Multi-Sector Pension Plan

Outline Retirement Income Sources Types of Pension Plans Outline of the MSPP – Eligibility, Benefits, etc.

Retirement Income in Canada

Canada’s 3 sources of Retirement Income Public Pension Plans Canada Pension Plan (CPP) Old Age Security (OAS) Guaranteed Income Supplement (GIS) Workplace Pension Plans Defined Benefit Defined Contribution Personal Savings (RRSP) CPP: Depends on the amount of contributions you’ve made. Benefits are up to a maximum of $908 per month. (taxable) OAS: Maximum of $517/month – provided you’ve been a resident of Canada for 40 years after 18th birthday. (taxable) GIS: For seniors who have low incomes – provides up to ~$650 per month, if you have no other income aside from OAS (not taxable)

Why a Workplace Pension Plan? Average monthly benefits paid from public plans: Canada/Quebec Pension = $501.82 Old Age Security = $489.57 Total = $991.39 (Jan. 2009) Many, especially women will not receive maximum benefit from public pension plans. Women will, on average receive much less than men from CPP. This is due to a number of factors, including lower paying jobs and less time in the paid workforce. CPP is like a workplace pension – you receive benefits based on how much and how long you contribute to the plan.

Workplace Pension Plans

Defined Contribution (DC) Group RRSP Defined Benefit (DB) Defined Contribution (DC) Group RRSP Contributions Set by the terms of the plan As per the collective agreement. Employer contributions are considered taxable income Benefits Pension wage is based on a formula Pension wage depends on the amount of money in individual’s account. Based on amount contributed, gains/losses on market and fees to purchase pension Same as DC

Defined Benefit (DB) Defined Contribution (DC) Group RRSP Risk Shared between the employer and plan members The employee faces the risk alone, through potentially poor investment returns, or retiring at the wrong time (i.e. after the market drops or when interest rates are low) This is not a pension plan, it is individual savings. The individual faces market risk alone.

Problems with DC Plans Employees must face risk alone Market fluctuations on investments Interest rates on annuities No guarantee of retirement benefits Members are not professional investors Must pay fees on investments

The Multi-Sector Pension Plan

Multi-Sector Pension Plan (MSPP) Defined Benefit Plan – with hybrid features Collective Approach Retirement wages based on set formula 100% union-run (CUPE and SEIU)

The Proposal This proposal is only for members who are on the DC Plan, not for members who are on the DB Plan (i.e. those hired before July 1, 1992)

The Proposal Current DC Plan: Contributions Proposed MSPP + DC: Contributions 6% Employee Contribution 6% Employer Contribution Total: 12% contribution Current DC Plan Proposed MSPP + DC 10.5% to the MSPP 12% to the DC Plan 1.5% to the DC Plan

The Proposal All of the benefits from the MSPP will be in addition to what you have already accrued in the DC plan and with your own RRSPs There is no change to what you have saved under your current pension plan CPP is not affected by participation in the MSPP: i.e. CPP benefits are in addition to the MSPP

MSPP – Eligibility Everyone in the bargaining unit must be covered after 500 hours of employment Some exceptions can be made (e.g. if some are on superannuation, they can stay there)

MSPP – Benefits: Future Service Credit $100 of contributions = $1.55 monthly retirement wage at age 65 Roughly equivalent to 1.95% of salary per year of service Contribution Monthly Retirement Wage $20,000 $310.00 $40,000 $602.00 $100,000 $1,550.00 Explain that it is 1.95% of THAT YEAR’s salary each year. It’s not a fund that takes the average of your best years.

MSPP - Benefits Accruing Contributions: assuming full contribution level (10.5%) and wage increase of 3% per year Annual Wage Annual Contribution 5 years of contributions 10 years of contributions 25 years of contributions $40,000 $4,200 $22,298 $48,148 $153,129 $50,000 $5,250 $27,873 $60,185 $191,411 $60,000 $6,300 $33,448 $72,222 $229,693 $70,000 $7,350 $39,022 $84,260 $267,976

MSPP – Benefits: Past Service Credit A unique feature of the plan may increase your retirement wage by as much as $186.20 per month at age 65. Based on years of service with your employer at the time the employer commences participation in the MSPP.

MSPP – Benefits: Past Service Credit $26.60 per year of service to a maximum of 7 years ($186.20) at age 65

MSPP - Benefits Some Examples: Total Contributions Future Service Past Service Retirement Wage $20,000 $310.00 $186.20 $496.20 $40,000 $620.00 $806.20 $100,000 $1,550.00 $1,736.20 **These examples are in addition to CPP and to any RRSP coverage

MSPP - Benefits Retirement rates: comparison between annuity rates and MSPP benefits, assuming $100,000 contribution Data as of May 29, 2009 Company Guarantee? Age 55 Age 60 Age 65 Sun Life None $568 $613 $678 BMO Insurance $576 $642 $701 Standard Life $527 $577 $646 MSPP 5 years $835 $1,158 $1,550 Annuities are currently at historic lows. MSPP rates – 6% deducted for each year that you retire before age 65.

MSPP – Retirement Options Must be “vested” to retire (24 months of contributions or Age 65) “Normal” retirement is Age 65 Can retire as early as Age 55 (6%/year reduction) Several guarantee options available: Joint and survivor benefits (50%, 60%, 75%, 100%) 5-year, 10-year or 15-year guarantee The standard option is survivor benefits at 60% or a 5 year guarantee for singles

MSPP – Leaving before Retirement If you have 24 months of “vesting service”, you can: Collect pension at a later date Move value to locked-in pension vehicle Move value to new employer’s plan if the new plan accepts the pension transfer

MSPP – Leaving before Retirement With less than 24 months of “vesting service”, your contributions are refunded with interest accrued.

MSPP – Plan Statistics As of May 2009: 80+ participating employers 5,600+ plan members ~60 pensioners $26 million in fund assets

MSPP – Plan Statistics Issue of under-funding Young pension plans all face under-funding issues MSPP based on Nursing Home plan: 20 years – never cut benefits Plan profile is excellent for the current downturn – growing plan with low retiree numbers Pooled risk vs. individual risk The employer has been putting out information about the fact that the plan is insufficiently funded. There are a few issues with this: first, as you all know, and as I’m sure you know by looking at your RRSP statements, everyone has felt the hit all plans have felt some degree of pinch, but this plan is actually very well suited to weather the storm. It has a very low number of retirees, which means that it doesn’t have to pay out very much – something that hurts pension plans during a market downturn. As you see on the screen, the plan is modelled on the nursing home plan – it is almost exactly the same plan. And that plan has been in operation for 20 years. There have never been any cuts to benefits – in fact, even in these economic circumstances, their board of trustees is considering an improvement to benefits. The MSPP, though, is a young plan. All new pension plans face under-funding issues related to their liabilities. And this plan, because of the past service credit especially, faces them like all of the others. The past service credit introduces liability to the plan (think of giving people money without the contributions) – and since the plan is registered in Ontario, the plan has 15 years to amortize that liability. This makes the plan look more underfunded than it really is. The plan is growing in membership. There are no guarantees. However, going with a plan that helps people to pool their risk is better than going it alone. This way takes out the individual bearing all of the risk, and it gets rid of the uncertainty that you’d have based on the time that you retire.

MSPP – Additional Information www.mspp.ca Questions/comments: Email Seth Sazant – sazants@psac-afpc.com