How will the ORPP affect Saskatchewan?

By Sheryl Smolkin

At this point it is not clear how the Ontario Registered Pension Plan (ORPP) that will come into effect in 2017 will affect Saskatchewan says Katherine Strutt, General Manager of the Saskatchewan Pension Plan.

“I don’t believe the provincial government is interested in a mandatory pension plan,” she says.

The ORPP is a plan that will require employer and employee contributions to generate additional government benefits in excess of monthly Canada Pension Plan benefits. The average amount of CPP for new beneficiaries in January 2015 was $618.59/month. The maximum monthly CPP benefit in 2015 is $1,065.

Key features of the ORPP as set out in the consultation paper Ontario Retirement Pension Plan: Key Design Questions are as follows:

  • The plan would be phased in beginning in 2017 with the largest employers. Contribution rates would be phased in over two years.
  • Employees and employers would contribute an equal amount, capped at 1.9% each on an employee’s annual earnings up to $90,000. Earnings above $90,000 would be exempt from ORPP contributions.
  • Earnings below a certain threshold would be exempted to reduce the burden on lower income workers.
  • Contributions would be invested at arm’s length from the government. ORPP would pool investment and longevity risk and aim to replace 15% of an individual’s earnings.
  • Participation would be mandatory, but workers who already participate in a “comparable workplace pension plan” would not be enrolled in ORPP. The government says its preferred definition of a comparable plan includes defined benefit and target benefit multi-employer pension plans.
  • Additional conversations will be held on the best way to assist the self-employed.

An article on the International Foundation of Employee Benefits Plans website aptly summarizes some of the controversy that still surrounds the new program:

“The ORPP proposal has raised concerns among many plan sponsors of defined contribution (DC) plans because the government is proposing that they may not be considered comparable workplace pension plans. Many DC plan sponsors say they already provide adequate contributions. If those plans are not considered comparable, some question whether employers will continue them and/or lower their contributions in order to fund both ORPP and a DC plan.

Another concern is that mandatory contributions will reduce take-home pay and may result in the reduction of other workplace benefits. In the paper, the government said “ . . . some employers may take stock of their current approaches and make decisions about the right compensation mix going forward . . .’”

Both the federal Liberals and NDP parties have publicly supported a CPP enhancement. If either of these parties forms the newly-elected federal government in October, Ontario might opt to hold off on ORPP implementation until a similar national program can be adopted.

Sept 21: Best from the blogosphere

By Sheryl Smolkin

Saving for retirement is important, but working for 35 years with only a few weeks of vacation a year is a daunting thought for many people. However, some companies allow employees to take one or more extended leaves during their career and in some cases establish income deferral programs to help them finance a career break.

Here are some of the things you need to know about taking a sabbatical in Canada.

In the Globe and Mail, columnist Tim Cestnick offers Tax and other tips for planning a work sabbatical. He discusses the little known privilege in our tax law that permits your employer to set up a deferred salary leave plan (DSLP). The plan allows you to set aside a portion of your pay each year for a certain period of time and to then take a leave of absence. The money you set aside under the plan is used to pay you during your time off. If the DSLP is set up properly, you won’t face tax on the amounts you set aside until you make withdrawals later during your leave.

In The Sabbatical, a 2009 blog on Canadian Dream: Free at 45, Tim Stobbs explores the pros and cons of taking a sabbatical. He says taking three months off will allow you to take a major trip, build your own cabin or take courses to further your education. But the downside is you may not be able to afford the loss of income or benefits, and there could be career fallout with your boss or co-workers.

If the sabbatical bug has bitten, talk to your manager or human resources department; you may be pleasantly surprised at your options. How to take a break from work by Diana Swift in Canadian Living gives you tips for negotiating time off. She says pick your time, suggest how your workload will be handled in your absence, and tell your boss why you believe you are an asset worth keeping.

Should I Consider Taking a Teaching Sabbatical? Teacher Man asks on Young and Thrifty. His union contract allows him to take a year off at one-third pay after two years in the school division and one-half pay after five years of teaching. He concludes that if he completes his Masters degree during his time off and improves his future earning potential (he is only in his 20s), the investment in time and money could definitely be worthwhile.

Sabbatical Financial Planning 101: How to travel and not get into debt on Aspire Canada has lots of great ideas like: start planning early; continue contributing to your benefits if you can; sell stuff to raise money; draw up a budget; plan to stay with friends/relative where possible during your travels; and, pursue opportunities to work while you are abroad on your sabbatical.

Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information with us on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.

Should your teenager get a part-time job?

By Sheryl Smolkin

School has barely started and your teenager tells you she wants to get a part-time job. While you admire her enthusiasm, you are naturally worried about the impact working 15-20 hours per week will have on both her and the family.

First of all, you should become familiar with the minimum age requirements for working in Saskatchewan. The general minimum age of employment in Saskatchewan is age 16.  To work in Saskatchewan, 14 and 15 year olds must have permission from their parents. They are also required to complete the Young Worker Readiness Certificate Course (available online) and obtain a Certificate of Completion.

Fourteen and 15 year olds can’t work more than 16 hours in a week in which school is in session; after 10 p.m. on a day before a school day; and before the start of any school day. They can work the same hours as other employees during school breaks and vacations. Young people under the age of 14 cannot work unless the employer has a special permit from the Director of Employment Standards.

These rules do not apply to sectors exempt from The Saskatchewan Employment Act and regulations, including:

  • Family businesses employing only immediate family;
  • Self-employed;
  • Traditional farming operations;
  • Babysitters; and
  • Newspaper carriers.

So assuming your child is legally-entitled to get a part-time job, here are some of the other questions the family should consider before she starts filling out application forms:

  1. Why does she want/need a job? Is the money that will be earned necessary for the family to cover basic expenses or will it be used for “extras” that you cannot or will not pay for? Will some of the money be saved towards college or university tuition?
  2. Does she feel pressure to work part-time because all her friends are doing it?
  3. Does she really have time to hold down a job? A part-time job can help a student develop a sense of responsibility and organizational skills to balance other commitments. But working could mean lower grades and fewer extra-curricular activities both of which may be considered when students apply for college or university.
  4. Can she handle the added physical and mental stress? An after-school or weekend job may seem like a great idea in sunny September. However, by November mid-terms when the temperatures plummet and everyone has a cold, combining work and school may be more than your child can physically or mentally handle.
  5. What transportation options are available? Is the job in walking distance from school or home? Is public transportation available? Is driving your child to and from work a practical option for the family?
  6. What about other family commitments? Your child may have regular chores like pet care or babysitting younger siblings after school. Are there other cost-effective options for the family?

In spite of the “time crunch” and the potential negative impact on your child’s grades, a part-time job can be a wonderful opportunity to gain work skills and experience. My sister’s first job was at McDonalds and ultimately she decided on a career in the hospitality industry.

In addition, by making their own money, kids have to learn how to manage it. They also have the independence to spend it on things like electronics or clothes that may be beyond the family budget. Saving money for expensive post-secondary education can reduce the need for student loans.

And with more and more young people struggling to get full-time jobs after graduation, the most valuable spin-off from part-time work could be networking opportunities and great references that give them toe-hold on the ladder to future success.

Sept 14: Best from the blogosphere

By Sheryl Smolkin

Over the last weeks the stock markets have been bouncing all over the place and now we are told that the Canadian economy is officially in recession. While it is natural to be concerned, particularly if you are close to retirement, the general consensus from most experts is to have confidence in your financial plan and stay the course. Today, and in coming weeks we will provide you with information to help you weather the storm.

In How to make sense of markets gone mad, Toronto Star personal finance writer Adam Mayers says this is a market correction of significant proportions. It could be short and sharp, or it may be long and lingering depending on how the real economy reacts. It may be tough to take the gyrations, but what it does do is set the stage for the next big rise.

Rob Carrick at the Globe and Mail says It’s decision time for your ‘dead’ money. If the summer market decline hasn’t stoked your appetite to buy stocks, he suggests that all the cash piling in your account is pretty much dead money. That’s true if you’re leaving the money uninvested, and also if you’ve taken the good sense step of keeping your cash in a high interest investment account.

MoneySense authors Jessica Bruno and Dean DiSpalatro consider What the recession means for your portfolio. They interviewed Jay Nash, portfolio manager at Roberts Nash Advisory Group, National Bank Financial, in London, Ontario. Nash’s message to clients is straightforward: The recession was largely focused in the energy sector, with other areas of the economy performing well. Most importantly, June’s solid data—pushed along by consumer spending—was better than expected.

Protecting your retirement income from the stock market by Wayne Rothe is on Retire Happy. Rothe reviews “Your Retirement Income Blueprint,” by Winnipeg financial advisor Daryl Diamond. Diamond writes about the impact of market gyrations on the “retirement risk zone.” This is generally the five years immediately before and after retirement age. A big drop in the value of your investments during this period can be disastrous.

And finally, Michael James on Money questions How Much Diversification Do You Need? He says, “Diversification is simple for indexers like me. We own all stocks for as low a cost as possible. There is no such thing as ‘di-worse-ification’ because we have no opinions about one stock being better than others. There is no reason to fret over active mutual funds because index funds are cheaper and cover the same asset classes.”

Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information with us on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.

Should you pay your tuition with Aeroplan points?

By Sheryl Smolkin

If you know someone heading off to University of Regina, Saskatchewan Polytechnic (or several other participating Canadian universities and colleges) you may be interested to know that Aeroplan points can now be used to pay their tuition. Ontario and Alberta students can also use Aeroplan points to pay down student loans. The service is operated online by HigherEDPoints.com.

When I initially read about this option in the Toronto Star my first reaction was that no students I know can afford to travel frequently enough to rack up a slew of airline points. But after reading further, I discovered that grandparents, parents and other generous benefactors can also convert points into cash and direct the money to the student of their choice so I was curious enough to find out more about how the program works.

Aeroplan’s Beyond Miles Charitable Pooling Program also allows students and institutions to “crowd-source” donations of Aeroplan Miles by setting up a Pooling Account for individuals in need. Each Charitable Pooling account will be able to run a Contribution Campaign once a year.

A campaign runs for a duration of 30 days and allows the charity to set a specific mileage goal. If the charity reaches 90% of their targeted goal through donations within the 30 day period, Aeroplan will contribute by donating 10% to ensure the goal is met.

The HigherEd.com site even includes a draft email for students who would like to solicit Aeroplan points from friends and family to help pay their school expenses. One plus seems to be there is no charge to donate points, whereas if you simply want to transfer Aeroplan points between accounts there is a charge of $.02 per mile.

But at an exchange rate of 35,000 Aeroplan points for $250, a student will need an awful lot of points to make a dent in annual tuition of $5,000 or an accumulated student loan of $35,000 or more. Furthermore, when you do the math, it becomes apparent that it makes more sense to give your child, grandchild or community member a cheque.

That’s because spending 35,000 Aeroplan points for a credit of only $250 (which works out to a reward of only .007 or 7/10 of a cent per mile) is not the best way to get good value for your hard-earned loyalty points.

Calculations on Flightfox, illustrate that depending on the cost of the ticket and the distance you are traveling, you can realize anything from 1.4 cents per mile on cheap round–trip flights within Canada and the Continental U.S.A. to 1.84 cents per mile on an international economy flight. Pricey international business class flights that cost over $6,000 (or 135,000 Aeroplan) miles can result in a return on your investment of about 4.53 cents per mile.

According to Suzanne Tyson, founder of Higher Ed Points who was quoted in the Toronto Star article, already some $120,000 in tuition and student loan offsets have been converted through this plan. She also notes that one Toronto employer cashed in his Aeroplan points and put them toward summer course tuition for three students.

Greg Hurst: Federal Consultations on Voluntary CPP

By Sheryl Smolkin

Click here to listen
Click here to listen

Today, I’m pleased to be interviewing Greg Hurst for savewithspp.com. Greg is a pension consultant and pension innovator based in Vancouver. He’s held many roles in the pension industry with large international and small regional consulting firms and a major Canadian insurer.

He’s a member of both the editorial advisory board of Benefits and Pensions Monitor and Benefits Canada’s online expert panel. In fact, two of his articles were among the five most widely-read Benefits Canada pension articles of 2013.

Today, Greg is going to share his thoughts with us on the federal government’s  surprising pre-election proposal to study allowing Canadians to voluntarily contribute to the Canada Pension Plan (CPP) to supplement their retirement savings.

Thank you for joining me today, Greg.

Glad to be here Sheryl.

Q: Were you surprised to hear of the federal government’s announcement in May that they are going to reconsider a voluntary top-up to the Canada Pension Plan?
A: It was totally unexpected. Since 2011, the federal government has consistently said it’s not the right time for changes to the CPP, and even more recently – in fact, just before the announcement – they characterized CPP contribution rate changes as a “pension tax hike.”

Q: Interesting. So, why do you think that the Minister of Finance, Joe Oliver, announced these consultations after the government and the provinces previously rejected similar proposals?
A: Well, an election is coming up. The federal Conservatives recognize that CPP expansion will be a significant election issue. In the 2014 Ontario election pensions were front and center, and Kathleen Wynne’s Liberals won with her promise of the Ontario Registered Pension Plan (ORPP), which grew out of the federal government’s refusal to consider CPP expansion in spite of a consensus amongst the provinces. Canadians have come to love the CPP. It delivers on its benefit promises and the CPP Investment Board consistently delivers good news on its investment returns.

Q: Now, in an article you wrote that was published May 27th on the Benefits Canada website, you suggest that “the devil is in the details.” The closing date for the consultations on a voluntary CPP top-up is September 10th and the election will be held on October 19th. Do you think a detailed blueprint for adding a voluntary tier to CPP will be available for public scrutiny prior to the election?
A: It is unlikely. October 19th is the next fixed election date, and that would leave less than six weeks to build and publish the blueprint. It would also require input from the provinces. It would be very irresponsible for the federal government to publish proposals for CPP changes without first consulting the provinces.

Q: Ontario has gone ahead and passed legislation to establish the ORPP. What do you think of those proposals?
A: Well, I really favor mandatory employer and employee contributions for pension benefits. It’s taken a lot of political courage and leadership from Ontario, which has been absent elsewhere in Canada for many, many years to implement the ORPP. But there again, the devil is in the details. I might have different ideas on how to build the ORPP, but I really don’t have any interest in criticizing those who exhibit this leadership in pensions.

Q: In your view, is it likely that other provinces will jump on the bandwagon once the Ontario plan is up and running?
A: I think there’s a good chance of that, particularly if the Conservatives win the upcoming federal election, because they’ve been consistently intransigent in their opposition to workplace pensions with mandatory employer contributions. But if the Liberals or NDP wins, they’re more likely to build on the leadership of Ontario and proceed with CPP expansion, which I think would make the ORPP unnecessary.

Q: Were you surprised by the federal announcement that the Harper government would not help Ontario administer the ORPP?
A: I was quite surprised. To me, it amounted to a juvenile temper tantrum. It seems to be extremely bad policy for the federal government to torpedo any provincial pension initiative, particularly in this way. Administration of contributions could easily be accommodated in the same way as provincial income tax collection. And in terms of tax deductibility, the feds could readily accommodate ORPP contributions in the current tax-assisted framework like they already do for the Quebec Pension Plan and the Saskatchewan Pension Plan.

Q: Do you believe a voluntary supplement to the CPP should be an option for Canadians to save for retirement? Is this something you would use to increase your retirement savings?
A: Well, to answer questions about the concept of a voluntary CPP supplement, I first have to suspend my disbelief that the federal government – and particularly a Conservative government – would actually choose to compete with the financial services industry, which already has a wide spectrum of products and services designed for retirement savings.

I think that the expectations amongst the public with this announcement are that it would be a savings and investment vehicle, in which case my answer would be, no, I wouldn’t use it to increase my retirement savings and, no, I don’t think they should bother.

Q: Why do you say that?
A: Well, although many Canadians might be excited by the possible opportunity to share in the investment results that the CPP Investment Board has achieved — particularly if the cost of investing is similar to the Board’s current cost — that’s not what they would get from a voluntary supplement under the CPP. It would require a different investment mandate from the CPP Investment Board, with the degree of difference dependent upon how much administrative flexibility the plan has. It would be far more expensive at the end of the day and would likely not have much to differentiate it from retirement investment options already available in the marketplace.

Q: And what about the design of a potential voluntary top-up? What do you think? Should the money be locked in? And should there be basic required contributions, or some variability? I mean what should this thing look like?
A: Well, you know, it depends on how they actually design it. They could do it as a standard savings and investment vehicle, or they could do it as a prepaid annuity vehicle, which might be more interesting. So, I think, first off, Canadians would generally choose good, old-fashioned RRSPs over CPP supplements as a savings and investment vehicle, unless the CPP had the same flexibility with no locking-in, in which case the cost would be almost the same as traditional RRSPs. But if a voluntary CPP supplement were designed around the prepaid annuity concept, contributions could be flexible so you could buy as many prepaid annuities as you want, perhaps within some limits; and full locking-in would perhaps be appropriate under that kind of a design.

Q: Now, in a previous question, you referred to the integration of a voluntary CPP into the current income tax rules. Do you think that that’s problematic, or it would be fairly easy to do?
A: I think it could be fairly easy to do within the current income tax rules. If you really wanted to make it work as a prepaid annuity concept, you could put it on top of the existing RRSP limits. It would just be another added-value pension saving that wouldn’t impact your RRSP limits.

Q: That might make it more attractive to particularly people who have topped up their RSP limits already.
A: Absolutely.

Q: So, who do you think should be responsible for investing the contributions made to a voluntary CPP supplement?
A: If it was designed around a prepaid annuity concept, it would be the CPP Investment Board.

Q: How important is keeping costs low to the success of this proposal?
A: Well, it’s fundamentally important if it’s a savings and investment vehicle, which means that it would be very difficult to do without having some sort of subsidy from the government. MERs aren’t really applicable to paid up annuities. But certainly the cost would then likely be comparable to the current costs of the CPP Investment Board services.

Q: When you discuss a “prepaid annuity,” what do you mean? Do you mean that it would operate like a defined-benefit pension as far as the consumers are concerned?
A: Yes. Once you purchase it – so, you come in with “this is the amount of contribution I have. This is my age.” And then that would purchase a certain amount of fixed pension payable at your retirement date of age 65, or maybe 67, assuming that becomes the new normal retirement date. So, when you buy the annuity, you would know how much you’re getting when you reach that retirement date — like a defined-benefit plan.

Q: Do you think that this voluntary top-up to CPP is ever going to see the light of day? Will that depend on who forms the next government?
A: No. Even if it’s a prepaid annuity, I don’t think there will be enough of a market appetite for the concept to proceed. If it were a saving and investment type of program, it would have costs that are too high to really compete with the current, private-sector marketplace. But if the Liberals or the NDP form the government, I believe then we’d see a mandatory form of CPP expansion.

Q: Thank you very much, Greg. I really appreciated talking to you today.
A: My pleasure, Sheryl.

This is the edited transcript of an interview conducted by telephone in July 2015.