W5: Retirement- Registered Pension Plans

What are the 3 categories of Canadian retirement income programs?

Government-sponsored, employer-sponsored, and individual private savings.

What are the main government-sponsored retirement plans?

Canada Pension Plan (CPP) and Old Age Security (OAS).

What are the main employer-sponsored retirement plans?

RPPs, Group RRSPs, and Deferred Profit Sharing Plans (DPSPs).

What are the main individual private retirement savings plans?

Personal RRSPs and TFSAs.

What is an RPP?

A Registered Pension Plan sponsored by an employer, group of employers, or union to provide retirement income.

What is the main purpose of an RPP?

To provide a life annuity to retired employees.

What are the two main types of RPPs?

Defined Benefit Pension Plans (DBPPs) and Defined Contribution Pension Plans (DCPPs).

What is a DPSP?

A Deferred Profit Sharing Plan funded by the employer based on company profits.

Who contributes to a DPSP?

The employer; employees are not permitted to contribute.

What is a Group RRSP?

An RRSP arranged through an employer, with employer contributions made to the employee's RRSP.

How does a Group RRSP differ from an RPP?

Group RRSP funds are not subject to RPP pension locking-in legislation.

What is the key difference between DBPP and DCPP?

DBPP defines the retirement benefit; DCPP defines the contribution.

Who bears investment risk in a DBPP?

The employer/plan sponsor.

Who bears investment risk in a DCPP?

The employee.

What determines a DBPP retirement benefit?

A formula based on benefit percentage, average pensionable earnings, and years of service.

What is the standard DBPP pension formula?

Annual pension = benefit percentage × average pensionable earnings × years of service.

What is the maximum benefit percentage per year of service stated in the lecture?

2.00%.

What earnings bases can a DBPP use?

Career average, final 3–5 years average, or best 3–5 years average, depending on the plan.

What is a career-average earnings formula?

It bases the pension earnings measure on earnings across the employee's career.

What is a final-average earnings formula?

It bases the pension on earnings during the final specified years of employment.

What is a best-average earnings formula?

It uses the employee's highest specified earning years; they need not be consecutive.

What happens if a DB pension fund has a deficit?

The employer is responsible for providing additional funding to cover the shortfall.

What is a contribution holiday?

A period when an employer can reduce or stop contributions because the pension fund has sufficient surplus assets.

How is a DB pension fund structured?

Employee and employer contributions flow into a centralized pooled investment fund.

What happens to a DCPP contribution account?

Contributions accumulate in an individualized account and are invested.

What investment options might a DCPP offer?

Conservative, moderate, or aggressive investment bundles.

What determines a DCPP retirement outcome?

Total contributions and investment performance over time.

What is the statutory minimum employer contribution stated for a DCPP?

1.00% of gross employee salary.

What is an example of a DCPP with matching?

Employer contributes a base 3%, then may match employee contributions up to a specified percentage.

On a $100,000 salary, what is a 3% employer base DCPP contribution?

$3,000.

On a $100,000 salary, what is a 4% employee contribution?

$4,000.

If a $4,000 employee contribution receives a 100% employer match, what is the match?

$4,000.

What is a major liquidity issue with an RPP/DCPP?

Pension assets are locked in, so separate non-locked savings may be needed for short-term needs.

What are examples of non-locked savings for liquidity?

Personal RRSPs or TFSAs, according to the lecture's planning example.

What is an employer's responsibility once an RPP is established?

The employer must fund the RPP according to the terms of the plan.

What happens to RPP funds under pension legislation?

They are legally locked in; the lecture states they cannot be withdrawn before age 55 at the earliest.

Are employer RPP contributions a taxable benefit to the employee?

No. Employer RPP contributions are not a taxable benefit to the employee when contributed.

Are employee RPP contributions tax deductible?

Yes, according to the lecture.

What happens when RPP retirement benefits are received?

They are taxed as income.

Can RPP benefits qualify for a pension tax credit?

Yes.

What is a Pension Adjustment (PA)?

The statutory value of pension benefits accrued during the tax year.

Where is the PA reported?

On Box 52 of the employee's T4 slip.

What is the purpose of the Pension Adjustment?

To prevent double dipping between an RPP and an RRSP.

How does an RPP generally affect RRSP contribution room?

The PA reduces the employee's RRSP contribution room for the following year.

What is the RRSP limit formula from the lecture?

Unused limit + min(18% × earned income, statutory cap) − PA.

What does a higher PA generally mean for next year's RRSP room?

Less RRSP contribution room, all else equal.

What is the DBPP PA formula shown in the lecture for a 2% plan?

PA = (2% × current-year salary × 9) − 600.

Why is current-year salary used in that DBPP PA formula?

The employee's eventual average best 5 years is not yet known.

What are common eligible pensionable earnings?

Salary, wages, vacation pay, commissions, taxable benefits/allowances, and qualifying bonuses per plan terms.

Are bonuses always included in pensionable earnings?

No. Inclusion depends on the specific pension plan.

Is overtime generally included in pensionable earnings?

No. The lecture says overtime is excluded in almost all corporate and industrial plans.

What is prescribed compensation?

The compensation level used by a plan for contributions during periods of reduced service.

What are examples of reduced-service periods?

Sabbatical, disability, and parental leave.

What is eligible pensionable service?

Service with an employer that qualifies under the plan and applicable Canadian pension rules.

What is a service buyback?

Buying back missed pensionable service to increase total service and potentially improve pension eligibility or benefits.

What is the DB factor formula?

Factor = current age + years of pensionable service.

What is a common unreduced pension factor target?

85.

How does the factor change each year an employee works?

It increases by 2: age rises by 1 and service rises by 1.

What is the formula for years to reach an unreduced factor?

(Target factor − current factor) ÷ 2.

What is normal retirement age (NRA)?

The standard retirement age specified in the pension plan documents.

Can an employee retire with an unreduced DB pension before NRA?

Yes, if the plan allows it and the employee meets its required factor.

What happens with early retirement before the required NRA or factor?

The pension benefit may be reduced.

What is Sue's current factor if she is 52 with 27 years of service?

79.

How many years does Sue need to reach factor 85 from factor 79?

3 years.

At what age does Sue reach factor 85?

Age 55.

What is Sue's pension at age 55 with $100,000 average earnings and 30 years service at 2%?

$60,000 per year.

What is Sue's pension if she works to age 57 with $104,000 average earnings and 32 years service at 2%?

$66,560 per year.

What is CPP integration in a DB plan?

Coordination of the pension formula with CPP, often around the YMPE.

Why might a DB pension decrease at age 65 under an integrated plan?

The plan assumes CPP begins and adjusts its own benefit accordingly.

What is the purpose of a CPP bridge provision?

To provide higher temporary pension income before CPP begins, subject to the plan's terms.

What is an indexed pension?

A pension whose payments increase according to an inflation measure such as CPI.

What happens to a non-indexed pension during inflation?

Its purchasing power declines because payments remain flat while prices rise.

If a $60,000 pension is indexed by 2%, what is Year 2's payment?

$61,200.

If $61,200 is indexed by 2%, what is Year 3's payment?

$62,424.

What is the key difference between last 5 years and best 5 years?

Last 5 uses five consecutive final years; best 5 uses the five highest eligible years.

Why can a late-career reduced-pay leave matter under a final-average plan?

It can lower the earnings average and therefore reduce the lifetime pension.

What is vesting?

When accrued pension benefits actually belong to the employee.

What does portability mean for a pension?

The ability to move pension entitlements, including eligible service, to another pension plan.

What are the two major DB risks an employer faces?

Investment/market risk and pension fund solvency/funding risk.

What is the core exam distinction for pension risk?

DB: employer bears investment risk; DC: employee bears investment risk.

What is the core exam distinction for RRSP room?

RPP participation creates a PA, which reduces RRSP contribution room.