New Rules for Commuted Values (Pensions, QC)

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AltaRed
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Re: New Rules for Commuted Values (Pensions, QC)

Post by AltaRed »

I think the time is gone for DB plans. Corporations don't like to have all that uncertainty on their books as much as anything AND there is no 'gold watch' loyalty anyway on either the employer's or employee's part. IOW, there is no point rewarding loyalty when none can realistically exist in this fast changing world. Employees often see these things as 'golden handcuffs' if they don't/can't get portability.
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Re: New Rules for Commuted Values (Pensions, QC)

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longinvest wrote: 24 Feb 2018 17:42
Mordko wrote: 24 Feb 2018 16:50 2. Having been through the process, I am opposed to all DB pensions due to lack of transparency. The government ones represent an unfair subsidy from private sector employees to the government ones. The private ones lead workers to believe that there is a guarantee and a contract, which apparently isn't worth all that much.
Every year, I get a fully detailed pension plan annual report. It's at least as transparent as any stock annual report I've seen.

As a bonus, I also get a personal report, telling me about my accrued pension rights, a commuted value estimate, and a pension projection if I work until age 65.

I don't see a transparency problem in my pension plan.
I used to get two pages. Learning that the plan is only 57% funded was a bit of a surprise. Very few people are aware of that. Naturally, companies with poorly funded plans provide less information.

Young people joining private DB schemes now don't realise that its a bad deal for them - hardly any will stay to get the full benefits; nor are the companies/schemes likely to last.

Unions certainly love DB schemes; they tend to love everything that favours older and/or lazy staff.

This isn't just a Canadian issue. Same process is going on elsewhere. For example most DB pensions in the UK that are still in existence no longer accept new members.

Generally, it's only the government and large old companies with entrenched unions that still have DB. The former is a transfer of risk from government employees to everyone else. The latter is a way to ensure that the companies stagnate; often fail and always have an unenthusiastic workforce.

DB pensions will die; the sooner the better.
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Re: New Rules for Commuted Values (Pensions, QC)

Post by longinvest »

Two pages? Are you sure that this wasn't a summary of the annual report; that there wasn't a downloadable full annual report elsewhere? Or, maybe I'm lucky to be in a reasonably well managed and transparent pension plan?
Mordko wrote: 25 Feb 2018 19:34 DB pensions will die; the sooner the better.
So, why are people asking for more generous CPP pensions? CPP is a DB pension.

Putting all the pressure on a single pension plan (CPP) would significantly increase risk. It's better to encourage private DB plans so that the failure of one plan is mitigated by the existence of the other plans. (e.g. those getting their pension cut are limited to those in plans who took risks and were unlucky).
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Re: New Rules for Commuted Values (Pensions, QC)

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longinvest wrote: 25 Feb 2018 20:27 So, why are people asking for more generous CPP pensions? CPP is a DB pension.

Putting all the pressure on a single pension plan (CPP) would significantly increase risk. It's better to encourage private DB plans so that the failure of one plan is mitigated by the existence of the other plans. (e.g. those getting their pension cut are limited to those in plans who took risks and were unlucky).
CPP is portable over one's entire career and there is no inherent under funding, at least not for prolonged periods Contributory rates change to keep that in check. It is probably good the pensionable earning ceiling has gone up though I still object to employers being responsible for 50% of the contributions. C'est la vie... It is the model we will live with as long as we have employers I suppose.

in the private sector, there is very little portability. The younger co-hort today, eg. 40 and younger, will be with multiple companies over their careers or be entrepreneurs themselves. A DB pension does absolutely nothing for them. I am a dinosaur but over a 35 year career, I was with one company (civil service) for 8.5 years in 3 different assignments in 3 different geographic locations, and the final 26.5 years in a multi-national in 9 different locations/work assignments, and 4 different affiliates of the mother ship.

If I had not had 'golden handcuffs' (DB pension) with the multi-national, I would have probably left that multi-national at least 5-10 years earlier and worked with yet another company before retirement. As it was, I needed to hang out for the last 5 or so years just to make my DB pension worthwhile. Had I stayed another 8 years to age 65, my DB pension would have been circa 50% higher. If you really think about it, that is a very sick way to retain employees.

Mordko is right... DB pensions, at least in the private sector, need to die (and are dying).
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Re: New Rules for Commuted Values (Pensions, QC)

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My understanding is that the "golden handcuffs" feature of DB plans was one of the main reasons private corporations introduced them. (I defer to Bruce Cohen on the accuracy of this.) It was also a reason why the plans were back-end-loaded, i.e. their worth increased dramatically as one approached retirement age.

I remember leaving the federal public service in 1988 at the age of 42, with 16 years of service. A friend who worked in Human Resources was shocked by this. Why was I sacrificing my pension? Why indeed? (I didn't mention that I was being pushed out. As it turned out, this was the best thing that ever happened to me.)

DB pensions are great if financial security is one's highest priority. But they can keep one for much too long in a job that is no longer appropriate. If having fulfilling and meaningful work is one's priority, then a DB plan can actually be a liability.

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Re: New Rules for Commuted Values (Pensions, QC)

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I agree, the reality is that DB's for private sector employees are largely dead.
I just wish Canadians in general were more financially literate and responsible. Outside of CPP, knowing most will depend on DC's and/or RRSP's is a scary thought. I read recently that 40% in a BMO survey had tapped into their RRSP last year to withdraw an avg $21k - 27% for a house, 23% for expenses, 21% for emergencies, and 20% to pay off debt. :(
http://www.cbc.ca/news/business/rrsp-re ... -1.4538878

If I was to tap into my registered sources now for monthly income (using prescribed minimums), my CPP would be 20% of my income, DC (LIRA) 30%, and my RRSP 50% (and as a couple - 20% CPP, 20% DC, 60% RRSP).
If CPP as all I had contributed towards retirement I'd be destitute. I fear that too many assume the gov't will look after them when they retire - which they will, just not in manner to which they are accustomed.
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Re: New Rules for Commuted Values (Pensions, QC)

Post by Mordko »

Not sure there is an actual problem here. On average retired Canadians live on 62% of pre-retirement income, which isn't bad at all. They pay far less tax, don't have to pay for the kids, travel to work, etc...

Of course people would take more responsibility for their finances at an earlier age if they were not mislead through opaque promises of DB pensions - which could be modified at any time, as we have just seen with the new law.
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Re: New Rules for Commuted Values (Pensions, QC)

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ghariton wrote: 25 Feb 2018 22:10 My understanding is that the "golden handcuffs" feature of DB plans was one of the main reasons private corporations introduced them. (I defer to Bruce Cohen on the accuracy of this.)
There were two periods when DB plans were very popular with Canadian employers.

he first was right after World War II. Wartime wage controls remained in effect but did not apply to pensions. So unions and employers both embraced the idea of generous DB pensions. I wouldn't say that golden handcuffs entered into it. The postwar period through the '60s was an era of career employment when people typically expected to work for the same employer for many years and employers -- who commonly taught workers what they had to know -- prized loyalty. Remember, that was a time of corporate paternalism when long serving employees were often given valuable presents including the proverbial gold watch at retirement.

The second period occurred during the '70s. I learned of this only from my co-author, Brian FitzGerald, who trained as an actuary in Britain and arrived in Canada at that time. His first few years of actuarial practice were spent converting defined contribution plans -- then called money purchase plans -- to DB. Employers had many older workers who were dead wood but could not afford to retire on their DC plans. So companies started adding inducements and guarantees. Ultimately they decided to simplify it all by going DB, which of course appealed to unions too. IIRC, the table started to turn against DB in the very early '90s. I distinctly recall that at that time there was a lot of hand wringing that a generation of corporate executives had come to believe that DB pensions were free because the 1980s bull market for stocks produced high returns while abnormally high interest rates reduced required funding. This produced hefty surpluses to which employers had full access until Conrad Black raided the Dominion Stores pension plan. Low interest rates, reduced union membership and markedly reduced desire for career relationships by both employers and employees then pretty much killed the DB concept outside the public service.

The US embraced DC long before Canada and now DC's creators lament what they did. For a number of reasons DC plans, mainly the 401k, have failed to provide many Americans with adequate retirement funding and the current plan du jour is now the target benefit plan which is similar in several ways to the hodge podge Brian FitzGerald encountered here in the '70s. As noted in another thread, the federal govt recently tabled legislation allowing federally regulated employers to offer target benefit plans.
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Re: New Rules for Commuted Values (Pensions, QC)

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Quebec,
longinvest wrote: 24 Feb 2018 18:01 Quebec,
Quebec wrote: 24 Feb 2018 16:07 So I have two layers of safety: (1) plan to retire early; (2) plan to spend quite a bit during retirement. You are adding a third layer of safety. I'm just questioning if you need that 3rd layer.
I understand, now. It's a good question. I'll have to think about it.
Thanks, for your question. It has forced me to reinspect my plan and better understand my motivations.

First, I removed the solvency ratio factor from my own personalized version of the after-tax spending plan (which, unlike the generic version, takes into account my pension promises) and looked at the impact. Due to the mathematics of retirement investing, the impact was relatively mild. In other words, the difference on annual after-tax spending would be much smaller than the difference in pension payment. This is explained by the fact the spreadsheet equalizes current and retirement after-tax spending. So, in order to spend more in retirement, pre-retirement spending has to increase too. Any increase in pension payment is thus spread across both pre-retirement and post-retirement spending.

Regardless of the size of the impact, I realized that this analysis didn't really resonate with me. I just didn't feel OK with ignoring the solvency ratio.

It has to do with my philosophy of trying to avoid big shocks when things don't go as expected. Here's how that works.

If I was to spend, today, as if the solvency ratio was 100%, I would save less. As long as everything goes according to plan, after-tax spending would remain level pre-retirement and post-retirement. But, if at some point, during retirement, the pension plan was terminated at the currently estimated solvency ratio, I would have to assume, at that point, in mid-retirement, the full impact of the implied cut in after-spending.

I much prefer to take into account the solvency ratio today. Here's what would happen if things go according to plan and if things don't.

Note: I'm assuming, for immediate-planning purpose, that market returns and the solvency ratio will remain fixed forever. But, don't forget that I update the spreadsheet, annually, with current portfolio size, pension promise, and solvency ratio. So, in real life, the spreadsheet recalculates a new after-tax spending amount that takes into account the new reality of the moment.

If everything goes well, spending will remain level between now and retirement. But, at retirement, I'll start receiving bigger pension payments than planned for. As a prudent retiree, I will consider the excess in pension payment (over plan) as part of the portfolio and subject it to VPW withdrawals. Doing so will protect the after-tax spending plan against future pension cuts. The impact of this approach will be a gradual increase in after-tax spending during retirement.

Here's the other scenario, where things go bad in mid-retirement. After-tax spending would remain stable between now and retirement. After retirement, after-tax spending would gradually increase until mid-retirement. At that point, when the pension is cut, after-tax spending wouldn't be affected, except that it would stop increasing.

Let me restate this: The impact of reducing pension expectations according to the solvency ratio on immediate after-tax spending is mild enough. Later, during retirement, the impact becomes a gradual increase in after-tax spending, as long as the pension remains uncut. In contrast, the impact of not taking into account the solvency ratio would lead to a significant reduction in after-tax spending in mid retirement, if the pension is cut at that point.

I sleep much better at night knowing that there's upside ahead if things go according to plan, and there isn't significant downside if they don't.
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Re: New Rules for Commuted Values (Pensions, QC)

Post by longinvest »

AltaRed wrote: 25 Feb 2018 21:51 CPP is portable over one's entire career
That and the fact that everyone is forced to contribute are very attractive features of CPP.
AltaRed wrote: 25 Feb 2018 21:51 and there is no inherent under funding
Not currently, but it's hard to predict the future. That's the main weakness of making CPP (or QPP in QC) the single DB plan: it becomes a single point of failure.

Yet, as long as the plan is well-managed and plan contributions are modulated according to the plan's health, there isn't much risk. Anyway, if things go bad, nothing prevents CPP from temporarily reducing payments to help with the situation (like VPW's reduction in withdrawals in bad times, but with a milder impact, thanks to ongoing contributions by workers and their employers).
AltaRed wrote: 25 Feb 2018 21:51 Mordko is right... DB pensions, at least in the private sector, need to die (and are dying).
Based on the presented arguments, I don't see any reason to make a distinction between public and private pensions. Public pensions aren't really more portable than private ones and they also act as golden handcuffs. So, if we're going to get rid of DB pensions, let's get rid of all of them (except CPP/QPP, of course).
Mordko wrote: 26 Feb 2018 12:17 Of course people would take more responsibility for their finances at an earlier age if they were not mislead through opaque promises of DB pensions - which could be modified at any time, as we have just seen with the new law.
I think that this is a pipe dream. People who aren't in DB plans don't necessarily take better responsibility for their finances. Look at Bruce Cohen's comments about it:
brucecohen wrote: 26 Feb 2018 17:17 The US embraced DC long before Canada and now DC's creators lament what they did. For a number of reasons DC plans, mainly the 401k, have failed to provide many Americans with adequate retirement funding
Last edited by longinvest on 27 Feb 2018 09:26, edited 4 times in total.
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Re: New Rules for Commuted Values (Pensions, QC)

Post by longinvest »

Bruce,
brucecohen wrote: 26 Feb 2018 17:17 the current plan du jour is now the target benefit plan which is similar in several ways to the hodge podge Brian FitzGerald encountered here in the '70s. As noted in another thread, the federal govt recently tabled legislation allowing federally regulated employers to offer target benefit plans.
Aren't target-benefit plans similar to DB plans, except for the DB's guaranteed fixed pension payment? Am I right in thinking that target-benefit plans will share most of the main drawbacks of DB plans, in that they won't be portable and act as golden handcuffs?
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Re: New Rules for Commuted Values (Pensions, QC)

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longinvest wrote: 27 Feb 2018 09:03 Based on the presented arguments, I don't see any reason to make a distinction between public and private pensions. Public pensions aren't really more portable than private ones and they also act as golden handcuffs. So, if we're going to get rid of DB pensions, let's get rid of all of them (except CPP/QPP, of course).
I have heard of people moving around between "civil service employers" at least within one jurisdiction, e.g. a province, or Federal civil service/crown corporations and that is considerable portability. Indeed, sometimes even the same pension plan. For example, Alberta nurses are in the same pension plan (LAPP) as a secretary working for the village of 'timbuktu' in the hinterland. Had I stayed employed by Ontario Hydro instead of jumping ship in the late '70s, it is my understanding my DB plan would have been portable to any Ontario civil service job, including various crown corporations. There is virtually none of that in private industry. That said, I do agree public DB plans are also golden handcuffs, but with a lot of slack in the chain.

Added: Yes, please let's get rid of all DB plans. I, as a taxpayer, don't trust the civil service/politicians with my chequebook.
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Re: New Rules for Commuted Values (Pensions, QC)

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AltaRed wrote: 27 Feb 2018 11:02 Added: Yes, please let's get rid of all DB plans. I, as a taxpayer, don't trust the civil service/politicians with my chequebook.
Including CPP/QPP? What about the hordes of Canadians who don't know better than to live paycheque-to-paycheque? Won't they vote for expanded GIS and OAS as soon as they hit retirement, making sure to confiscate a significant part of your delayed gratification? :?
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Re: New Rules for Commuted Values (Pensions, QC)

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You know I did not mean CPP/QPP....
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Re: New Rules for Commuted Values (Pensions, QC)

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AltaRed wrote: 27 Feb 2018 11:22 You know I did not mean CPP/QPP....
Wouldn't that mean that you actually trust the civil service/politicians with that part of your chequebook? :wink: (It's a scary thought, I know).
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Re: New Rules for Commuted Values (Pensions, QC)

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longinvest wrote: 27 Feb 2018 11:28
AltaRed wrote: 27 Feb 2018 11:22 You know I did not mean CPP/QPP....
Wouldn't that mean that you actually trust the civil service/politicians with that part of your chequebook? :wink: (It's a scary thought, I know).
Try http://www.cppib.com/en/who-we-are/governance-overview/ C'mon now. You are reaching :roll:

Added: I concede my error in my earlier post. I included the politics infested QPP in my comment. A senior's moment.
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Re: New Rules for Commuted Values (Pensions, QC)

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I don't know how widely this was publicized but in 2015 BC allowed the conversion of some db plans to target benefit plans

https://www.morneaushepell.com/ca-en/in ... ion-policy

I was surprised to find UBC is now a target benefit plan

http://staff.pensions.ubc.ca/tag/target-benefit-plan/

I completely agree with longinvest: a lot can happen in the 25-30 years you are in retirement. I don't expect to lose all my pension money, but it wouldn't surprise me if it was eventually changed to a target benefit plan or if there was changes made to the commuted value. It doesn't hurt to have some extra money if everything goes well.
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Re: New Rules for Commuted Values (Pensions, QC)

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I am guessing that any changes could only occur prospectively. Anything earned up to this point under current rules would have to be grandfathered in terms of benefits, albeit elimination or modification of commuted value options could be considered borderline 'retro-activity'.

The problem today is not knowing WHEN one's current plan will be frozen and the terms changed. As I believe I mentioned earlier, my DB plan consists of 3 components due to changes that were made over my career, each one less lucrative than the previous. Not complaining
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Re: New Rules for Commuted Values (Pensions, QC)

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AltaRed wrote: 27 Feb 2018 11:40 C'mon now. You are reaching :roll:
Of course, I was. :)
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Re: New Rules for Commuted Values (Pensions, QC)

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AltaRed wrote: 27 Feb 2018 12:36 I am guessing that any changes could only occur prospectively. Anything earned up to this point under current rules would have to be grandfathered in terms of benefits, albeit elimination or modification of commuted value options could be considered borderline 'retro-activity'.
The new QC law for municipal pensions caused lots of complaining because it retroactively eliminated inflation-indexing for current retirees for as long as the pension plans aren't in good-enough shape to pay for it. I think that the unions are fighting that in courts. I guess this will be settled by the Supreme Court in 10 years or more.
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Re: New Rules for Commuted Values (Pensions, QC)

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Off-topic posts moved to new CPP Mandate & Performance topic
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Re: New Rules for Commuted Values (Pensions, QC)

Post by Quebec »

longinvest wrote: 27 Feb 2018 08:36
Thanks, for your question. It has forced me to reinspect my plan and better understand my motivations.

(...)

I sleep much better at night knowing that there's upside ahead if things go according to plan, and there isn't significant downside if they don't.
Sounds good. Very prudent plan. Happy for you that the current impact on spending is small.
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