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Foundations of Pension Plans

Retirement income system

Employer-
Government Individual
Sponsored
Pension Retirement
Pension
Plans Savings Plan
Plans

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Types of pension plans in Canada

Parties to a pension plan

PLAN MEMBER PLAN SPONSOR PENSION PLAN PLAN

COMMITTEE ADMINISTRATOR /
TRUSTEE

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Unlocking Provisions
• Purpose of pension plans is to provide retirement
income to member
• Pension plans enjoy tax advantages during
accumulation phase
• So, they are not easily accessible
• Early access to accumulated funds is referred to as
unlocking
• Unlocking provisions vary by plan regulator
(which varies by jurisdiction or may be Federal)
• Special circumstances: Shortened life expectancy,
extreme financial hardship
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Canada Pension Plan

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Canada Pension Plan (CPP)

• The Canada Pension Plan (CPP) is a universal, mandatory program intended to provide
contributors and their families with partial replacement of earnings upon retirement,
disability or death.
• The CPP is a monthly benefit that was originally designed to replace about 25% of the
average person’s lifetime pre-retirement employment earnings, up to a maximum
amount. By 2065, that will increase to 33.3% of the average worker’s income
• Except for in Quebec, almost all individuals who work in Canada are required to contribute
to the CPP. Quebec has a parallel plan, the Quebec Pension Plan (QPP).
• Compulsory contributions by plan members and their employers, based on the members’
earnings.
• The Canada Pension Plan is fully funded through employer and employee contributions into
the plan and the interest earnings on those contributions.

CPP Benefits
Post-
Retirement Retirement Death
Benefits Benefits Benefits

Survivor Disability
Benefits Benefits

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Retirement Benefits
• Paid to workers starting between age 60 and 70
• Two factors determine pensionable employment: how long they have worked in Canada and
how much they earned while working.
• Most types of employment and self-employment qualify as pensionable employment subject
to Canada Pension Plan contributions.
• Exceptions:
• Earnings <3500 per annum
• Casual workers (e.g. baby sitters)
• Migratory workers who work less than 25 days a year /or earn <$250 from any one employer
• Members of religious orders

Post Retirement Benefit (PRB)

• An individual who is 65-70 age, who works while receiving CPP
retirement pension, can continue to make contributions toward
the PRB
• Employer will also have to contribute equally
• All provinces except Quebec (QPP)
• The CPP contributions will go toward post-retirement benefits
(PRB), which will increase retirement income.
• <65 age, the individual & employer will continue to make CPP
contributions

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Disability Benefits
• Monthly payment - persons with mental or physical disability

• Three general categories

• Disability pension
• Post retirement disability benefit
• Children’s benefit

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Disability Benefits contd……

• Financial protection to disabled , and dependents, regardless of cause
• To qualify
• Must have contributed for four of the last 6 years and earned at
least 10% of years YMPE
• Under age 65 with severe and prolonged mental or physical
impairment that prevents the individual from working regularly at
any job
• Must apply in writing (max 12 months retroactive) and benefits
begin four months after CPP considers applicant as having become
disabled
• The maximum monthly disability benefit is $1,464.83 (2022)
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Disability benefits will cease when

contributor
• Is no longer considered disabled
• Begins to receive normal retirement benefits at age 65
• Elects to receive early retirement benefit (age 60-64)
• Dies (benefits end that month)

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Survivors benefits
• Survivors pension
• Monthly benefit paid to spouse or partner based on age of survivor,
deceased contributory earnings, dependents etc.
• Starts the month following the contributors death

• Children’s benefit
• Paid to each dependent child of deceased contributor under age 18 or full
time student under age 25

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Death Benefit
• Flat $2500
• One time lump sum payment made after a qualifying contributor
dies
• Not automatic, need to apply normally within 60 days of death
• Eligibility:
• Must have contributed to CPP for at least one of the following
• 1/3 of the calendar years in the contributory period for the base CPP, but no less
than 3 calendar years
• 10 calendar years

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CPP Contributions

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CPP Contributory earnings /pensionable

earnings
• Employer and employee make mandatory contributions
• Contributions based on employees earnings between a minimum
& maximum
• Minimum amount : Years Basic Exemption (YBE) $3500 (2022)
• Maximum amount: Years Maximum Pensionable Earnings (YMPE)
$64900 (2022)
• Pensionable Earnings = YMPE –YBE
• For 2021: YBE = $3500 ; YMPE =$61600
• For 2022: YBE =$3500 ; YMPE =$64900
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Contributory period
Contributory period
begins from the later of
• Date the individual
reaches age 18
• Jan 1, 1966(when CPP
started)
Contributory period ends the
earlier of
• Age 70
• Up to and including the month
in which an individual, who is
>65 age, elects to stop
contributing
• Death of the individual

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Contribution rates
• Percentage of the employee’s contributory earnings
• Employer identical rates
• 2022 : 5.70% (2021, 5.45%) each for employer & employee
• 2022: Self employed individuals pay full rate 11.4% (2021, 10.9%)
• Effective 2019 CPP enhancement rates begun taking effect
• Rates will continue to increase gradually over a five year period
up to 2023

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Contribution calculations
1. Determine the employee’s gross income. If the gross income
exceeds the year’s maximum pensionable earnings (YMPE),
substitute the year’s maximum pensionable earnings for the
employee’s gross income.
2. Subtract the year’s basic exemption (YBE $3,500) from (1).
3. Multiply the result in (2) by the applicable CPP contribution rate
(5.70% in 2022; 5.45% in 2021 )

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Spouse & common law partner benefits

• Definition of spouse:
• A legally married spouse
• A common law partner, of either sex who have lived in a conjugal
relationship for at least 12 months

• Must report their status

• Provisions:
• spouses may elect to share pension credits, split credits, or entitlement to
survivor benefits

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Retirement Age & Retirement benefits

• Full retirement benefits @ normal retirement age i.e. 65
• Early retirement : Prior to age 65
• Pension otherwise payable at age 65 less 0.6% per month for each month
prior to 65th birthday
• 7.2% for each full year (0.6% *12)
• If starts at 60, pension will be reduced by 36% (max reduction)
• Late retirement : After age 65
• Enhancement of 0.7% per month (8.4% per year)
• If starts at 70, pension will be increased by 42% (max enhancement)
• If contributor applies after age 70, retroactive benefits are available for a
maximum of 12 months

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As early as age 60 and as

When to late as age 70
start
collecting No right choice / age
CPP?

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When to start : factors to consider

• Length of time the contributor was a plan member

• Contributory earnings
• Other sources of retirement income
• Health factors
• Combined good health and good income

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Advantageous to delay CPP retirement

pension if

• The individual does not qualify for maximum pension as he/she

was a CPP member only for a short time
• Earnings are well below the YMPE throughout the contributory
period and thus do not qualify for maximum pension
• Have substantial income from other sources
• Have adequate income, are in good health and have a family
history of longevity

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CPP PENSION SHARING

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CPP Pension sharing : Assignment

• CPP pension can be shared through ‘assignment’
• PRB not eligible for sharing
• Purpose:
• Shifts retirement income from spouse in higher marginal tax rate to the spouse
in lower marginal tax rate
• Reduces the total income tax payable within the family unit
• It redistributes the income and not increase or decrease the overall
retirement pension
• To undertake an assignment, either spouse must make an application
for the assignment of CPP retirement benefit
• Both spouses must be at least 60 and receiving CPP retirement benefits

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Pension sharing depends on

The portion of retirement pension while living together is split
between the spouses and depends on…….
• How long the contributor and spouse have lived together
• Number of years in the contributory period

𝑌𝑒𝑎𝑟𝑠 𝑚𝑎𝑟𝑟𝑖𝑒𝑑
Assignable amount =Pension *𝑌𝑒𝑎𝑟𝑠 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑒𝑑

After assignment pension =

CPP remaining after assignment +50% of the pension to be shared

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Terminating pension sharing

Assignment can be terminated by
• Either partner requests Employment & Social Development Canada
(ESDC, the CPP administrator) a termination
• The month a spouse/partner dies
• Spouse or partner who never made CPP contributions begins making
contributions
• 12th month after a legal separation or the month a divorce becomes final

Upon termination
• each party reverts to receiving their original pensions

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Credit Splitting

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Credit Splitting
• The division of credits
• In the event of a divorce or separation, the accumulated property
should be divided equally between the couple, including CPP
credits
• Only triggered upon dissolution of a relationship
• Couples in a relationship cannot ‘split’ credits the same way they
‘assign’ or ‘share’ pensions
• If only one partner has qualifying credits, then only those credits
are split, but if both partners have credits, then both sets must be
split

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Credit splitting contd….

• Couple does not receive any payment at the time of credit splitting
• Split credits aligned with the appropriate spouse, used when calculating
retirement benefit entitlements
• Credits of higher income-earner are decreased and credits of lower
income-earner are increased proportionally as a result of split
• The longer the couple live together, the greater the impact of credit
splitting
• Includes calendar year couple began living together
• Excludes the year the relationship ended
• Ex: Married on Dec 27th 2010 and divorced on Dec 30 2019, for credit splitting
they have been married for 9 full calendar years (2010 included, 2019
excluded)

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Credit splitting contd….

• Beneficial to partner who
• Is the lowest wage-earner, or worked for the shorter period of time & vice
versa
• Mandatory after 1986 in most provinces, even if it contravened
spousal agreement
• Since 2000 Includes same sex couples
• No application deadline if married couple divorced
• Common law partners must apply for credit splitting within four years of
separation

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Indexing of benefits
• All CPP benefits are indexed for inflation (except Death benefits)
• The indexing factor is called pension index

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Tax treatment of CPP contributions & benefits

Self employed individuals’
Employer contributions Employee contributions
contribution

• Deductible expense for • Not a tax-deductible • Half contributions may

employer expense for employee
• Not a taxable benefit to • 15% non refundable
the employee federal tax credit and a
non refundable tax
credit a provincial level
be used to claim the non
refundable tax credit
• Other half business
expense

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Next class………….
CPP To be continued

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