Would people be better off if they worked a little longer, and collected their retirement benefits a little later?

A new study from the Canadian Institute of Actuaries (CIA) called Retire Later for Greater Benefits explores this idea, and proposes a number of changes, including moving the “target eligibility age” for the Canada Pension Plan and Quebec Pension Plan to 67 from 65, while moving the earliest age for receiving these benefits from 60 to 62. As well, the CIA’s research recommends that the latest date for starting these benefits move from 70 to 75.

Old Age Security (OAS) would see its target age move to 67 from 65. For registered pension plans (RPPs), the CIA similarly recommends moving the target retirement age to 67 from 65, and the latest retirement date to 75 from 71.

Why make such changes? An infographic from the CIA notes that we are living longer – a 65-year-old man in 2016 can expect to live for 19.9 years, while a woman can expect 22.5 more years of living. This is an approximately six-year improvement versus 1966.

So we are living longer, the study notes, but face challenges, such as “continuing low interest rates, rising retirement costs, the erosion of private pensions and labour force shortages.”

Save with SPP reached out to the CIA President John Dark via email to ask a few questions about these ideas.

Is, we asked, a goal of this proposal to save the government money on benefits? Dark says no, the aim “is not about lowering costs to the government. The programs as they are currently formulated are sustainable for at least 40 to 75 years, and we believe this proposal will have minimal if any implications on the government’s costs.

“We are suggesting using the current increments available in the CPP/QPP and OAS to increase the benefits at the later age.” On the idea of government savings, Dark notes that while CPP/QPP are paid for by employers and employees, OAS is paid directly through government revenue.

Our next question was about employment – if full government pension benefits begin later, could there be an impact on employment opportunities for younger people, as older folks work longer, say until age 75?

“We’re not recommending 75 as the normal retirement age,” explains Dark. “We are recommending that over a phase-in period of about 10 years we move from a system where people think of ‘normal’ retirement age as 65 to one where 67 (with higher benefits) is the norm.

“The lifting of the end limit from 71 to 75 is at the back end; there are currently those who continue to work past normal retirement and can continue to do so even later if they choose,” he explains. “Current legislation forces retirees to start taking money out of RRSPs and RPPs at age 71 – we think this should increase to 75 to support the increasing number of Canadians who are working longer.”

As for the idea of younger workers being blocked from employment opportunities, Dark says “if we had a very static workforce this might as you suggest cause a bit of blockage for new entrants, but as we say in the paper, Canada has the opposite problem.

“Many areas are having a difficult time finding workers,” he explains, adding that “in the very near future a great many baby boomers will begin to retire. We think allowing people who want to remain in the work force can help with that.

“It’s important to remember that if you have planned retirement at 65 this proposal won’t prevent you from doing that except that OAS wouldn’t be available until 67 instead of 65 (and we expect the government would explore other options for supporting vulnerable populations who need OAS-type support at earlier ages).” Dark explains.

Would starting benefits later mean a bigger lifetime benefit, and could it help with the finnicky problem of “decumulation,” where retirement savings are turned into an income stream?

“Under our proposal,” Dark explains, “people could work just a little longer and get higher benefits for life. By itself that doesn’t make decumulation any less tricky – but perhaps a little more secure.

“For many people in defined contribution (DC) plans who have no inflation protection, longevity guarantees, or investment performance guarantees from an employer, using your own funds earlier and leaving the start of CPP and OAS to as late as possible can help provide some of the best protection against inflation for at least part of your retirement income,” he adds. And, he notes, because you waited, you will get a bigger benefit than you would have got at 65.

Finally, we asked if having a longer runway to retirement age might help Canadians save more for their golden years.

“Clearly by having a longer period of work you have more opportunity to accumulate funds, and by providing more security of retirement income it will help as well,” Dark notes. “We also know that Canadians are already starting their careers later in life – getting established in their 30s rather than their 20s, for example – and need that longer runway anyway.

“Overall, to me the most important word in the report is `nudge.’ If we can get people to think about retirement sooner and get governments to act on a number of areas that we and others have outlined we hope to improve retirement security for Canadians. This is just the start of a journey that will have lots of chapters.”

We thank John Dark, as well as Sandra Caya, CIA’s Associate Director, Communications and Public Affairs, for taking the time to speak with Save with SPP. Some additional research of the CIA’s can be found on Global News Radio, BNN Bloomberg and the Globe and Mail.

Even if the runway towards retirement age is lengthened, it’s never too early to start saving for retirement. If you don’t have a workplace pension plan, or do but want to augment it, the Saskatchewan Pension Plan may be a vehicle whose tires you should consider kicking. It’s an open DC plan with a good track record of low-cost investment success, and many options at retirement for converting your savings to a lifetime income stream.

Written by Martin Biefer
	Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock. He and his wife live with their Shelties, Duncan and Phoebe, and cat, Toobins. You can follow him on Twitter – his handle is @AveryKerr22

A look at the best of the Internet, from an SPP point of view

Tax-free pension plans may offer a new pathway to retirement security: NIA

With workplace pensions becoming more and more rare, and Canadians generally not finding ways to save on their own for retirement, it may be time for fresh thinking.

Why not, asks Dr. Bonnie-Jeanne MacDonald of the National Institute on Ageing, introduce a new savings vehicle – a tax-free pension plan?

Interviewed by Yahoo! Finance Canada, Dr. MacDonald says the workplace pension plan model can work well. “Workplace pension plans are a key element to retirement income security due to features like automatic savings, employer contributions, substantial fee reductions via economies of scale, potentially higher risk-adjusted investment returns, and possible pooling of longevity and other risks,” she states in the article.

Dr. MacDonald and her NIA colleagues are calling for something that builds on those principles but in a different, tax-free way, the article explains. The new Tax-Free Pension Plan would, like an RRSP or RPP, allow pension contributions to grow tax-free, the article says. But because it would be structured like a TFSA, no taxes would need to be deducted when the savings are pulled out as retirement income, the article reports.

“TFSAs have been very popular for personal savings, and the same option could be provided to workplace pension plans. It would open the pension plan world to many more Canadians, particularly those at risk of becoming Canada’s more financially vulnerable seniors in the future,” she explains.

And because the money within the Tax-Free Pension Plan is not taxable on withdrawal, it would not negatively impact the individual’s eligibility for benefits like OAS and GIS, the article states.

It’s an interesting concept, and Save with SPP will watch to see if it gets adopted anywhere. Save with SPP earlier did an interview with Dr. MacDonald on income security for seniors and her work with NIA continues to seek ways to ensure the golden years are indeed the best of our lives.

Cutting bad habits can build retirement security

Writing in the Greater Fool blog Doug Rowat provides an insightful breakdown of some “regular” expenses most of us could trim to free up money for retirement savings.

Citing data from Turner Investments and Statistics Canada, Rowat notes that Canadians spend a whopping $2,593 on restaurants and $3,430 on clothing every year, on average. Canadians also spend, on average, $1,497 each year on cigarettes and alcohol.

“Could you eat out less often,” asks Rowat. “Go less to expensive restaurants? Substitute lunches instead of dinners? Skip desserts and alcohol?” Saving even $500 a year on each of these categories can really add up, he notes.

“If you implemented all of these cost reductions at once across all of these categories, you’d have more than $186,000 in additional retirement savings. That’s meaningful and could result in a more fulfilling or much earlier retirement,” suggests Rowat. He’s right – shedding a bad habit or two can really fatten the wallet.

If you don’t have a retirement plan at work, the Saskatchewan Pension Plan is ready and waiting to help you start your own. The plan offers professional investing at a low cost, a great track record of returns, and best of all, a way to convert your savings to retirement income at the finish line. You can set up automatic contributions easily, a “set it and forget it” approach – and by cutting out a few bad habits, you can free up some cash today for retirement income tomorrow. It’s win-win.

Written by Martin Biefer
	Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing, classic rock, and darts. You can follow him on Twitter – his handle is @AveryKerr22

 

Hi. My name is Sheryl Smolkin, and today I’m interviewing Randy Bauslaugh for a savewithspp.com podcast. Randy is a partner at the McCarthy Tétrault law firm, where he leads the national pensions, benefits, and executive compensation practice. He has been involved with many of the leading pensions and benefits cases over the last 30 years, and he is also a member of the Saskatchewan Pension Plan.

Welcome, Randy. I’m so glad you could make time for us in your busy schedule.

Thanks. I’m happy to give back to the SPP.

That’s terrific. Randy has recently written an article titled Dumb and Dumber: Individual Investment Choice in DC Plans. That’s what we’re going to talk about today. 

Q: Randy, that’s a very provocative title for an article. Tell me about the independent research supporting your thesis that giving investment choice to plan members in defined contribution RPPs is riskier from a legal perspective and a bad idea from a financial performance perspective.
A: Sure. The research comes from various sources – research institutions, academics, news articles and a lot of that relates to the financial performance side. Also, on the legal side, I had a student a few years ago take a look, and there were 3,500 class actions relating to defined contribution plans particularly in the US and those were just relating to DC plan fees.

I think you can pick up any standard textbook on pensions and it will tell you that defined benefit plans have a low legal risk but potentially fatal financial risk. That’s because they guarantee the retirement payments. However, they always say DC plans have low financial risk, because the employer just contributes a fixed amount, but very high legal risk, because there are so many different ways of getting sued.

Q: Then why do DC plan sponsors typically provide a broad range of investment options for plan members?
A: Well, I don’t really know. I have some theories. Before the mid-1980s, most plans did not provide choice, and then it sort of became trendy. I think a lot of employers just believe that choice empowers their employees, or maybe it’s just because after all, who wants just one TV channel.

I also know for a fact that aside from individual empowerment or incentives for the financial industry, there are a lot of plan sponsors out there who think either they have a legal obligation to provide choice or they are somehow reducing their legal exposure if they do provide choice when exactly the opposite is true.

Q: What legal risks does offering multiple investment options raise for DC plan sponsors?
A: Well, one thing a client once said to me is, “Well, what about the (Capital Accumulation Plan) CAP guidelines? I need to provide choice to comply with the CAP guidelines.”  Financial market regulators put out something called Guidelines for Capital Accumulation Plans. Take a look at the table of contents and you’ll find a whole lot of ways of being sued under a DC plan that offers choice. I’ve got a slide presentation that just identifies 48 different ways in which plan members have sued their employers only over fees.

The other thing people should do is read the second paragraph of those guidelines. It says it applies where you’re giving two or more choices, so it doesn’t apply if you’re not giving any choice.

Q: Is providing only one investment option, such as a balanced fund, a set-and-forget strategy for plan sponsors, or do they still have active management and monitoring responsibilities?
A: They still have the active management and monitoring responsibilities. It’s definitely not just “let’s turn it on and forget about it.” Ideally, a DC plan should be managed like a defined-benefit fund. You may do a profile of what your current particular employee group looks like and then the investments can be shaped to that group’s profile, but you still need to manage it on a regular basis.

One of the advantages of a single fund is that you get professional management of the whole fund, not members making their own investment choices for their own little pots. Once you set it up, you should still review it every month or at least every quarter just to make sure that that fund has got an appropriate mix for your group.

Q: Why is a one-fund approach less expensive from a fees perspective for both plan sponsors and plan members?
A: Well, usually you can get economies of scale that will keep the fees down, because you’ve just got one big pot and not multiple little pots. I know that recently a lot of DC fund providers have dramatically reduced their fees for, say, balanced funds and other investment vehicles but some of the other esoteric funds are still pretty expensive. When you’ve got all these little individual accounts, you still have lots of transaction and other fees that are tied to those accounts. That tends to make them a bit more expensive than a pooled arrangement.

Q: Doesn’t having one or more investments managed by several investment managers better diversify a DC plan member’s portfolio and promote better overall returns?
A: Well, you can get that in a no-choice plan, as well, because you could have many managers that are managing different parts of the bigger pool. But the difference is you now have scale, and you’ve got professional management of the money.

Most plan members are not good at investing. In fact, only 7% or so of DC members can actually beat the rate of return of the average DB plan. One of the more interesting statistics that came up in the research was that only 3% of their professional advisors can beat the average rate of return of the average DB plan.

Q: What is a default fund, and what percentage of DC plan members typically invest in the default fund?
A: About 85% of the members in DC plans don’t make any choice at all. If they don’t make a choice, they end up in the “so-called” default fund. It’s a fund that you get into in default of making an election. Employers have to keep track of who is in the default fund because it’s not really clear whether it is just as a result of a decision or simply putting off investment of their money. It may actually be the plan member’s choice to go into the default fund.

In some surveys many members have said  that they thought the default fund must be the best fund because that’s the one the sponsor set up for people who don’t make decisions. Increasingly, what we’re seeing out there today, though, is people defaulting into what’s called a target date fund.

A target date fund is based on your age when you go into it, and as you start getting close to your retirement age, it will move your portfolio from largely stocks to largely bonds. That’s not a bad idea, because once you retire, the theory is you don’t have the capacity to make more income, so a loss just before retirement is undesirable.

One of my clients actually allows employees to choose their target date funds, and  they found that a number of people were choosing three of these target date funds because they weren’t sure if they were going to retire at age 55, 60 or 65. So they put a third of their money in each in case they retire early or later, which is probably the absolute worst thing they could do.

Q: How long have you been a member of Saskatchewan Pension Plan, Randy?
A: Probably about 10 years. I was at another firm some years ago, and they had a pension arrangement, and then when I came to this firm and they don’t. I just think SPP is a great idea.

I  know a lot of people … Even my own professional financial advisor questioned how I got into the SPP and asked whether I was born in the province. No, I wasn’t. It’s open to anybody, and it works just like an RRSP. Anyway, every year I just keep moving the maximum amount from my RRSP to the SPP, and I make the maximum contribution every year. I’m glad to see it’s gone up.

*This is the edited transcript of a podcast recorded in April 2018.

—

Written by Sheryl Smolkin
	Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.

By Sheryl Smolkin

By now you may be aware that there are changes to the Registered Retirement Income Fund (RRIF) withdrawal rules in the 2015 federal budget. But you may be wondering what difference it will make to you.

The basic purpose of the tax deferral provided on savings in registered pension plans (RPPs) and registered retirement savings plans (RRSPs) is to encourage and assist you to accumulate savings over your working career in order to meet your retirement income needs.

Consistent with this purpose, savings in Saskatchewan Pension Plan and RRSPs must be converted into a retirement income vehicle by age 71. In particular, unless you purchase an annuity, an RRSP must be converted to a RRIF by the end of the year in which you reach 71 years of age and a minimum amount must be withdrawn from the RRIF annually beginning the year after it is established (alternatively, the RRSP savings may be used to purchase an annuity). This treatment ensures that the tax-deferred RRSP/RRIF savings serve their intended retirement income purpose.

A formula is used to determine the required minimum amount a person must withdraw each year from a RRIF. The formula is based on a percentage factor multiplied by the value of the assets in the RRIF. The percentage factors (the RRIF factors) are based on a particular rate of return and indexing assumption.

Until this year, a senior was required to withdraw 7.38% of their RRIF in the year they are age 71 at the start of the year.  The RRIF factor increased each year until age 94 when the percentage that seniors were required to withdraw annually was capped at 20%.

The existing RRIF factors were in place since 1992. The 2015 Federal Budget adjusts the RRIF minimum withdrawal factors that apply in respect of ages 71 to 94 to better reflect more recent long-term historical real rates of return and expected inflation. As a result, the new RRIF factors will be substantially lower than the existing factors.

The new RRIF factors will range from 5.28% at age 71 to 18.79% at age 94. The percentage that you will be required to withdraw from your RRIF will remain capped at 20% at age 95 and above. Table 1 below shows the existing and proposed new RRIF factors.

TABLE 1: EXISTING AND NEW RRIF FACTORS
Age at January 1	Existing Factor %	New Factor %	Age at January 1	Existing Factor %	New Factor %
71	7.38	5.28	84	9.93	8.08
72	7.48	5.40	85	10.33	8.51
73	7.59	5.53	86	10.79	8.99
74	7.71	5.67	87	11.33	9.55
75	7.85	5.82	88	11.96	10.21
76	7.99	5.98	89	12.71	10.99
77	8.15	6.17	90	13.62	11.92
78	8.33	6.36	91	14.73	13.06
79	8.53	6.58	92	16.12	14.49
80	8.75	6.82	93	17.92	16.34
81	8.99	7.08	94	20.00	18.79
82	9.27	7.38	95+	20.00	20.00
83	9.58	7.71
SOURCE: BUDGET 2015 ANNEX 5.1

By permitting more capital preservation, the new factors will help reduce the risk that you will outlive your savings, while ensuring that the tax deferral provided on RRSP/RRIF savings continues to serve a retirement income purpose.

As illustrated in Table 2 below, the new RRIF factors will permit close to 50% more capital to be preserved to age 90, compared to the existing factors (Table 1 above).

TABLE 2: CAPITAL PRESERVED UNDER THE RRIF FACTORS
Age at January 1	Under existing RRIF factors	Under new RRIF factors	Difference (% more remaining)
71	100,000	100,000	–
80	64,000	77,000	20
85	47,000	62,000	32
90	30,000	44,000	47
95	15,000	24,000	60
100	6,000	10,000	67
1 For an individual 71 years of age at the start of 2015 with $100,000 in RRIF capital making the required minimum RRIF withdrawal each year.
2 Age 71 capital preserved at older ages is expressed in terms of the real (or constant) dollar value of the capital (i.e., the value of the capital adjusted for inflation after age 71). The calculations assume a 5% nominal rate of return on RRIF assets and 2% inflation.
SOURCE: BUDGET 2015 ANNEX 5.1

By reducing your RRIF withdrawals, you can retain more assets in your RRIF—assets that will continue to accumulate on a tax-deferred basis to support your future retirement income needs should you live to an advanced age. In addition, if you do not need your minimum RRIF withdrawal for income purposes, you can save the after-tax amount for future needs — for example, in a Tax-Free Savings Account (TFSA), if you have available TFSA contribution room.

Of course, if you need more money sooner, you can withdraw it from your RRIF and pay the tax owing. Any money that you withdraw from a RRIF will increase your income for the purposes of calculating the Old Age Security clawback and eligibility for the Guaranteed Income Supplement.

Also read: RRIF rules need updating: C.D. Howe

By Sheryl Smolkin

One of the perks of growing older is that there are some additional tax credits you can take advantage of when you file your income tax return. For example, the pension income tax credit is available to you if you are under age 65, but the amounts that qualify for this tax credit are different, depending on whether you are pre or post age 65.

The federal non-refundable tax credit applies to up to $2,000 of eligible pension income. That means you will get back a maximum of 15% or $300. Provincial tax savings are in addition and can bump up your total savings by an additional $350 to $700 depending on your province of residence.

Since you can transfer up to 50% of pension income to your spouse for tax purposes, a couple can each access this tax credit even if only one of the pair is receiving an eligible pension.

If you are younger than age 65, the only pension income that is eligible for the pension tax credit is either from a superannuation/pension plan, annuity payments from the Saskatchewan Pension Plan or annuity income you are receiving because of the death of your spouse or common-law partner. The income you receive in these circumstances might be in the form of Registered Retirement Income Fund (RRIF), Registered Retirement Plan (RRSP) or Deferred Profit Sharing Plan (DPSP) income, but only if you have been receiving this income since your spouse passed away. 

If you are 65 or older eligible income can be:

• Income from a superannuation or pension plan.
• RPP lifetime benefits.
• RRIF income.
•  DPSP income.
• RRSP annuity income.
• EBP benefits.
• Regular annuities.
• Elected split pension income.
• Variable pension benefits.
• Foreign pension income unless the foreign pension income is tax-free in Canada because of a tax treaty or income from a United States Individual Retirement Account.

For a more detailed list of pension and annuity income eligible for the pension tax credit, check out CRA’s Eligible Pension and Annuity Income (less than 65 years of age) and Eligible Pension and Annuity Income (65 years of age or older) charts.

The following income does not qualify as pension income for the pension income tax credit:

• Old Age Security or Canada Pension Plan benefits
• Quebec Pension Plan benefits
• Death benefits
• Retiring allowances
• RRSP withdrawals other than annuity payments
• Payments from salary deferral arrangements, retirement compensation arrangements, employee benefit plans, or employee trusts.

A recent decision of the Tax Court of Canada in Taylor v. The Queen clarified the meaning of “annuity income from an RRSP.” Sarah Taylor began withdrawing money from an RRSP when her husband died. According to the terms of the RRSP she had total discretion with respect to the timing and the amounts of the withdrawals.

To minimize withdrawal fees, she decided to take funds out only once a year. In 2011 she withdrew funds a second time to make an unusual tax payment. The two payments to her were $12,500 and $6,250. Her accountant argued that once she turned 65 in 2011 these amounts and other similar annual withdrawals should be treated as annuity payments as required by the definition of “pension income” for the purposes of the pension tax credit.

Madame Justice Judith Woods ruled that withdrawals made by Taylor from her RRSP were not annuity payments and did not qualify for the pension tax credit because her financial institution had no obligation to make payments on a recurring basis.

The lesson to be taken from this court case is to be certain you understand the rules with respect to RRIF withdrawals and the pension tax credit.  Some people who do not have eligible pension income at age 65 opt for an interim approach. If you move $12,000 into a RRIF and then withdraw $2,000 a year for six years, these withdrawals will allow you to qualify for the full pension tax credit.