Retirement Test 2 - Pension Plans
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95 Terms
What are the three main sources of retirement income?
Government plans
employer-sponsored plans
individual savings
What is a Registered Pension Plan (RPP)?
employer-sponsored pension plan
registered with the CRA and the applicable pension regulator
What is a plan sponsor?
employer or eligible organization
that establishes or sponsors a pension plan
What is a plan administrator?
person or organization
responsible for administering the plan
according to terms and applicable legislation
What is a Single-Employer Pension Plan (SEPP)?
Pension plan established for employees of one employer or employer group, as defined by applicable rules.
What is a Multi-Employer Pension Plan (MEPP)?
pension plan covering employees of multiple employers
often within the same industry
or under collective agreements
What is a Defined Benefit Pension Plan (DBPP)?
pension plan
in which retirement benefits are determined
by a formula specified in the plan
What is a Defined Contribution Pension Plan (DCPP)?
pension plan in which contributions are specified
but the final retirement benefit
is not guaranteed
What is a Deferred Profit Sharing Plan (DPSP)?
employer-sponsored plan
in which employer contributions
are generally linked to profits or a plan-defined formula
What determines a DCPP member's retirement benefit?
Contributions
investment performance
fees
how the accumulated balance is used
What is pensionable service?
period of service
credited under a pension plan
and used to calculate pension benefits
What is portability?
The ability to:
transfer or move pension value or benefits when leaving employment
subject to applicable rules
What is a locked-in account?
retirement savings account
holding pension money
is generally restricted to retirement-income purposes
What is commuted value?
present lump-sum value of a future pension benefit
calculated using applicable actuarial assumptions and rules
What is CAPSA?
Canadian Association of Pension Supervisory Authorities
which promotes coordination and guidance
among Canadian pension regulators
What is the PBSA?
Pension Benefits Standards Act
1985
which is federal pension benefits legislation
What does underfunded mean?
plan's assets < measured liabilities
under the relevant funding measure
What is a going-concern valuation?
assesses the plan
assuming it continues operating over the long term
What is a solvency valuation?
assesses the plan using assumptions
associated with settling benefits
if the plan were wound up, where required
What is a contribution holiday?
period when an employer
may temporarily reduce or stop contributions
if the funding position and applicable rules permit
What is the funding ratio formula?
Funding ratio = (Plan assets ÷ Plan liabilities) × 100%.
What is a flat-benefit pension formula?
A formula providing
fixed pension amount for each qualifying unit of service
What is a best-average-earnings pension formula?
A formula based on:
the highest qualifying average earnings
over a specified period
What does the accrual rate represent in a DBPP?
percentage of pensionable earnings
credited toward the annual pension
for each year of service
What is a Pension Adjustment (PA)?
value of pension benefits earned or accrued
by an employee
in a registered pension plan during the year
What is the purpose of the Pension Adjustment (PA)?
reduces the RRSP contribution room
generated for the following year
to prevent double dipping on tax-assisted retirement savings
What is the basic RRSP room formula after PA?
New RRSP room = Lesser of (18% × Prior-year earned income) or the applicable annual dollar limit) - PA
What can affect final available RRSP contribution room besides new room and PA?
Unused contribution room carried forward and other applicable adjustments.
What is a Pension Adjustment Reversal (PAR)?
Benefits received on a leaving plan < accumulated PAs = RRSP room restored
How do you calculate years to a target factor if age and service each rise by one per year?
Years to target factor = (Target factor − Current factor) ÷ 2
if the plan uses this rule
What is a joint-and-survivor pension?
pension option that continues a specified level of income
to an eligible surviving spouse
after the member's death
What is a guarantee period?
guaranteed period for pension payments
with remaining payments going to an eligible beneficiary if the member dies
What is the survivor pension?
pension benefit
that provides continuing income
to an eligible survivor under the plan's terms
What is a bridging benefit?
temporary additional benefit
that may bridge income until another benefit, often CPP, begins
What is CPP integration?
Coordinating a workplace pension formula
with CPP benefits
according to the plan's provisions
What are ancillary benefits?
Additional benefits beyond the basic retirement pension
such as survivor, disability, or bridging benefits, depending on the plan
What is the main purpose of registered pension plan tax treatment?
support retirement saving
through tax-deferred treatment
subject to applicable rules
What are common options when leaving a pension plan?
Leave benefits in the plan
transfer eligible value to another pension plan
or transfer eligible commuted value to a locked-in account
subject to rules
What factors should be considered when choosing a retirement pension option?
Retirement income needs
life expectancy
survivor protection
tax treatment
investment risk
plan terms
What are the three methods for determining DCPP contributions?
Flat benefit method
fixed dollar amount method
percentage of earnings method
What happens to DCPP benefits when a member dies?
Vested: survivor or estate receives the vested account value
Not vested: receive the member's contributions plus interest
What are common options for DCPP assets at retirement or when membership ends?
Purchase an immediate or deferred registered life annuity
or transfer to an eligible locked-in retirement vehicle
What factors affect when to draw income from a DCPP?
Cash-flow needs
retirement time horizon
life expectancy
government benefits
taxes
What is the maximum annual employer contribution to a DPSP?
Lesser of half the annual MP limit
or 18% of the employee's earnings
Predictable retirement income based on a defined formula
may provide lifetime pension income
may offer survivor benefit options
What are the disadvantages of a DBPP?
Members generally have less control over investment decisions
benefits and available options depend on:
plan terms
funding arrangements
applicable rules
What are the advantages of a DCPP?
Investment control (members choose from the investments offered by the plan)
no direct investment-performance guarantee is required from the employer
flexibility
vesting and portability
Investment risk (the member generally bears it)
uncertain retirement income because the final benefit depends on contributions and investment performance
longevity risk (the accumulated savings may not last throughout retirement)
Employer-funded retirement savings
employees do not contribute directly
employer contributions can help employees accumulate retirement savings
What are the disadvantages of a DPSP?
cannot make direct contributions
employer contributions may depend on profits or the plan's contribution formula
benefits depend on, employer contributions and investment performance
Why does DBPP underfunding matter near retirement?
plan may not have enough assets to cover liabilities
may face a short fall
employer may need to add funds
underfunding doesn't automatically reduce pensions
Survivor benefits vs. beneficiary designation?
Survivor benefits provide ongoing income
Designation names who may receive death benefits
DPSP withdrawal vs. eligible transfer?
Withdrawals are generally taxable
Eligible transfers are generally tax-deferred