1 Why DC is better for us Andrey Pavlov Professor of Finance Beedie School of Business

2 Why Defined Contribution is Better for Us Pays you (much) better at retirement DC is tax efficient If you leave you get all your money DC is safe and secure even if the plan goes bust It’s fair

3 Why DC is Better for Us Pays you (much) better at retirement DC is tax efficient If you leave you get all your money DC is safe and secure even if the plan goes bust It’s fair

4 Portfolio value was below previous peak for 27 months Average annual return, including the financial crisis = 7.15% This 60/40 portfolio is simple, Requires no expertise to implement, Does not employ active mutual fund managers, Fees and expenses that are the same or lower than the BC College Plan. If you can pay your bills online you can set up this portfolio.

5

6 DC and DB Annual Pension (7% rate of return) DB assumptions: 2% * highest average salary * pensionable service 5-year guarantee Retire at age 65 Source: Contribute 20% of salary each year Invest in the 60/40 portfolio Use up all funds over 20 years Contribute 20% of salary each year Invest in the 60/40 portfolio Use ONLY investment gains, do not touch the capital A switch to DB benefits only people who are 60 or older!!!

7 DB assumptions: 2% * highest average salary * pensionable service 5-year guarantee Retire at age 65 Source: DC and DB Annual Pension (5% rate of return) Contribute 20% of salary each year Invest in the 60/40 portfolio Use up all funds over 20 years Contribute 20% of salary each year Invest in the 60/40 portfolio Use ONLY investment gains, do not touch the capital A switch to DB benefits only people who are 55 and older!!!

8 What about annuities A common concern is that nobody has enough to buy a proper annuity  Annuities are some of the worst investments possible (Banks are booking huge profits because of these types of retail products)  If the BC College Plan were buying annuities (or using them to calculate solvency), they would be insolvent. Sticking to a balanced diversified portfolio will almost certainly pay you better  Even if you start right before a financial crisis

9 Why DC is Better for Us Pays you (much) better at retirement DC is tax efficient If you leave you get all your money DC is safe and secure even if the plan goes bust It’s fair

10 SFU plan is tax efficient The contributions YOU make should go into  Spousal RRSP (this is golden)  TSFA (excellent)  You should let your spouse save If he/she has lower income If he/she is paid as a contractor If you make over $170,000  Much of your DB contributions are from AFTER-TAX dollars (as per Dominique Roelants’ presentation on the BC College Plan)

11 Why DC is Better for Us Pays you (much) better at retirement DC is tax efficient If you leave you get all your money DC is safe and secure even if the plan goes bust It’s fair

12 If you leave (7% return) DB assumptions: Retirement pay based on 2% * highest average salary * pensionable service Start work at age 30, retire at age 65 Receive pension for 20 years No spouse 7% annualized rate of return The actuarial value of your pension is next to nothing because it is so far in the future

13 If you leave (5% return) DB assumptions: Retirement pay based on 2% * highest average salary * pensionable service Start work at age 30, retire at age 65 Receive pension for 20 years No spouse 5% annualized rate of return The actuarial value of your pension is next to nothing because it is so far in the future

14 Why DC is Better for Us Pays you (much) better at retirement DC is tax efficient If you leave you get all your money DC is safe and secure even if the plan goes bust It’s fair

15

16 DB plans often default Detroit (2014) Orange County (1994) Dominique Roelants (of BC College Plan) did not inspire confidence:  Mr. Roelants’ explanation for the compulsory nature of the BC College Plan was misleading  He overstated the impact of the 2008 financial crisis on a balanced and diversified portfolio  His comparison between our current plan and the BC College Plan at the end of his talk completely ignored the member contributions the College Plan requires

17 Why DC is Better for Us Pays you (much) better at retirement DC is tax efficient If you leave you get all your money DC is safe and secure even if the plan goes bust DC is fair  DB takes from the young to subsidize the old  DB takes from everyone and pays the government Because it is tax inefficient  DB magnifies the effects of any discrimination DB benefits people who progress fast through the ranks and penalizes people who have relatively flat salary over their career

18 Appendix

19 DB assumptions: 2% * highest average salary * pensionable service 5-year guarantee Retire at age 65 Source: DC and DB Annual Pension (7% rate of return)

20 DB assumptions: 2% * highest average salary * pensionable service 5-year guarantee Retire at age 65 Source: DC and DB Annual Pension (5% rate of return)