1. INTRODUCTION
In 1998, a new feature, called a Flexible Pension Plan was added to the University of Waterloo Pension Plan. The Flex feature allows Plan members to make additional voluntary tax-deductible contributions without affecting their RRSP room. Each year you decide whether or not you wish to contribute. If you do, your contributions go into a personal Flex Account and earn tax-sheltered interest at the same rate as the UW Pension Fund. You use the balance in your Flex Account to improve your UW pension by purchasing Flex Options at the time you retire. The Flex Options include better early retirement provisions and larger joint and survivor pensions.
The purpose of this information and examples is to help Plan members decide whether they wish to participate in the Flexible Pension Plan. Full technical details of the Flex Plan are available in the official Plan Text, which is the authoritative document and is available from the Human Resources Department.
*** RECENT CHANGES
The Pension & Benefits Committee monitors participation in the flexible pension plan, as well as the resources necessary to administer the flex plan on an annual basis. Due to the small percentage of active pension plan members currently participating in the flex plan (less than 3%) and the complexity and cost associated with administering the flex plan, the Pension & Benefits Committee made a recommendation in February 2011 to the Board of Governors that the flex plan be wound-down in a staged approach. With Board approval, the Pension & Benefits Committee incorporated the amendment into the restated pension plan text and circulated the text to members in April 2011 for review and comment. The wind-down of the flex plan was also discussed in the Pension & Benefits Committee 2011 Report to the Community sent via email on October 7, 2011.
As mentioned in previous communications, the wind-down will occur as follows:
For clarity, new members who join the Pension Plan after December 31, 2011 will not be allowed to make flex contributions.
The flex plan will be administered as usual until all obligations have been fulfilled in accordance with the terms of the flexible pension plan. For those members who are active participants of the flex plan, no new flex contributions will be permitted after 2013, however your existing flex contributions will remain on file until you retire, terminate or die, at which time they will be paid in accordance with the plan.
2. FLEX ACCOUNTS
A Flex Account is like an RRSP in that each year you can decide what you wish to contribute, up to a contribution maximum as described below. The University does not contribute to Flex Accounts. Your contributions are tax-deductible, and the interest earned in your Flex Account is tax-sheltered.
Your Flex Account earns interest at the same rate as the UW Pension Fund. In the last eight years the Pension Fund has earned 12.16% (2003), 9.4% (2004), 9.65% (2005), 13.25% (2006), 1.62% (2007), -21.51% (2008), 14.70 (2009) and 8.49% (2010).
Note that if the Pension Fund rate of return is negative, as it was in 2008, the balance in your Flex Account decreases.
The money in your Flex Account must be used for retirement income (see Flex Options below), and cannot be withdrawn for other needs or emergencies.
The Income Tax Act restricts the total amount that can be paid to you from the Pension Fund, including your Flex Account. If your Flex Account contains more than you can spend on permissible Flex Options when you retire, the excess is forfeited and must remain in the Pension Fund. This is the Use It or Lose It Rule - see below.
For most Pension Plan members, the maximum you can contribute to your Flex Account in any calendar year is 9% of your T4 earnings (including taxable benefits) minus the amount you are required to contribute to the UW Pension Plan. The University does not contribute to Flex Accounts. Your RRSP room is not affected by contributions to your Flex Account.
The following table shows approximate Flex contribution limits for 2011.
| 2011 |
Contrib. Limit |
2011 |
Contrib. Limit |
2011 |
Contrib. Limit |
|
| 30,000 |
960 |
70,000 |
1,698 |
110,000 |
1,797 |
|
| 40,000 |
1,280 |
80,000 |
1,768 |
120,000 |
1,732 |
|
| 50,000 |
1,558 |
90,000 |
1,838 |
130,000 |
1,667 |
|
60,000 |
1,628 |
100,000 |
1,862 |
140,000 |
1,602 |
|
Please call Wanda Speek at extension 33573 to obtain your estimated Flex contribution limit for 2011. You can contribute any amount up to the limit, or you can choose not to contribute at all. Note, however, that unused Flex contribution room cannot be carried forward to future years.
If you wish to contribute to a Flex Account and obtain a tax deduction in 2011, your cheque dated December 31, 2011 made payable to the University of Waterloo must be received by Wanda Speek in Human Resources no later than December 16, 2011. If you do not contribute this year, you will only be able to contribute in 2012 and 2013 if you have made a flex contribution in a previous year.
4. FLEX OPTIONS
When you retire, you use the balance in your Flex Account to purchase one or more of the Flex Options described below. You choose the options you want when you retire to use up the balance in your Flex Account. You can purchase more than one option, or only part of an option if your Flex Account balance is not large enough for the full enhancement.
Each Option will have a price tag that depends on your age at retirement, basic pension, the level of enhancement sought, and external market factors. Price tags cannot be determined accurately until you retire, but the tables and examples following will give you an indication of possible amounts.
Flex Options 1 and 2 pertain to early retirement. For these options, the price tag will decrease as your retirement age increases beyond 55, which is the minimum early retirement age. Only Option 3 is available at age 65, so if you think you may work to age 65, you need to be especially careful not to accumulate too large a balance in your Flex Account. Under the Use It or Lose It Rule, what can't be spent on Flex Options is forfeited and must remain in the Pension Fund.
The Income Tax Act allows pension improvements to be purchased by flex contributions on the portion of your pension attributable to Plan membership after 1989 only. It also limits the total pension payable. The 2011 limit is $2,552.22 per year of credited service, including any enhancements you purchase with your Flex Account.
OPTION 1: Improved Early Retirement Pension
If you retire early, your UW formula pension is normally reduced because it will be paid longer than if you started to receive your pension at age 65. Effective May 1, 2000, the early retirement adjustment factors for those retiring from the University at age 55 or older were revised to 0% adjustment at ages 62 and above, and 6% adjustment per year prior to age 62. This has affected your ability to use your flex account, so the "Use It or Lose It Rule" should be carefully reviewed.
Your Flex Account balance can be used to eliminate some or all of the reduction due to early retirement, subject to the Income Tax Act limits on early retirement enhancements and the maximum pension limit.
OPTION 2: Bridge Benefit to Age 65
You can use this Flex Option to provide a temporary increase to your pension if you retire early. The bridge benefit is payable until the earlier of death or attainment of age 65 . Generally, you become eligible for full payments from the Canada Pension Plan and Old Age Security at age 65. This Option, subject to Income Tax Act limits, lets you "bridge the gap" by buying a benefit to completely or partially replace government payments.
OPTION 3: Enhancements to your Form of Pension
The normal form of UW pension, as calculated by the Pension Plan formula, is a single-life pension guaranteed for ten years. This means that if you die within ten years of retiring, monthly payments will continue to your beneficiary or estate for the balance of the ten years. Other forms of pension are available. If you are married, you must choose a Joint and Survivor 60% pension, unless your spouse signs a waiver form. This form of pension pays a reduced pension to your spouse after your death. Your pension is reduced to adjust for the value of the survivor pension.
This Flex Option can help you pay for a longer guarantee period on a single-life pension, or a better joint and survivor pension.
Again, the Income Tax Act limit applies to your total pension, including any enhancements purchased with your Flex Account. Also, as described above, such enhancements can only apply to post 1989 pension service.
If your Flex Account contains more than you can spend on permissible Flex Options when you retire, the excess is forfeited and must remain in the Pension Fund.
The money in your Flex Account must be used for retirement income and cannot be withdrawn for other needs. The Income Tax Act limits the total amount that can be paid to you from the Pension Plan, including your Flex Account.
It is important for you to plan ahead and monitor your Flex Account balance carefully. This is your responsibility: the University cannot provide individual help or counselling. You will need to be especially careful if you plan to work to age 65 or beyond, or if your pension will be affected by the Income Tax Act maximum. If you are in doubt, you should consult a professional financial advisor.
Because of the Use It or Lose It Rule and inability to withdraw funds except as retirement income, most Plan members will want to make full use of their RRSP room before contributing to a Flex Account.
6. WHAT HAPPENS AT RETIREMENT?
When you retire, you must use the balance in your Flex Account to purchase one or more Flex Options. As already noted, if your Flex Account contains more than you can spend on permissible Flex Options, the excess is forfeited and must remain in the Pension Fund.
If you choose to take a lump sum payment instead of a UW pension, the same procedure is followed. Using your Flex Account, you purchase Flex Options to enhance your pension subject to the Income Tax Act limits. You then receive a lump sum payment equal to the value of your enhanced pension. Note, however, that the Income Tax Act Maximum Transfer Value limit applies and could result in part of your pension value being paid to you as a taxable refund.
7. WHAT HAPPENS AT TERMINATION?
If you leave UW prior to retirement age (55), you can choose either a deferred UW pension or a lump sum transfer equal to the value of your UW pension. In either case, your Flex Account balance would be used to purchase Flex Options, thereby increasing your deferred pension or transfer value.
8. INCOME TAX ACT MAXIMUM PENSION
In most cases, the Income Tax Act limits the maximum annual pension payable from our Pension Plan to $2,522.22 per year of service in the Plan (2011 limit). Your formula pension attains this limit if your final average earnings (best 36 consecutive months in your last ten years) is about $142,101 or more. This limit increases each year by the average industry wage index and will increase to $2,646.67 per year of service effective January 1, 2012.
If you retire early or take a joint and survivor pension, the formula pension is reduced before it is compared with the Income Tax Act maximum. For instance, if you retired five years early, the reduction in your pension would be 12%, and your final average earnings could be about 12% higher than $142,101 before the Income Tax Act maximum would affect you.
Any enhancements you purchase with your Flex Account must be added to your pension before it is compared with the Income Tax Act maximum. If you think the Income Tax Act limit will affect you when you retire, you will need to be especially careful that you do not contribute too much to your Flex Account.
9. FIFTY PERCENT RULE
Under current legislation, the University must pay for at least 50% of your UW pension. When you retire, the value of your accumulated contributions with interest is compared with your pension value. If your accumulated contributions exceed 50% of your pension value, the excess is refunded to you.
We expect the 50% rule will not apply to pension enhancements purchased from your Flex Account, but there has as yet been no clear determination of this matter. If the 50% rule does apply to Flex enhancements, then it will be necessary to terminate the Flexible Pension Plan arrangements and return Flex contributions with interest to Plan members. This money would then be taxable because contributions were made on a tax-deductible basis.
10. HELP!! WHAT SHOULD I DO NOW?
The Flexible Pension Plan provides you with an opportunity for additional tax-deductible retirement savings, but as you have seen, there are potential dangers. If you are going to contribute to a Flex Account, you need to plan ahead for your retirement and monitor your Flex Account balance to ensure that you do not contribute too much.
Flex Accounts will have the greatest value for Plan members who know they want to retire early. If you think you might work to age 65 or beyond, or if you think the Income Tax Act limit may affect your pension, then you need to be especially careful.
The remainder of this information contains tables and examples to help you decide whether you want to contribute to a Flex Account. Each year the University will update this information, and will inform you of the balance in your Flex Account. However, the University cannot provide individual financial counselling. If you need help, please consult a professional financial advisor .
10.1 How much would you like to contribute?
Each year you will need to decide how much to contribute to your RRSP and/or Flex Account. Canada Revenue Agency informs you each year of your RRSP contribution limit. The maximum Flex contribution room is as described in Section 3 above. Each year you may contribute nothing at all, or any amount up to your allowable flex limit.
If you have unused RRSP room, you may wish to use it first before contributing to your Flex Account. Remember that you cannot withdraw funds from your Flex Account as you can from an RRSP, and the Use It or Lose It Rule applies to your Flex Account as well. Also, unused RRSP contribution room carries forward to future years, but that is not true for Flex contributions.
Once you have decided how much you would like to contribute to your Flex Account, you need to consider how much your Flex Account balance may grow as a result of interest income, and how much you may be able to spend on permissible Flex Options when you retire. There is a good deal of uncertainty in both considerations, particularly if retirement is many years away.
10.2 When would you like to retire?
To estimate the balance in your Flex Account and the amount you can spend on Flex Options, you will need to assume a retirement date. The Tables below give information for retirement or termination at ages 45, 55, 60, 62 and 65.
10.3 How much will your Flex Account grow?
Table 1 shows how $1.00 invested now will grow at 4%, 7%, or 10% interest. The actual rate of interest depends on investment returns in the Pension Fund and will only be known after the fact. Actual rates of return since 1998 when flex was introduced have ranged from a low of -21.51% in 2008 to a high of 14.7% in 2009. The Pension Plan actuary uses 7% as a planning figure, but the actual returns could be significantly higher or lower than 7%.
To determine how large your Flex Account balance might be when you retire, you would multiply your proposed contribution by the appropriate factors from Table 1. For instance, suppose that you plan to contribute $2,500 in 2011 and intend to retire in ten years. Then, from Table 1, the balance in ten years would be
$2,500 x 1.48 = $3,700 at 4% interest;
$2,500 x 1.97 = $4,925 at 7% interest;
$2,500 x 2.59 = $6,475 at 10% interest.
If you contributed previously, you need to add your current flex account balance to your proposed contribution, and then multiply the total by the appropriate factors from Table 1. Your current flex account balance is the flex contributions made to date with interest at the fund rate of return to the end of 2011. The rate for 2011 may turn out to be positive or negative, but the number will not be known until 2012.
10.4 How do you determine your eligible Flex service?
If you joined the UW Pension Plan after 1989, your eligible service for Flex enhancements is simply the number of years of credited service you will have in the UW Pension Plan by the time you retire. If you joined before 1990, your eligible Flex service is your credited service in the Pension Plan from January 1, 1990 to your retirement date. Flex enhancements are available only for credited service in the Pension Plan after 1989.
For instance, if you joined the UW Pension Plan on July 1, 1994 and expect to retire 15 years from now (i.e. January 1, 2027), you will have 32.5 years of eligible Flex service. However, if you joined the Plan on January 1, 1985 and expect to retire in 15 years, you will have 37 years of eligible Flex service. Service prior to 1990 is not eligible for Flex improvements.
10.5 How much will you be able to spend on Flex Options?
To estimate the amount you may be able to spend on all permissible Flex Options when you retire, you multiply the values given in Table 2B by your years of eligible Flex service (see Section 10.4).
The top half of Table 2A, Table 2B or Table 2C is for Plan Members who have a spouse at the time they retire, and who take a Joint and Survivor Pension with the maximum possible improvement under Option 3. The bottom half is for Plan Members who choose a single-life pension with the maximum possible guarantee period under Option 3. Where retirement occurs prior to age 65, the figures also include both enhancement of the early retirement pension (Option 1) and the bridge benefit (Option 2).
The values in these tables are only estimates, calculated by the Pension Plan actuary using assumptions as set out in the Appendix. Tables 2A, 2B and 2C provide alternate estimates using different assumptions about future salary increases as set out in the Tables. All three Tables assume that UW salary increases, including selective and merit components where applicable, will on average be 0.5% plus the percentage increase in the average industrial wage.
Owing to promotions and merit increases, some individual salaries will increase faster or slower than the average. This is one of the reasons why it is important to review your Flex Account annually. The actual amount you can spend on Flex Options will not be known with certainty until you retire.
11. EXAMPLES
Note: In all of the examples that follow, it is assumed that the hypothetical members do not have an existing Flex Account balance by virtue of not making any Flex contributions prior to 2011.* If you wish to model yourself based on one, or more, of the examples that follow, and you did make a Flex contribution in previous years, use the technique described in 10.3 to estimate your starting position. Then, add the resultant figure to the hypothetical 2011 Flex contribution specified in the applicable example(s). We will use Table 2B for all of the examples.
*Remember that due to the recent changes to the Flex plan, only those members with balances in their Flex Accounts will be allowed to make new Flex contributions in 2012 and 2013.
Example 11.1
Anna is 45 years old and her current salary is $35,000. She is married and wants to retire at age 55 with a joint and survivor pension. She has been a member of the Pension Plan since 1988.
Anna could contribute about $1,120 in 2011. Using Table 1, she finds that, at 7% interest, that amount would grow in ten years to
$1,120 x 1.97 = $2,206.
Anna's eligible Flex service will be about 31 years (from January 1, 1990, until her retirement date in 2021).
The value in Table 2B (married) for age 45, salary $35,000, and retirement at age 55 is $12,100. Multiplying by 31 years of Flex service gives
$12,100 x 31 = $375,100
as the estimated amount Anna could spend on Flex Options at age 55.
Anna would be eligible for all three Flex Options, but will probably not be able to contribute enough in her ten remaining years to purchase all of them. There does not appear to be any significant risk that Anna's Flex Account will grow too large to be spent on Flex Options. However, she should still monitor her Flex Account before contributing each year, since changes in salary, marital status, retirement plans, investment returns, etc., may affect her situation.
Example 11.2
Bob is 55 and earns $35,000. He is married, and is expecting to work at UW until he is 65. He joined the Pension Plan in 1975.
Bob could contribute about $1,120 in 2011 . Using Table 1 he finds that in ten years $1,120 would grow to $2,206 at 7% interest, or $2,901 at 10% interest.
Bob's eligible Flex service will be about 31 years (from January 1, 1990, until his retirement date in 2021 ).
The value in Table 2B (married) for age 55, salary $35,000, and retirement at age 65 is $1,300. Multiplying by 31 years of Flex service gives
$1,300 x 31 = $40,300as the estimated amount Bob could spend on Flex Options at age 65.
If Bob is not married when he retires, he can extend the guarantee period on his own pension to 15 years. The value from Table 2B (single) is $500, and the estimated amount he could spend is
$500 x 31 = $15,500
It appears safe for Bob to contribute in 2011 (again, assuming he does not have a current flex account balance), because his 2011 contribution with interest does not exceed the value of Option 3. But Bob will need to be careful not to over-contribute in future years.
Example 11.3
Marian is 55 and earns $90,000. She is single and would like to retire at age 60 or 62. She joined the Pension Plan before 1990.
Marian could contribute about $1,810 in 2011 . At 7% interest, this would grow to $2,535 in five years, or to $2,914 in seven years.
If Marian retires at age 60 she will have 26 years of Flex service, and from Table 2B (single) the estimated amount she could spend on Flex Options is
$7,800 x 26 = $202,800
At age 62 she will have 28 years of Flex service, and the estimated amount is
$3,200 x 28 = $89,600
By contributing to a Flex Account, Marian can obtain a better early retirement pension and/or a bridge benefit. She will probably not be able to contribute enough to purchase all of the Flex Options, but nonetheless she will be able to make a worthwhile improvement to her retirement income at age 60 or 62.
The chief danger for Marian is that, if she changes her plans and decides to continue working to age 65, she might not be able to spend her entire Flex Account balance. At age 65 only Option 3 would be available, and in addition her pension may be affected by the Income Tax Act Maximum Pension.
Example 11.4
Remy is 35 and earns $35,000. He doesn't yet have long-term career or retirement plans. He is married, and he joined the Pension Plan at the beginning of 1995.
Remy could contribute about $1,120 in 2011 .
Remy's numbers are in the first row of Table 2B (married). If he decides to leave UW at age 45, his Flex service would be 26 years and the estimated amount he could spend on Flex Options is
$10,500 x 26 = $273,000
If he continues at UW until age 60 the estimated amount is
$8,000 x 41 = $328,000
If he works at UW right through to age 65, the estimated amount is
$2,700 x 46 = $124,200Remy is eligible for all three Flex Options and has plenty of room to build his Flex Account. The question for Remy will be whether, at this stage in his life, he wishes to commit disposable income to additional retirement savings. Remember that money contributed to a Flex Account cannot be withdrawn except as retirement income. Remy may prefer to contribute the maximum amount to his RRSP, because RRSP funds can be withdrawn for other priorities or emergencies. On the other hand, if he has not made any Flex contributions yet, he will not be able to make any Flex contributions in 2012 or 2013 unless he makes a Flex contribution in 2011.
Example 11.5
John is 60 and earns $150,000. He is married and has been a member of the Pension Plan for 30 years. He would like a better joint and survivor pension, and also likes the idea of reducing current income tax by making a tax-deductible contribution. He expects to work until he is 65.
John could contribute about $1,544 in 2011 . At 7% interest this would grow to $2,162 in five years.
John's pension will be affected by the Income Tax Act Maximum. If John works to age 65, there is a very good chance he will not be able to spend his Flex Account balance. The balance would be forfeited and would have to remain in the Pension Fund. John should probably not contribute to a Flex Account.
If John were to retire a year or two early, he may be able to spend his Flex Account balance by purchasing a bridge benefit, as well as the joint and survivor improvement.
John needs to think very carefully before contributing to a Flex Account, and should seek help from a financial advisor.
Example 11.6
Elizabeth is 35 and earns $60,000. She is single and joined the Pension Plan at the beginning of 1999. She is an exceptional performer, and expects to receive promotions and larger-than-average salary increases during her career. She hasn't begun to think about retirement - a lot can happen in 30 years! But she could contribute about $1,600 to a Flex Account in 2011, and wants to reduce her income tax.
Elizabeth still has the opportunity to build a substantial Flex Account by the time she retires if she makes a 2011 Flex contribution. If she leaves UW before retirement age, she will probably be able to transfer her full Flex Account balance to a locked-in RRSP. If she stays at UW, she can retire early with an enhanced early retirement pension and bridge benefit.
If Elizabeth works at UW until she is 65 and is single when she retires, then from Table 2B , the estimated amount she could spend is $2,400 x 42 = $100,800 . Over 30 years, her $1,600 Flex contribution would grow to $12,176 at 7% interest, or $27,920 at 10% interest. It appears that she should be able to spend her 2011 contribution.
However, remember that the values in the Tables are calculated using average salary increases. If Elizabeth receives larger-than-average increases, she could be affected by the Income Tax Act maximum pension when she retires, and might be unable to spend her Flex Account at age 65. Because of the uncertainties, she might decide not to make any Flex contributions and contribute to her own personal RRSP instead for tax-deductible savings.
VALUE OF MAXIMUM AVAILABLE FLEX OPTIONS
Tables 2A, 2B, and 2C give the estimated value of the maximum available Flex Options per year of eligible Flex service at the time of retirement or termination. The Tables give estimated value per year of eligible Flex service, which you will need to multiply by your eligible Flex service at retirement or termination. Eligible Flex service is years of service in the UW Pension Plan from January 1, 1990, until retirement or termination.
The values in Tables 2A, 2B, and 2C are only estimates, calculated by the Pension Plan actuary using different sets of assumptions about the future. These assumptions are described below. The actual amount you can spend on Flex Options will not be known with certainty until you retire.
The use of these Tables is illustrated in Sections 10 and 11.
Assumptions: Table 2A
UW Salary Increases: 2%
Increase in Average Industrial Wage and Yearly Maximum Pensionable Earnings: 1.0%
Increase in Income Tax Act Maximum pension: 1.5% per year starting in 2008
Assumptions: Table 2B
UW Salary Increases: 4%
Increase in Average Industrial Wage and Yearly Maximum Pensionable Earnings: 3.0%
Increase in Income Tax Act Maximum pension: 3.5% per year starting in 2008
Assumptions: Table 2C
UW Salary Increases: 6%
Increase in Average Industrial Wage and Yearly Maximum Pensionable Earnings: 5.0%
Increase in Income Tax Act Maximum pension: 5.5% per year starting in 2008
Additional Assumptions: Tables 2A, 2B, 2C
Real Rate of Return: 3.85%
Normal Form of Pension: payable for life, with 120 monthly payments guaranteed
Post Retirement Indexing: 100% of CPI
Mortality: Uninsured Pensioner Table 1994 projected to 2015 (75% male / 25% female split)
Spousal age: Spouse assumed to be 2 years younger than Member
If you have any further questions, please contact Wanda Speek, extension 33573, or Sue McGrath extension 32046.
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