Tax Credit of $2,000 could be
claimed by you and your spouse
82
What is Eligible For Deemed
Transfer to Spouse
BEFORE 65
Life annuity from
pension plan
FROM 65
NOT ELIGIBLE
Life annuity
Cash Withdrawals
while deferred
RRIF
Old age Security
LIF
Canada Pension Plan
83
Other Savings In Retirement
• Higher Property Tax Credit
•
You can defer paying property taxes in BC and pay only
simple interest. Let the kids worry about it!
• Lower ICBC Premiums after 65
• Buses, ferries, eye examinations – all cheaper!
• Shopping (senior discount days), movies, hotels
*********
• You pay more for extended health/dental
84
UBC FPP Retirement
Income Options
FPP Account
Applicable to all or part of your total account balance
Defer Decision
Variable Payment
Life Annuity
Flexible Income Options
RRIF/LIF-Type Payments
85
External Options
• Non-locked-in RRSP
• Locked-in retirement account (LIRA)
• Life annuity
- Fixed payments
- Variable payments
- Indexed payments
• RRIF (Non-locked-in funds)
• LIF (Locked-in funds)
• GMWB- Guaranteed Minimum Withdrawal
Benefit Plans
86
Guaranteed Minimum Withdrawal
Benefit Plans (GMWB)
• Combine life annuity with RRIF. Pension for life and
full death benefit for remaining account balance
• Guaranteed to receive 5% of account balance at
retirement for life even if you run out of money
• Possible to receive higher guaranteed payment
amounts every 3 years at reset points
• Full death benefit of market value of fund at anytime
87
Downsides to GMWB
• Higher management fee by about 1%
• The 5% guarantee will be badly outpaced by inflation
if and when your money runs out
• Few are likely to run out of money with a balanced
fund approach
• Consult your financial planner/advisor for details on
how they work.
88
EXTERNAL OPTIONS
• Unsolicited financial advice
• Not affiliated with the Faculty
Pension Plan
89
EXTERNAL OPTIONS
Things to Consider
• Allows you to gain access to more investment
options
• You could set up a “self-directed” plan
• Professional investment advice is often
available
• More lifetime annuity options
• Management and administrative fees are
usually higher than FPP
90
UBC OPTIONS
Things to Consider
• Management and administrative fees are
usually lower
• You can access the same investment funds
you are already familiar with
• The FPP is closely supervised by Trustees
• We are not financial advisors
91
FLEXIBILITY
• Use all or part of your account balance for any
of the choices
• Elect to transfer all or part of your account
balance to a financial institution.
• You can re-transfer funds back into the plan at a
later date
• You can transfer RRSP funds into your UBC
Faculty Pension Plan account
92
Transfers From Other Plans
• All funds from other registered plans are
accepted, including:
– RRSP’S (excluding spousal)
– RPP’S
• There are no tax consequences
• Check if any transfer fees from current
provider
93
QUICKIE QUIZ
Mary’s father has five daughters:
1. Nana
2. Nene
3. Nini
4. Nono
5. What is the name of
the 5th daughter?
94
Working at UBC Beyond Age 65
WITHOUT Starting a UBC Pension:
•
Pension contributions continue until age 71.
•
No Reduction for part-time with 15 years service
•
Group Benefit Coverage continues except:
–
–
–
IRP + Spousal Life
Basic Life reduces to 1 times salary
CPP & OAS are payable
95
Working at UBC Beyond Age 65
PLUS Starting a UBC Pension:
• Pension contributions cease
• Group benefits cease
• Option to continue health and dental on
employee pay all basis
• CPP & OAS are payable
96
Services of a Financial Planner
• Physician – Physical Health
• Financial Planner – Financial Health
97
Services of a Financial Planner
•
•
•
•
•
•
•
Investment allocation advice
Tax planning
Do you want to leave an estate?
Monthly budgeting
Debt management
Management of your non-registered assets
Develop a Long Term Financial Plan for you
98
Creating a Financial Plan
• A Will and Financial Plan are both essential
• Identify what you own and what you owe
• What is your cash flow – income and expenses
• Identify your tolerance for investment risk
• Determine what standard of living you expect in
retirement and what your expenses will be
• Recommend investments that will ensure you meet
your goals
• A Financial Planner can help
99
Creating a Financial Plan
Knowing the path you are going to take to reach
your financial goals is as essential as if you were
taking a trip.
100
Financial Planners
• Should be able to assist you in pension decisions in
context of an overall financial plan
• Many different types of compensation
• Article: Choosing a Financial Planner
• Additional resources:
 www.theglobeandmail.com/globe-investor/personal-finance
 www.GetSmarterAboutMoney.ca
 http://www.financialplanningforcanadians.ca/
101
Making Investment Choices
• Investing 101
• Faculty Plan fund options
• Things to consider when choosing an investment
strategy that is right for you
• What is risk?
• How often should I change my investment
allocation?
• Common mistakes advisors say investors make
102
General Classes of Investments
Investing 101
Rates of Return
Equities
Bonds
GICs
Money Market
Variability of returns
103
RISK / REWARD
HIGH
ABOVE
AVERAGE
MEDIUM
LOW
EMERGING
MARKETS
CONVERTIBLE
DEBENTURES
BLUE CHIP
STOCKS
T-BILLS
PENNY
STOCKS
SMALL CAP
STOCKS
GOVERNMENT
BONDS
GIC’S
FUTURES
WARRANTS
CORPORATE
BONDS
CANADA
SAVINGS
BONDS
INCOME REAL
ESTATE
PREMIUM
SAVING A/C’S
DERIVATIVES
SPECULATIVE
REAL ESTATE
104
FPP Long Term Investment
Objectives
• Capital Preservation Versus Speculation
• Professional Investment Managers –
Buy/Sell Securities
• Performance Objectives
• Performance Assessment
105
Long Term Asset Class Returns
Investment Results
(Growth of $100 from December 1949 to December 2014)
$90,000
Value of $100
(Annualized
Rate of Return)
US Equities in $C:
$112,162 (11.4%)
Canada Equities:
$47,113 (9.9%)
$9,000
Bonds:
$11,329 (7.6%)
T-Bills:
$3,160 (5.5%)
$900
Inflation
$1,022 (3.6%)
$90
1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014
106
Rates of Return
FPP Investment Funds
Canadian &
Foreign Equity
Funds
Balanced Fund
Bond Fund
Short-Term
Investment
Fund
Variability of Returns
107
Investment Policy-Asset Mix
Asset Class
Balanced
Fund
Bond
Fund
Canadian Equities
20.0%
Global Equities
30.0%
Real Estate (CAD)
10.0%
Real Return Bonds
8.0%
20.0%
Government and
Corporate Bonds
32.0%
80.0%
Canadian
Equity
Fund
Foreign
Equity
Fund
GICs
100.0%
100.0%
Short term debt
securities
Assets (Millions)
Dec 31, 2015
Short -Term
Investment
Fund (STIF)
100.0%
$1,652.1
$50.5
$125.8
$125.8
$34.3
$16.6
108
Investment Performance
109
Which Fund Should I Invest In?
Investment Fund
2010 Gross
Return
2011 Gross
Return
2012 Gross
Return
Balanced
9.98%
3.18%
10.14%
Bond
8.61%
10.52%
4.37%
Can. Equity
17.97%
-7.95%
11.52%
Foreign Equity
6.27%
-2.14%
16.46%
Short Term
0.58%
1.25%
1.26%
110
Which Fund Should I Invest In?
Investment
Fund
2010 Gross
Return
2011 Gross
Return
2012 Gross
Return
2013 Gross
Return
Balanced
9.98%
3.18%
10.14%
13.77%
Bond
8.61%
10.52%
4.37%
-3.58%
Can. Equity
17.97%
-7.95%
11.52%
20.33%
Foreign
Equity
6.27%
-2.14%
16.46%
36.81%
Short Term
0.58%
1.25%
1.26%
1.36%
111
Which Fund Should I Invest In?
Investment
Fund
2008 Gross
Return
2009 Gross
Return
2010 Gross
Return
2011 Gross
Return
Balanced
-13.00%
12.46%
9.98%
3.18%
Bond
2.73%
10.47%
8.61%
10.52%
Can. Equity
-30.69%
30.67%
17.97%
-7.95%
Foreign
Equity
-26.48%
10.49%
6.27%
-2.14%
Short Term
3.12%
0.46%
0.58%
1.25%
112
What does this tell us?
• Last year’s returns are not next year’s returns
• You would be playing a futile guessing game if
you made long term investment decisions based
on short term returns
• Long term investment decisions are just that –
long term and should be not be changed in
response to short term market swings
113
Long Term Averages
Can Be Misleading
10 Year Gross Averages
to December 31, 2012
Balanced
7.06%
Bond
6.26%
Can. Equity
10.28%
Foreign Equity
3.12%
Short Term
2.31%
114
Averages Can Be Misleading:
10 Year Gross Average Returns
10 Year Gross Averages
to December 31, 2007
Balanced
7.15%
Bond
6.07%
Can. Equity
10.48%
Foreign Equity
3.38%
Short Term
4.35%
115
What does this tell us?
• Be wary of average returns - one year’s unique
results can skew long term averages
• Our investment decision needs to be based on our
tolerance for variability in returns.
• Look at long term returns but look at the long term
pattern to see if it fits with your risk tolerance.
116
Asset Class Annual Performance
117
GROSS Annual Returns:
Finding your Risk Tolerance
(Funds With Stocks)
Year
Equity (CDN)
Equity (Foreign)
Balanced
2006
19.01%
20.22%
13.96%
2007
11.52%
-9.74%
3.19%
2008
-30.69%
-26.84%
-13.00%
2009
30.67%
10.50%
12.46%
2010
17.97%
6.27%
9.98%
2011
-7.95%
-2.14%
3.18%
2012
11.52%
16.46%
10.14%
2013
20.33%
36.81%
13.77%
2014
10.72%
16.23%
11.44%
2015
-6.75%
19.55%
6.56%
10 Yr Av.
6.10%
7.33%
6.87%
118
Advantages of a Balanced Fund:
Risk is Reduced by Diversification
•
•
•
•
•
•
•
Asset Class (Stocks, Bonds, Real Estate)
Countries
Investment Manager Styles
Industries and Sectors
Government and Corporate Bonds
Long Term and Short Term Maturities
Currencies
119
Your Most Important Decision
• The most important decision you have to make is to
decide what % of your pension fund will be invested
in stocks and what % will be invested in fixed
income (Bonds, Real Estate, etc.)
• what will your Balanced Fund look like?
• Are you comfortable with the asset allocation of the
FPP Balanced Fund or would you prefer to build
your own Balanced Fund?
120
Balanced Fund
Target Asset Allocation
Canadian Real
Return Bonds
8.0%
Canadian Real
Estate 10.0%
Canadian Equities
20.0%
US Equities
6.0%
Fixed Income
32.0%
*
Global Equities
24.0%
Global Equities includes investments in both U.S. Equities and Non-North American Equities
121
Some Possible Asset Allocations
80%
High‐risk tolerance
35% 65%
Aggressive
50%
Risk
Acceptable volatility (long-term)
20%
50%
Moderate
65%
20%
80%
35% Conservative
Equities
Risk‐averse
Fixed‐income securities
Potential Return
122
Asset Allocation Tool
Investment Risk Profiler
123
Your Results
124
Asset Mix
125
You Can Build Your Own
Balanced Fund
What is the asset allocation of your Balanced Fund?
Canadian Equities
Global Equities
Bonds
Real Estate
?%
?%
?%
?%
• If you want real estate exposure, you must have some of
your assets in the Balanced Fund
126
Don’t Forget to Rebalance!
• Rebalancing back to your original asset
allocation at least annually is the key to staying
on track!
• Do this regardless of market conditions
• Investment advisor can be very helpful in
developing an investment plan
127
The Importance of Re-Balancing
Canadian
Equity
Foreign
Equity
Bond
Fund
End of
2002
20%
20%
60%
End of
2007
32%
18%
50%
128
The Importance of Re-Balancing
129
Building Your Own Balanced Fund
Which Equity Fund?
• CANADIAN EQUITY FUND
OR
• FOREIGN EQUITY FUND
130
Why Consider Investing
Outside of Canada?
• Narrowness of Canadian Market (Energy, Materials
& Financials)
• Canada is only 3% of world market – (could be
missing out on 97% of the worlds investment
opportunities)
• Small # of firms dominate Canadian Market
(example of Nortel – 30% in 2000)
131
Investing Outside Canada Offers Access to More Types of
Companies and Stronger Economies — Diversification
Top 3 Sector Weights
As of December 31, 2015
TSX
S&P 500
MSCI EAFE
Financials
38.3%
Information
Technology
20.7%
Financials
20.8%
Energy
18.5%
Financials
16.5%
Information
Technology
14.2%
9.5%
Health Care
15.2%
Health Care
13.5%
Total
52.4%
Total
48.5%
Materials
Total
66.3%
132
Why Consider Investing
Outside of Canada?
133
Making your Investment Choice:
Things to Consider
•
•
•
•
The Nature of Faculty Pension Plan Investments
Investment Time Horizon
Tolerance for Variability of Returns
Historical Returns (does the pattern of returns fit your
tolerance for risk)
• Other non-pension investments/assets
• Investment knowledge/interest
• Work with professional investment and financial
advisors
134
Does it Matter?
Growth of $100,000 Over 20 Years
$800,000
10%:
$672,750
$700,000
Investment
$600,000
8%:
$466,095
$500,000
6%:
$320,700
$400,000
$300,000
4%:
$219,112
$200,000
$100,000
$0
0
5
10
15
20
Years
4%
6%
8%
10%
135
Inflation
• Why we need an Investment Strategy that will
outpace inflation!
• What $1,000 is worth in 20 years:
2%
3%
4%
$673 $545
$456
• $1.00 dollar earned in 1986 is now worth 47 cents
136
Risk
What is RISK?
• A scary 4 letter word that causes emotional
thinking rather than rational thinking.
137
Newspaper Headlines From
October 1987
• Another massive sell-off devastates
Wall Street
• It’s Armageddon, stock analyst says as
panic continues
• Traders push panic button as sky falls
on markets
• Global stock markets in free-fall
• Gates of hell open wide – investors fall
in, never to be heard from again
138
Emotional Thinking
• Anxiety and fear of losing all my money
• Loss of sleep
• Leading to Panic Selling – locking in
losses
139
Making Investment Changes
During a Market Correction
Balanced Fund
• May 2008 - $441,961
• Dec 2008 - $374,504
• Difference - $(67,457)
Moved to Short Term Fund at December 31, 2008
• Short Term Fund at Nov. 10 • Balanced Fund at Nov. 10 • Difference
$376,900
$445,510
$ 68,610140
The Remedy For Fear
If you do not invest beyond your risk tolerance
you will never have to worry about fear taking
control and being responsible for emotional
decisions during a market downturn.
141
Rational Thinking
• Average stock market declines last about 8
months
• Market corrections are normal and they have
always recovered and exceeded new highs
• Stocks are now cheaper
• Stocks compensate for short term volatility by
providing higher returns.
• Stocks are only one component in a Balanced
Fund
142
What is Risk?
• Possible loss of all my money invested in the
Faculty Pension Plan?
OR
• Variability of returns – the ups and downs
• Possibility that my investments won’t earn
enough to last for my life
143
Sample of 2015 Holdings in FPP
Canadian Equity & Balanced Fund
•
•
•
•
•
•
•
•
•
•
Alimentation Couche-Tard
Bank of Nova Scotia
BCE Inc.
Brookfield
Canadian National Railway
Cenovus Energy
CGI Group
CIBC
Constellation Software
Fortis Inc.
•
•
•
•
•
•
•
•
•
•
Manulife
Open Text Corp.
Royal Bank of Canada
Saputo
Sun Life
Suncor
Toromont
Toronto Dominion Bank
TransCanada
Valeant
144
How Often Can I Change My
Investment Allocation?
• Online allocation changes on Sun Life website
• Daily Valuation- BEFORE 4:00 pm EASTERN
• Watch for Short-term Trading warning
145
Advice From Professionals
“If you want to see the greatest threat to
your financial future then go home and
take a look in the mirror!”
Warren Buffet
146
Advice From Professionals
“In the end, how your investments
behave is much less important than how
you behave!”
Benjamin Graham
147
Mistakes Investment Advisors Say
Are Hazardous to Your WEALTH
• Failing to realize that market
downturns are normal.
148
Recovery of Markets After
Major Downturns
YEAR
CRISIS
1982
Latin American financial crisis
1984
US Bank crisis
1987
Black Monday- US stock crash
1990
US Savings & Loan Crisis
1995
Mexican pesos crisis
1997
Asian economic recession
1998
Hedge Fund blow-up
2000
Tech stock meltdown
2008
US sub-prime mortgage crisis
2011
European and U.S. Debt Crisis
149
Including dividends, the 2009 annual returns
rank 3rd behind only 1979 and 1983.
2008 was by far the worst year over this period.
S&P/TSX Total Return Index:
Annual returns 1957 to 2009
50%
40%
35%
30%
20%
10%
0%
‐10%
‐20%
‐30%
‐40%
-33%
150
Addiction to Prediction
“It is very difficult to make predictions –
especially about the future!”
Yogi Berra,
New York Yankees
151
The Challenge of Trying to Time the Markets
Year
Canadian Equity Fund
Bond Fund
2002
-9.19%
8.33%
2003
29.14%
6.40%
2004
14.37%
6.42%
2005
23.73%
6.19%
2006
19.01%
3.44%
2007
11.52%
3.78%
2008
-30.69%
2.73%
2009
30.67%
10.47%
2010
17.97%
8.61%
2011
-7.95%
10.52%
2012
11.52%
4.37%
2013
20.33%
-3.58%
2014
10.72%
9.62%
2015
-6.75%
3.54%
(gross annual returns)
152
Markets are Unpredictable!
(Returns include dividends and are measured in Canadian $)
Stock Market/Country
2011 Returns
US- Dow
+10%
US-S&P 500
+3%
US. Nasdaq
+1%
U.K
-1%
Japan
-9%
Korea
-11%
Canada
-12%
China
-15%
Germany
-16%
Hong Kong
-16%
France
-17%
India
-32%
153
Mistakes Investment Advisors Say
Are Hazardous to Your WEALTH
• Thinking we can consistently time market
downturns and recoveries
• A double-edged sword
154
Don’t Miss the Large Quarterly
Gains That Frequently Occur
August 1996: From Balanced to Short Term
March 1998: From Short Term to Balanced
August 1996 to February 1998 Returns
Short Term Fund: 10.11%
Balanced Fund:
30.95%
155
The Problem with Paying Too Much
Attention to Short Term Returns
2010 NET RETURNS
BALANCED FUND
BOND FUND
January – August
1.89%
6.91%
* Member changes from Balanced Fund to Bond Fund
Sept. – Dec.
7.48%
Balanced Fund Return:
Bond Fund Return:
Member’s Return
1.34%
9.37%
8.25%
3.23%
156
Balanced Fund Annual Returns (Net)
30 Year Track Record - 8.37%
1986-1995
1996-2005
2006-2015
11.38%
18.58%
13.58%
2.33%
14.54%
2.66%
9.00%
6.79%
-13.45%
14.62%
10.90%
11.93%
-0.46%
4.77%
9.37%
16.29%
0.64%
2.62%
7.33%
-3.07%
9.58%
22.19%
12.36%
13.18%
-0.54%
8.09%
10.86%
17.03%
11.79%
6.09%
157
Negative Quarters Are Normal!
(Based on Balanced Fund)
Year
Negative Quarters
Annual Return (Gross)
2006
1
13.96%
2007
0
3.19%
2008
3
-13.00%
2009
1
12.46%
2010
1
9.98%
2011
1
3.18%
2012
1
10.14%
2013
1
13.77%
2014
0
11.44%
2015
2
6.56%
158
Short Term Volatility in Equity
Investments Is a Fact of Life:
THINK LONG TERM!
• Over the very long term stocks have always been
the highest asset class
• Owners make more money than Lenders
• Negative returns happen in less than 5 year
averages not in the long term
• Choose the level of short term volatility you are
comfortable with and stick to the plan
• Reacting to short term market noises can destroy
a good long term plan
159
What Professionals Say About Making
Investment Allocation Changes
• Try NOT to make changes in response to what is
happening in the markets.
• Instead make changes when:
– You want to rebalance your unique balanced fund.
– You feel there is a change in your long term risk
tolerance- life cycle investing.
160
Sample Life Cycle Investing
Age
Asset Mix
Equity %
20-40
Balanced
Canadian Equity
Foreign Equity
50%
25%
25%
75%
40-50
Balanced
Canadian Equity
Foreign Equity
70%
15%
15%
65%
50-60
Balanced
Bond Fund
90%
10%
45%
60-70
Balanced
Bond
GIC
80%
10%
10%
40%
70+
Balanced
Bond
GIC
60%
30%
10%
30%
161
Advice From Professionals
“The investor with a portfolio of sound stocks and
bonds should expect their values to fluctuate and
should neither be concerned by sizable declines
nor become excited by sizable advances. Always
remember that market corrections are temporary
and are there to either be taken advantage of or
to be ignored!”
Benjamin Graham
162
Summary of Investor Mistakes
•
•
•
•
•
•
•
Having all our “eggs” in one basket
Putting too much long term money into savings vehicles
(GIC’S) rather than investment vehicles
Chasing last years returns (rear view mirror investing)
Not understanding our tolerance for risk
Trying to time the markets – thinking they are
predictable
Moving pension money into short term investments near
or at the end of a market downturn
Leaving funds designated for long term investing parked
in a short term fund for too long a period of time
163
Investment Advisor
Recommendations
• Diversification
• Expect market corrections but see them for what
they are – normal and buying opportunities
• Stay invested – don’t try and guess market ups and
downs. Markets are unpredictable and will always
surprise you! Try to avoid prediction addiction!
• Review pension investments annually not
daily/monthly. Think long term
• Work with a professional advisor
164
165
Keeping Perspective by
Remembering Our Priorities
1. SPIRITUAL AND MENTAL HEALTH
2. PHYSICAL HEALTH
3. TIME
4. HELPING OTHERS
5. MONEY
166
167
2016 Annual Pension Forum
Date:
Time:
Place:
May 25, 2016 (Wednesday)
10:30 am - 1:00 pm (doors open 10:15 am)
Commons Block Ballroom
Marine Drive Residence, 2205 Lower Mall
Presentation begins at 10:30 am
• Plan performance in 2015
• Review 2015 and 2016 Initiatives
Information Tables & Guest Exhibitors 11:30 am to 1:00 pm
◦ New to the Plan
◦ Retirement
◦ UBC Retirement & Survivor Benefits
◦ Faculty Relations
◦ Service Canada
Happiness Comes From Within
“Happiness resides not in possessions
and not in gold. The feeling of happiness
dwells in the soul”
Democritus (460-370 BC)
169