Actuary Karen Hall: Turning DC savings into an income stream

1 Oct

By Sheryl Smolkin

Click here to listen

Click here to listen

Today I’m interviewing actuary Karen Hall for Prior to her recent retirement, she was a vice president at the consulting firm Aon Hewitt, based in Vancouver. In addition to enjoying her retirement, she is continuing to explore cost effective and easy ways to create a steady income out of defined contribution (DC) pension savings.

Karen has 35 years of professional experience in the areas of pension actuarial consulting, flexible benefits consulting, senior management and HR leadership. She is also the author of the book, Risk Management Strategies for an Aging Workforce available on Amazon. Thanks so much for joining me today, Karen.


Q: Most Canadians in the private sector today have defined contribution pension plans. Tell me how a DC plan works.
A: Well, Sheryl, defined contribution means the contributions going in are defined or fixed. The member and her employer each contribute to the plan. The member often chooses how the money is invested from a number of investment options provided by the plan. Then, when the member comes to retire, she has a lump sum amount saved.

Q: On retirement, the conversion of DC assets into retirement income is for the most part left up to retirees. Why is that a problem?
A: If you buy an annuity you don’t get much in income for the amount you saved. The only other alternative is doing it yourself, that is, choosing investments, deciding how much to withdraw and figuring out how to make the money last for your lifetime. If you rely on advisers for any of this, you’re typically paying a substantial fee of at least 2% of your assets every year. The average person is just not equipped to make these decisions. I find it complicated enough and I’ve been living and breathing pensions for 35 years.

Q: Frequently, insurance companies or other DC or Group RRSP carriers, have group registered retirement income funds that retiring members of client group retirement plans can move their money into at retirement. Do these plans resolve some of these issues of high retail fees and poor financial literacy that you identified in our last question?
A: I don’t think they do. It would depend, of course, on the deal. But, often the fees are still quite high, near 2%, and the individual is still making all of the decisions I just mentioned.

Q: So how common are Group RRIF’s established for retirees of just one employer and what are the pros and cons of these types of arrangements?
A: Based on my experience, they aren’t that common. I can see why plan sponsor companies don’t want the ongoing administration. But I do think it would be great if the retiree could basically just stay in the plan and get the same investment options and fee deals as when they were active.

What I do see more often is where the insurance company that is the record keeper for the plan will have options for the member to transfer into their individual RRIF products, perhaps with a modest reduction in fees as compared to a retail purchase.

Q: How much clout do individual DC plan sponsors have in negotiating fees for their former members in rollover plans or single organization Group RRIF’s?
A: Well, as with everything, it depends on the size of the employer and on how much the employer wants to push for such a service. I do know of large employers who have negotiated such services.

Q: How should investment options be structured in rollover plans and single company Group RRIFs to maximize value from a DC plan in the decumulation phase?
A: In my view, the same options as when the member was active should generally be fine. The plan could add a target date type option for accounts and payments. But I think the typical choice of a range of balance funds and funds with conservative to moderate risk. You are going to live a fair number of years in retirement, so your time horizon isn’t that short.

Q: Saskatchewan and several other provinces, plus federal pension legislation, now allow payment of a variable pension from a DC plan – that means a stream of income that tries to simulate a defined benefit pension. Could you briefly explain to me how it works?
A: Well, it does depend on the plan and the legislation how they set it up, but very generally such an arrangement would allow the plan to provide payments to retirees. Like you said, it would simulate a defined benefit type of pension. There would generally be monthly payments and the amount of each payment would vary depending on plan experience.

For example, one client I know determines the amount of the monthly payment once a year. The amount is leveled for the year, so it’s paid every month at a level amount, but then it gets recalculated every January and depends on how well the fund did in the previous year. Generally – hopefully – it usually goes up or slightly or stays about the same. However, if it was a really bad year like 2008, the monthly pensions would likely be reduced.

Q: And how do they draw down funds in terms of various funds or investments the members are invested in or cash or whatever is actually sitting in the member’s account?
A: Well, in this particular one, when you retire and choose a variable pension, you have a lump sum amount and that lump sum amount gets translated into a number of units in the fund. Then, the fund pays a pension based on a dollar amount per unit, so the dollar amount per unit times the number of units you have, that’s what you get.

And what’s happening in this one is they’re insuring the mortality, so you don’t actually see your lump sum getting drawn down, you’re guaranteed to get that amount however long you live, and then the mortality is spread amongst the group.

Q: Oh, that’s really interesting. So it’s not just a matter of investments being sold and your money being distributed once a year, like if you had your own individual RRIF.
A: Right. So the plans can offer an individual RRIF and in those circumstances you’d see your money getting drawn down. But these variable pension ideas are to do with pooling the mortality risk.

Q: So to what extent have employers taken advantage of their ability to pay variable pensions to enhance the value of their DC plans to plan members in this all important decumulation phase?
A: As far as I know, not many have done so. Well, I know the one I gave in my example, but I don’t know of any other examples.

Q: And why do you think that’s the case?
A: Well, I think that it’s just new, right? CAP Guideline Number 8 says that plan sponsors should help members transition, but it’s new and sponsors are still considering their options. They are watching to see what others will do.

Q: Is there a real cost or a potential liability to employers that take on this responsibility?
A: That’s the big issue. For example, if you don’t have a big enough group, it’s hard to pool the mortality risk. The other thing is I’m not sure members are clamoring for variable pensions. Plan sponsors will pay attention when it affects active members and their appreciation of the benefit. I know there are plans that are interested in designing this and we’ll probably see how it develops in the next few years .

Q: Do you think it will be more of interest to public sector or private sector?
A: I think the public sector will have more ability to implement these and I think that union groups without a defined benefit plan might be interested.

Q: How important is effective employer communications in adding value to DC benefits for retirees in the decumulation phase?
A: Some employers are doing more to help members understand their options and prepare for retirement in the decumulation phase. For example, they provide one to three day retirement preparation seminars that can help considerably. I do still think, however, that individuals are not equipped to make many of these decisions. And you can put design features into DC plans that would help members better with the decision making.

Q: Could you give me an example of one or two of those?
A: Auto enrollment, auto escalation, and the design feature that we were just talking about — variable pensions — that would assist members with decision making in the decumulation phase would help.

Q: What role can annuity purchases play using all or part of the money in the plan members, DC account or RRIF to enhance the orderly draw down funds after retirement?
A: Annuities are expensive when the person is first retiring. However, I would definitely consider purchasing an annuity after about my mid 70’s. At that point, the insurance element becomes more interesting and significant because you don’t know if you’re going to live a few more years or a couple of more decades.

And the financial impact of living 2 or 20 years more is huge. The security that an annuity can give becomes much more worthwhile. So one strategy could be to separate your savings into two buckets: A: the amount you will need at age 80 saved via the annuity and B: the RRIF or the amount you’re going to spend between now and age 80. This is a bit easier to deal with, because the time frame’s better defined.

Q: That’s interesting. So do you have any other comments or suggestions that people are approaching retirement with a DC pensions or group/individual RRSPs to think about?
A: Well, focusing on just the DC pension is helpful, but I do think it’s also an incomplete solution. If the person has properly saved for retirement, he/she doesn’t have just one DC or Group RRSP account.

Even if they combine savings from previous employers, the spouse probably has registered savings, both spouses might have their own tax-free savings account and they probably have non-registered money too.

All these sources of income must be coordinated so the individual can meet their retirement and personal financial goal. Either the person has to educate themselves to manage on their own or they need help in finding an appropriately qualified financial adviser to assist them.

Right now in Canada, the price of such assistance is, in my view, unreasonably high. I also feel that many financial advisers do not have much experience with effective decumulation of retirement savings. Individuals have to look hard to find the right person.

Well, thank you very much. I really appreciate that you spoke to us today, Karen.

You are very welcome. It’s a pleasure, Sheryl. Thank you for asking me.

This is the edited transcript of an interview conducted by telephone in July 2015.

How will the ORPP affect Saskatchewan?

24 Sep

By Sheryl Smolkin

At this point it is not clear how the Ontario Registered Pension Plan (ORPP) that will come into effect in 2017 will affect Saskatchewan says Katherine Strutt, General Manager of the Saskatchewan Pension Plan.

“I don’t believe the provincial government is interested in a mandatory pension plan,” she says.

The ORPP is a plan that will require employer and employee contributions to generate additional government benefits in excess of monthly Canada Pension Plan benefits. The average amount of CPP for new beneficiaries in January 2015 was $618.59/month. The maximum monthly CPP benefit in 2015 is $1,065.

Key features of the ORPP as set out in the consultation paper Ontario Retirement Pension Plan: Key Design Questions are as follows:

  • The plan would be phased in beginning in 2017 with the largest employers. Contribution rates would be phased in over two years.
  • Employees and employers would contribute an equal amount, capped at 1.9% each on an employee’s annual earnings up to $90,000. Earnings above $90,000 would be exempt from ORPP contributions.
  • Earnings below a certain threshold would be exempted to reduce the burden on lower income workers.
  • Contributions would be invested at arm’s length from the government. ORPP would pool investment and longevity risk and aim to replace 15% of an individual’s earnings.
  • Participation would be mandatory, but workers who already participate in a “comparable workplace pension plan” would not be enrolled in ORPP. The government says its preferred definition of a comparable plan includes defined benefit and target benefit multi-employer pension plans.
  • Additional conversations will be held on the best way to assist the self-employed.

An article on the International Foundation of Employee Benefits Plans website aptly summarizes some of the controversy that still surrounds the new program:

“The ORPP proposal has raised concerns among many plan sponsors of defined contribution (DC) plans because the government is proposing that they may not be considered comparable workplace pension plans. Many DC plan sponsors say they already provide adequate contributions. If those plans are not considered comparable, some question whether employers will continue them and/or lower their contributions in order to fund both ORPP and a DC plan.

Another concern is that mandatory contributions will reduce take-home pay and may result in the reduction of other workplace benefits. In the paper, the government said “ . . . some employers may take stock of their current approaches and make decisions about the right compensation mix going forward . . .’”

Both the federal Liberals and NDP parties have publicly supported a CPP enhancement. If either of these parties forms the newly-elected federal government in October, Ontario might opt to hold off on ORPP implementation until a similar national program can be adopted.

Sept 21: Best from the blogosphere

21 Sep

By Sheryl Smolkin

Saving for retirement is important, but working for 35 years with only a few weeks of vacation a year is a daunting thought for many people. However, some companies allow employees to take one or more extended leaves during their career and in some cases establish income deferral programs to help them finance a career break.

Here are some of the things you need to know about taking a sabbatical in Canada.

In the Globe and Mail, columnist Tim Cestnick offers Tax and other tips for planning a work sabbatical. He discusses the little known privilege in our tax law that permits your employer to set up a deferred salary leave plan (DSLP). The plan allows you to set aside a portion of your pay each year for a certain period of time and to then take a leave of absence. The money you set aside under the plan is used to pay you during your time off. If the DSLP is set up properly, you won’t face tax on the amounts you set aside until you make withdrawals later during your leave.

In The Sabbatical, a 2009 blog on Canadian Dream: Free at 45, Tim Stobbs explores the pros and cons of taking a sabbatical. He says taking three months off will allow you to take a major trip, build your own cabin or take courses to further your education. But the downside is you may not be able to afford the loss of income or benefits, and there could be career fallout with your boss or co-workers.

If the sabbatical bug has bitten, talk to your manager or human resources department; you may be pleasantly surprised at your options. How to take a break from work by Diana Swift in Canadian Living gives you tips for negotiating time off. She says pick your time, suggest how your workload will be handled in your absence, and tell your boss why you believe you are an asset worth keeping.

Should I Consider Taking a Teaching Sabbatical? Teacher Man asks on Young and Thrifty. His union contract allows him to take a year off at one-third pay after two years in the school division and one-half pay after five years of teaching. He concludes that if he completes his Masters degree during his time off and improves his future earning potential (he is only in his 20s), the investment in time and money could definitely be worthwhile.

Sabbatical Financial Planning 101: How to travel and not get into debt on Aspire Canada has lots of great ideas like: start planning early; continue contributing to your benefits if you can; sell stuff to raise money; draw up a budget; plan to stay with friends/relative where possible during your travels; and, pursue opportunities to work while you are abroad on your sabbatical.

Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information with us on and your name will be entered in a quarterly draw for a gift card.

Should your teenager get a part-time job?

17 Sep

By Sheryl Smolkin

School has barely started and your teenager tells you she wants to get a part-time job. While you admire her enthusiasm, you are naturally worried about the impact working 15-20 hours per week will have on both her and the family.

First of all, you should become familiar with the minimum age requirements for working in Saskatchewan. The general minimum age of employment in Saskatchewan is age 16.  To work in Saskatchewan, 14 and 15 year olds must have permission from their parents. They are also required to complete the Young Worker Readiness Certificate Course (available online) and obtain a Certificate of Completion.

Fourteen and 15 year olds can’t work more than 16 hours in a week in which school is in session; after 10 p.m. on a day before a school day; and before the start of any school day. They can work the same hours as other employees during school breaks and vacations. Young people under the age of 14 cannot work unless the employer has a special permit from the Director of Employment Standards.

These rules do not apply to sectors exempt from The Saskatchewan Employment Act and regulations, including:

  • Family businesses employing only immediate family;
  • Self-employed;
  • Traditional farming operations;
  • Babysitters; and
  • Newspaper carriers.

So assuming your child is legally-entitled to get a part-time job, here are some of the other questions the family should consider before she starts filling out application forms:

  1. Why does she want/need a job? Is the money that will be earned necessary for the family to cover basic expenses or will it be used for “extras” that you cannot or will not pay for? Will some of the money be saved towards college or university tuition?
  2. Does she feel pressure to work part-time because all her friends are doing it?
  3. Does she really have time to hold down a job? A part-time job can help a student develop a sense of responsibility and organizational skills to balance other commitments. But working could mean lower grades and fewer extra-curricular activities both of which may be considered when students apply for college or university.
  4. Can she handle the added physical and mental stress? An after-school or weekend job may seem like a great idea in sunny September. However, by November mid-terms when the temperatures plummet and everyone has a cold, combining work and school may be more than your child can physically or mentally handle.
  5. What transportation options are available? Is the job in walking distance from school or home? Is public transportation available? Is driving your child to and from work a practical option for the family?
  6. What about other family commitments? Your child may have regular chores like pet care or babysitting younger siblings after school. Are there other cost-effective options for the family?

In spite of the “time crunch” and the potential negative impact on your child’s grades, a part-time job can be a wonderful opportunity to gain work skills and experience. My sister’s first job was at McDonalds and ultimately she decided on a career in the hospitality industry.

In addition, by making their own money, kids have to learn how to manage it. They also have the independence to spend it on things like electronics or clothes that may be beyond the family budget. Saving money for expensive post-secondary education can reduce the need for student loans.

And with more and more young people struggling to get full-time jobs after graduation, the most valuable spin-off from part-time work could be networking opportunities and great references that give them toe-hold on the ladder to future success.

Sept 14: Best from the blogosphere

14 Sep

By Sheryl Smolkin

Over the last weeks the stock markets have been bouncing all over the place and now we are told that the Canadian economy is officially in recession. While it is natural to be concerned, particularly if you are close to retirement, the general consensus from most experts is to have confidence in your financial plan and stay the course. Today, and in coming weeks we will provide you with information to help you weather the storm.

In How to make sense of markets gone mad, Toronto Star personal finance writer Adam Mayers says this is a market correction of significant proportions. It could be short and sharp, or it may be long and lingering depending on how the real economy reacts. It may be tough to take the gyrations, but what it does do is set the stage for the next big rise.

Rob Carrick at the Globe and Mail says It’s decision time for your ‘dead’ money. If the summer market decline hasn’t stoked your appetite to buy stocks, he suggests that all the cash piling in your account is pretty much dead money. That’s true if you’re leaving the money uninvested, and also if you’ve taken the good sense step of keeping your cash in a high interest investment account.

MoneySense authors Jessica Bruno and Dean DiSpalatro consider What the recession means for your portfolio. They interviewed Jay Nash, portfolio manager at Roberts Nash Advisory Group, National Bank Financial, in London, Ontario. Nash’s message to clients is straightforward: The recession was largely focused in the energy sector, with other areas of the economy performing well. Most importantly, June’s solid data—pushed along by consumer spending—was better than expected.

Protecting your retirement income from the stock market by Wayne Rothe is on Retire Happy. Rothe reviews “Your Retirement Income Blueprint,” by Winnipeg financial advisor Daryl Diamond. Diamond writes about the impact of market gyrations on the “retirement risk zone.” This is generally the five years immediately before and after retirement age. A big drop in the value of your investments during this period can be disastrous.

And finally, Michael James on Money questions How Much Diversification Do You Need? He says, “Diversification is simple for indexers like me. We own all stocks for as low a cost as possible. There is no such thing as ‘di-worse-ification’ because we have no opinions about one stock being better than others. There is no reason to fret over active mutual funds because index funds are cheaper and cover the same asset classes.”

Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information with us on and your name will be entered in a quarterly draw for a gift card.

Should you pay your tuition with Aeroplan points?

10 Sep

By Sheryl Smolkin

If you know someone heading off to University of Regina, Saskatchewan Polytechnic (or several other participating Canadian universities and colleges) you may be interested to know that Aeroplan points can now be used to pay their tuition. Ontario and Alberta students can also use Aeroplan points to pay down student loans. The service is operated online by

When I initially read about this option in the Toronto Star my first reaction was that no students I know can afford to travel frequently enough to rack up a slew of airline points. But after reading further, I discovered that grandparents, parents and other generous benefactors can also convert points into cash and direct the money to the student of their choice so I was curious enough to find out more about how the program works.

Aeroplan’s Beyond Miles Charitable Pooling Program also allows students and institutions to “crowd-source” donations of Aeroplan Miles by setting up a Pooling Account for individuals in need. Each Charitable Pooling account will be able to run a Contribution Campaign once a year.

A campaign runs for a duration of 30 days and allows the charity to set a specific mileage goal. If the charity reaches 90% of their targeted goal through donations within the 30 day period, Aeroplan will contribute by donating 10% to ensure the goal is met.

The site even includes a draft email for students who would like to solicit Aeroplan points from friends and family to help pay their school expenses. One plus seems to be there is no charge to donate points, whereas if you simply want to transfer Aeroplan points between accounts there is a charge of $.02 per mile.

But at an exchange rate of 35,000 Aeroplan points for $250, a student will need an awful lot of points to make a dent in annual tuition of $5,000 or an accumulated student loan of $35,000 or more. Furthermore, when you do the math, it becomes apparent that it makes more sense to give your child, grandchild or community member a cheque.

That’s because spending 35,000 Aeroplan points for a credit of only $250 (which works out to a reward of only .007 or 7/10 of a cent per mile) is not the best way to get good value for your hard-earned loyalty points.

Calculations on Flightfox, illustrate that depending on the cost of the ticket and the distance you are traveling, you can realize anything from 1.4 cents per mile on cheap round–trip flights within Canada and the Continental U.S.A. to 1.84 cents per mile on an international economy flight. Pricey international business class flights that cost over $6,000 (or 135,000 Aeroplan) miles can result in a return on your investment of about 4.53 cents per mile.

According to Suzanne Tyson, founder of Higher Ed Points who was quoted in the Toronto Star article, already some $120,000 in tuition and student loan offsets have been converted through this plan. She also notes that one Toronto employer cashed in his Aeroplan points and put them toward summer course tuition for three students.

Greg Hurst: Federal Consultations on Voluntary CPP

3 Sep

By Sheryl Smolkin

Click here to listen

Click here to listen

Today, I’m pleased to be interviewing Greg Hurst for Greg is a pension consultant and pension innovator based in Vancouver. He’s held many roles in the pension industry with large international and small regional consulting firms and a major Canadian insurer.

He’s a member of both the editorial advisory board of Benefits and Pensions Monitor and Benefits Canada’s online expert panel. In fact, two of his articles were among the five most widely-read Benefits Canada pension articles of 2013.

Today, Greg is going to share his thoughts with us on the federal government’s  surprising pre-election proposal to study allowing Canadians to voluntarily contribute to the Canada Pension Plan (CPP) to supplement their retirement savings.

Thank you for joining me today, Greg.

Glad to be here Sheryl.

Q: Were you surprised to hear of the federal government’s announcement in May that they are going to reconsider a voluntary top-up to the Canada Pension Plan?
A: It was totally unexpected. Since 2011, the federal government has consistently said it’s not the right time for changes to the CPP, and even more recently – in fact, just before the announcement – they characterized CPP contribution rate changes as a “pension tax hike.”

Q: Interesting. So, why do you think that the Minister of Finance, Joe Oliver, announced these consultations after the government and the provinces previously rejected similar proposals?
A: Well, an election is coming up. The federal Conservatives recognize that CPP expansion will be a significant election issue. In the 2014 Ontario election pensions were front and center, and Kathleen Wynne’s Liberals won with her promise of the Ontario Registered Pension Plan (ORPP), which grew out of the federal government’s refusal to consider CPP expansion in spite of a consensus amongst the provinces. Canadians have come to love the CPP. It delivers on its benefit promises and the CPP Investment Board consistently delivers good news on its investment returns.

Q: Now, in an article you wrote that was published May 27th on the Benefits Canada website, you suggest that “the devil is in the details.” The closing date for the consultations on a voluntary CPP top-up is September 10th and the election will be held on October 19th. Do you think a detailed blueprint for adding a voluntary tier to CPP will be available for public scrutiny prior to the election?
A: It is unlikely. October 19th is the next fixed election date, and that would leave less than six weeks to build and publish the blueprint. It would also require input from the provinces. It would be very irresponsible for the federal government to publish proposals for CPP changes without first consulting the provinces.

Q: Ontario has gone ahead and passed legislation to establish the ORPP. What do you think of those proposals?
A: Well, I really favor mandatory employer and employee contributions for pension benefits. It’s taken a lot of political courage and leadership from Ontario, which has been absent elsewhere in Canada for many, many years to implement the ORPP. But there again, the devil is in the details. I might have different ideas on how to build the ORPP, but I really don’t have any interest in criticizing those who exhibit this leadership in pensions.

Q: In your view, is it likely that other provinces will jump on the bandwagon once the Ontario plan is up and running?
A: I think there’s a good chance of that, particularly if the Conservatives win the upcoming federal election, because they’ve been consistently intransigent in their opposition to workplace pensions with mandatory employer contributions. But if the Liberals or NDP wins, they’re more likely to build on the leadership of Ontario and proceed with CPP expansion, which I think would make the ORPP unnecessary.

Q: Were you surprised by the federal announcement that the Harper government would not help Ontario administer the ORPP?
A: I was quite surprised. To me, it amounted to a juvenile temper tantrum. It seems to be extremely bad policy for the federal government to torpedo any provincial pension initiative, particularly in this way. Administration of contributions could easily be accommodated in the same way as provincial income tax collection. And in terms of tax deductibility, the feds could readily accommodate ORPP contributions in the current tax-assisted framework like they already do for the Quebec Pension Plan and the Saskatchewan Pension Plan.

Q: Do you believe a voluntary supplement to the CPP should be an option for Canadians to save for retirement? Is this something you would use to increase your retirement savings?
A: Well, to answer questions about the concept of a voluntary CPP supplement, I first have to suspend my disbelief that the federal government – and particularly a Conservative government – would actually choose to compete with the financial services industry, which already has a wide spectrum of products and services designed for retirement savings.

I think that the expectations amongst the public with this announcement are that it would be a savings and investment vehicle, in which case my answer would be, no, I wouldn’t use it to increase my retirement savings and, no, I don’t think they should bother.

Q: Why do you say that?
A: Well, although many Canadians might be excited by the possible opportunity to share in the investment results that the CPP Investment Board has achieved — particularly if the cost of investing is similar to the Board’s current cost — that’s not what they would get from a voluntary supplement under the CPP. It would require a different investment mandate from the CPP Investment Board, with the degree of difference dependent upon how much administrative flexibility the plan has. It would be far more expensive at the end of the day and would likely not have much to differentiate it from retirement investment options already available in the marketplace.

Q: And what about the design of a potential voluntary top-up? What do you think? Should the money be locked in? And should there be basic required contributions, or some variability? I mean what should this thing look like?
A: Well, you know, it depends on how they actually design it. They could do it as a standard savings and investment vehicle, or they could do it as a prepaid annuity vehicle, which might be more interesting. So, I think, first off, Canadians would generally choose good, old-fashioned RRSPs over CPP supplements as a savings and investment vehicle, unless the CPP had the same flexibility with no locking-in, in which case the cost would be almost the same as traditional RRSPs. But if a voluntary CPP supplement were designed around the prepaid annuity concept, contributions could be flexible so you could buy as many prepaid annuities as you want, perhaps within some limits; and full locking-in would perhaps be appropriate under that kind of a design.

Q: Now, in a previous question, you referred to the integration of a voluntary CPP into the current income tax rules. Do you think that that’s problematic, or it would be fairly easy to do?
A: I think it could be fairly easy to do within the current income tax rules. If you really wanted to make it work as a prepaid annuity concept, you could put it on top of the existing RRSP limits. It would just be another added-value pension saving that wouldn’t impact your RRSP limits.

Q: That might make it more attractive to particularly people who have topped up their RSP limits already.
A: Absolutely.

Q: So, who do you think should be responsible for investing the contributions made to a voluntary CPP supplement?
A: If it was designed around a prepaid annuity concept, it would be the CPP Investment Board.

Q: How important is keeping costs low to the success of this proposal?
A: Well, it’s fundamentally important if it’s a savings and investment vehicle, which means that it would be very difficult to do without having some sort of subsidy from the government. MERs aren’t really applicable to paid up annuities. But certainly the cost would then likely be comparable to the current costs of the CPP Investment Board services.

Q: When you discuss a “prepaid annuity,” what do you mean? Do you mean that it would operate like a defined-benefit pension as far as the consumers are concerned?
A: Yes. Once you purchase it – so, you come in with “this is the amount of contribution I have. This is my age.” And then that would purchase a certain amount of fixed pension payable at your retirement date of age 65, or maybe 67, assuming that becomes the new normal retirement date. So, when you buy the annuity, you would know how much you’re getting when you reach that retirement date — like a defined-benefit plan.

Q: Do you think that this voluntary top-up to CPP is ever going to see the light of day? Will that depend on who forms the next government?
A: No. Even if it’s a prepaid annuity, I don’t think there will be enough of a market appetite for the concept to proceed. If it were a saving and investment type of program, it would have costs that are too high to really compete with the current, private-sector marketplace. But if the Liberals or the NDP form the government, I believe then we’d see a mandatory form of CPP expansion.

Q: Thank you very much, Greg. I really appreciated talking to you today.
A: My pleasure, Sheryl.

This is the edited transcript of an interview conducted by telephone in July 2015.

Aug 31: Best from the blogosphere

31 Aug

By Sheryl Smolkin

Tomorrow will be September and that means it won’t be long before you are thrown back into the maelstrom of activity that signifies the beginning of the business and academic year. So this week we continue with our back to basics theme, and bring you excerpts from some of our favourite personal finance writers and bloggers.

I really like The Sabbatical as a Dress Rehearsal for Retirement on the Financial Independence Hub by Adrian Mastracci. My husband retired when a four month sabbatical was refused but fully intends to seek contract work again in the fall.

I’m Not an Entitled Millennial Because I Can’t Afford to Buy a House in the City I Live In by Jessica Moorehous on Mo’ Money Mo’ houses explains why she and her husband decided to rent indefinitely when they couldn’t buy even a small home in Toronto for $500,000 with 20% down.

Mr. Money Moustache asks What if Everyone Became Frugal?. He concludes that it is savers and investors and not consumers that are the engine of economic growth. Only by sacrificing current consumption, can people put money into banks or share offerings, which end up in the hands of new and existing businesses allowing them to increase their productivity. Capital creates productivity, and productivity is the driver of our standard of living.

With Prime Minister Stephen Harper’s pre-election announcement that if elected he will raise the tax-free amount you can withdraw from your registered retirement savings plan to buy a first home to $35,000, Rob Carrick’s column Don’t buy a house at the expense of your RRSP is very timely.

And finally, To owe or not to owe, not such a simple question says Adam Mayers in the Toronto Star. Conventional wisdom has it that you shouldn’t owe anybody anything when you retire because your ability to pay it off is diminished. But as with most things to do with personal finance, he says one size doesn’t fit all. In some cases, it could make sense to pay the debt off slowly.

Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information with us on and your name will be entered in a quarterly draw for a gift card.

Are Canadians saving enough for retirement?

27 Aug

By Sheryl Smolkin

Are Canadians saving enough for retirement? It depends who you ask.

A BMO survey conducted in early 2014 revealed that only 43% of Canadians planned to make RRSP contributions by the March 1st deadline, down from 50% the previous year. An October 2014 study from the Conference Board of Canada reports that almost four in 10 Canadians are not saving and nearly 20% of respondents said they will never retire.

Yet a 2015 study of 12,000 Canadian households conducted by consulting firm McKinsey & Co. says that four out of every five of the nation’s households are on track to maintain their standard of living in retirement. The research reveals that most of the unprepared households belong to one of two groups of middle to high-income households:

  • Those who do not contribute enough to their defined contribution (DC) pension plans or group, and
  • Those who do not have access to an employer-sponsored plan and have below average personal savings.

The McKinsey study suggests that since the retirement savings challenge is quite narrow, the best way to address it should be an approach targeted to these groups that is balanced and maintains the fairness of the system for all Canadian households.

And now, Malcolm Hamilton, a Senior Fellow at the C.D. Howe Institute and a former Partner with Mercer has weighed in on the issue with his commentary Do Canadians Save Too Little?

Hamilton agrees with the McKinsey research that Canadians are reasonably well-prepared for retirement. Most save more than the five percent household savings rate. Most can retire comfortably on less than the traditional 70% retirement target. Furthermore, the size of the group that appears to be “at risk” cannot be accurately determined nor can the attributes of its members be usefully described.

He notes that a couple can live comfortably after retirement despite a reduction in income of more than 30% for several reasons:

  • They no longer need to save for retirement.
  • They no longer contribute to CPP and EI.
  • One of their largest pre-retirement expenses – supporting children – ends.
  • During their working lives the couple acquires non-financial assets like the family home, cars, furniture, art and jewelry. Some can be turned into a stream of income. Some cannot. But they do not need to budget to re-acquire these items during retirement.
  • Finally, any tolerable reduction in post-retirement income is amplified by a disproportionate reduction in income tax due to the progressive nature of our tax system and special tax breaks reserved for seniors.

As studies of our retirement system become more sophisticated, Hamilton thinks we should focus more on solutions for individuals who are not saving enough as opposed to a blanket approach that will impact everyone

So how can we fill the “gaps” identified by these studies?

Hamilton is not a big fan of an enhanced Canada or Quebec Pension plan. He agrees that CPP/QPP are effective ways to increase the post-retirement incomes, and to reduce the pre-retirement incomes, of all working Canadians.

However, he says they are ineffective ways to increase the post-retirement incomes of hard-to-identify minorities who are thought to be saving too little. “Their strength is their reach – they can efficiently move everyone to a common goal,” Hamilton says. “But what if there is no common goal? What if there are only individual goals dictated by personal circumstances and priorities?”

The report concludes that because gross replacement targets are unreliable measures of retirement income adequacy due to the diversity of our population, programs like the CPP/QPP can go only so far in addressing our retirement needs. They can establish a lowest common denominator – a replacement target that all Canadians should strive to equal or exceed.

“Beyond that, we need better-targeted programs – programs that are better able to recognize and address our individual needs,” Hamilton says.

Aug 24: Best from the blogosphere

24 Aug

By Sheryl Smolkin

After several weeks of “theme” issues of Best from the Blogosphere, for the next several weeks we will get back to basics and check out what our perennial favourites have been writing about lately.

On Boomer & Echo, Marie Engen discusses 3 financial mistakes to avoid. They are buying too much home; raiding your RRSP; and, putting your child’s needs ahead of your retirement.

Retire Happy’s Sarah Milton describes Using the Lifelong Learning Plan. The LLP is a program that allows Canadian residents to borrow up to $20,000 from their RRSPs in order to cover the costs of a full-time further education program for themselves, their common-law partner or spouse. If the Harper government is re-elected, they have promised to raise this amount to $35,000.

The Frugal Trader gives a Financial Freedom Update on Million Dollar Journey. He says in the year since he has reached the million dollar net worth milestone it feels great but nothing has really changed. His family has recently decided to become a single income family and with tight fiscal management they are able to live on one government salary. 

Blonde on a Budget Cait Flanders moved from Vancouver to Victoria recently and she has established a final de-cluttering challenge for herself. Last year she purged 43% of her belongings in one month to embrace a minimalist lifestyle. She has given herself 20 days to see how much more stuff she can get rid of when she unpacks her moving boxes.

Finally, Michael James on money says Your Retirement Spending Plan is Critical. While working, if you don’t like the plan your financial advisor has set up for you, you can find a new advisor and make up for past mistakes. But if your advisor puts you on a bad retirement spending plan, by the time you figure out there is a problem, there’s little you can do. other than cut spending.

Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information with us on and your name will be entered in a quarterly draw for a gift card.


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