Members > Newsletters > Fall 2009

The cost and value of a benefit

Pensions have continued to be at the top of the news in recent months, and there is no sign of this changing any time soon. At the end of October, the federal government announced some new rules for pension plans. While none of the changes apply to our Plan, which is regulated by the Ontario government, it is encouraging to see governments starting to take action in support of defined benefit plans.

Our provincial government, which is responsible for Ontario's Pension Benefits Act and therefore the regulation of our Plan, has also indicated that more changes to pension law will be proposed in the near future. (See here for more information on provincial law and our Plan's issues with solvency funding.)

Although 2008 was a bad year to be an institutional investor, 2009 appears to be providing us with a good start on recovery, and it has been a good year for getting changes to pension legislation onto the public agenda.

Whatever kind of pension plan one's employer may offer, it seems clear that everyone needs to have a plan for retirement, that a significant amount of money is needed to make the plan work, and that a means of investing the money at a reasonable risk is hard to come by. Members of a defined benefit plan like ours have the advantage in this area.

The Plan's contribution rate is significant - and it's important to remember that the contribution rate will be going up on January 1, 2010 - but those contributions serve members well when they enter the pension fund. The defined benefit pension is still difficult to beat as the best vehicle for retirement savings.

Our Plan gives you the advantage of pooling investment and mortality risk with other members. Investment risk is shared among all members in a larger, more diversified fund, which is better able to ride out rough times in the markets than any smaller investor, and pays proportionally less fees for doing so. Because the mortality risk (the fact that you do not know how long you will need your retirement savings) is pooled in our Plan, you will not outlive your defined benefit pension, which will continue as long as you do. Other types of plans cannot provide this certainty.

The benefit you will receive is defined up front - it will not be affected by the state of markets in the year you wish to retire. Your benefit has a value that does not run the risk of diminishing during your working career.

As part of the public debate, many commentators are proposing modifications to improve our retirement income system. Some of the suggestions you may have seen in the news include a supplementary Canada Pension Plan, rules to encourage smaller plans to mix in their funds with larger fund managers, and the development of large defined-contribution-type plans run by a central body such as an insurance company.

CAAT Plan officials will participate in the discussion and development of these ideas with interest. Any or all of them could help Canadians better manage their savings and plan their retirement. However, it seems very unlikely that any of them will dethrone the well managed, defined benefit plan (such as the CAAT Plan) as the leader in Canadian retirement savings vehicles.

Contributions to the Plan made by both active members and employers will be increasing by 1%, effective January 1, 2010. This will bring the rate to 10.3% on earnings that are subject to Canada Pension Plan (CPP) contributions, and 12.1% for earnings that are not, or:

12.1% on your earnings below the YBE, and
10.3% on your earnings between the YBE and the YMPE, and
12.1% on your earnings above the YMPE.

Contributions are divided this way because our Plan recognizes some integration with the CPP. The YBE - Year's Basic Exemption, or the earnings below which CPP contributions do not apply - is $3,500. The YMPE - Year's Maximum Pensionable Earnings, or maximum earnings to which CPP contributions apply - will be $47,200 in 2010.

Keep in mind that pension contributions are tax deductible, which means that the impact of a 1% increase is significantly less than 1% on an after-tax basis.

December 2009