Presentation on theme: "OASRetirement and Pension Fund Association of Retirees of the OAS (AROAS) Department of Human Resources of the OAS OAS Staff Association OAS Staff Federal."— Presentation transcript:
OASRetirement and Pension Fund Association of Retirees of the OAS (AROAS) Department of Human Resources of the OAS OAS Staff Association OAS Staff Federal Credit Union Association of Pensioners of the OAS Retirement and Pension Fund (ASPEN) PRE- RETIREMENT LECTURE SERIES
Pre-Retirement Lecture Series: I.Retirement Benefit Options Presents: OAS Retirement and Pension Fund and Association of Pensioners of the OAS Retirement and Pension Fund November 9, 2006 Washington, DC For participants close to retirement
80% - 100% of net income for a similar life style RetirementSeparation 5 years before retirement 10 years before retirement Formulate some financial planning Adjustment More serious planning Medical examination Assessment of retirement options Accumulation Period Distribution Period Chronology:
* To facilitate the lecture, throughout this presentation masculine and feminine terms will be alternated Considerations Only the future retiree knows what is the best for him* and her beneficiaries (if there are beneficiaries) After retirement, the retiree will need a periodic source of income to sustain her during the rest of her life
Considerations (continued) Assets Desired life style Civil status Spouse retirement benefits (if she has...) Health (own and beneficiaries) Knowledge and will to manage assets Family expectations Be realistic with the assessment of the situation Feel comfortable with the final decision taken
Retirement benefits have the objective to provide for a safe and reliable source of income for the remainder of the retiree life and that of his beneficiaries, when applicable Starting point
The retiree must compare the available financial resources under the different retirement options with the desired life style after retirement Be open minded to carry out this process Assessment of the participant situation >=<>=<
Obtain the most complete possible image of your situation and that of your beneficiaries. Consult your: Personal situation (and family situation) : Lawyer Financial analyst AccountantDoctor
Retirement Benefits: The participant must perform a very careful analysis of the different benefit options for her retirement Be careful, avoid external influences (even good natured ones). It is YOUR retirement. And each case is different!!
R&P Fund Retirement Options Payment of a cash lump sum DB DC A pension determined by a Defined Benefit Formula An annuity acquired with the funds in the participant’s account Participant retiring or separating Participant retiring or separating The proportion the participant can take in cash depends on the elected scheme. If the participant decides to acquire an annuity, the annuity must respect certain minimums.
R&P Fund Retirement Options: A pension determined by a Defined Benefit Formula Participant Retiring or separating Participant Retiring or separating A participant that had a low income level, may opt to take an alternative minimum pension, if that is better for him. This benefit can be divided in up to 1/3 in cash and 2/3 in a pension An alternative minimum pension determined by the participant’s basic salary Alternative minimum pension reduced in proportion to the cash taken Up to 1/3 in cash
Eligibility to take annuity or pension 15 years or more of participation in the Plan 55 years or more of age Participant qualifies for Pension or Annuity Less than 15 years of participation Less than 55 years of age Participant receives benefit in cash
What happens if you DO NOT qualify for Pension or Annuity?
Separation If the employee participation is less than 7 years, her account will be liquidated as per the vesting scale. Separation is not considered retirement. Participation < 7 years If the participation is between 7 and 15 years or if the age is less than 55 years (but the participants has more than 7 years of participation), his account will be liquidated with 100% of the vesting. However, this participant cannot retire because he does not comply with the minimum retirement requirements. Participation < 15 years Age < 55 years o
If the participant DOES qualify for Pension or Annuity there are several options
Pension through the 2% Formula (Defined Benefit)
Benefits Age = 65 years Participation ≥ 15 years Compulsory Retirement No actuarial reduction Age + Participation ≥ 85 Participation ≥ 15 years 65 > Age ≥ 55 years Voluntary Retirement No actuarial reduction Age + Participation < 85 Participation ≥ 15 years 65 > Age ≥ 55 years Early Retirement Actuarial reduction Defined Benefit: depending on the situation it can be pension, cash or combination Retirement benefits begin at age 65 Participation ≥ 15 years 65 > Age ≥ 55 years Deferred Retirement No actuarial reduction Age: End of participation Retirement Age Retirement Age = 65 years
Benefits Defined Benefit: depending on the situation it can be pension, cash or combination No. of years of Participation in the Plan Average Pensionable Remuneration (best 3 of last 5 years) Annual Pension Actuarial Tables Life actuarial value of a pension 2/3 or more dedicated to a pension Up to 1/3 can be taken in cash Defined Benefit Formula Age Actuarial Reduction?
Benefits Defined Benefit: Computation of a Pension under the 2% Formula It is a life pension with automatic spouse survivorship benefit (50%) Based on number of years of participation Considers the Average Pensionable Remuneration (ξ) during the best 36 consecutive months within the last 5 years of participation It is 2% of ξ times the number of years of participation up to a maximum of 30 years. If employee participated more than 30 years, adds 1 ⅔ % of ξ for each additional year during the next 10, up to a total of 40 years (years 31 to 40) A participant with 40 or more years of participation will receive a maximum pension of 76.67% of ξ
Benefits Defined Benefit: Example of computation of pension under the 2% Formula year 31year 32year 33year 34year ξ = (3900* *6+4200* *6)/36 = 4000 Pension = 4000*0.02* * *5 = Actuarial reduction factors will be applied in case of age below 65 or non compliance with rule of 85
Annuity (Defined Contribution)
Benefits Defined Contribution: depending on the situation it can be pension, cash or combination Can be taken part in an Annuity, part in Cash Can be totally dedicated to acquire an annuity Can be taken as a cash lump sum Funds in Participant’s Account Acquisition is offered to participants that entered the Plan before January 1 st, 1982 and under certain conditions to participants that entered the Plan after that date
Benefits Defined Contribution: Determination of Annuity Funds taken in Cash Funds in Participant’s Account Level of Spouse’s protection (0, 50, 100%) Actuarial Tables Spouse’s Age (if married) Participant’s Age Funds to acquire Annuity Annuity These are Life Annuities adjusted by Cost of Living
Benefits Defined Contribution: Example of Annuity Determination Cash: $400,000 Funds: $1,000,000 Level of Protection: 50% Actuarial Factor: Spouse’s Age: 65 Female Participant’s Age: 65 Male For Annuity: $600,000 Annuity*: $42,376 per year $3,531 per month These are Life Annuities adjusted by Cost of Living *The value of the annuity at the OAS Retirement and Pension Fund is obtained using the actuarial factors in force as of November 9, 2006
Benefits Defined Contribution: Acquisition of Annuity The Office of the Retirement and Pension Fund will calculate if this option is better than taking a pension through the 2% formula Generally, this option will be more convenient for participants that: Are not married (do not have to set aside funds for protection of spouse) Whose accounts are larger than the actuarial value of the pensions calculated through the 2% formula Whose spouses have a good pension This option can combine cash distribution
Advantages shared by Pensions and Annuities
Benefits Pensions and Annuities: Pros, cons and considerations Legal protection Life pensions and life annuities No worries! on financial and market risks Cost of living adjustments Premature death Health (own and spouse) Priority claim Representation in the Committee Provides diversification
Cash Lump Sum
It is a unique payment in cash For the amount on the account Of the future retiree at the Moment of retirement. All these decisions are irreversible
Benefits Cash Lump Sum: Considerations Once retired, the retiree will have to invest her assets to generate income The retiree will have to make this option as comparable as possible to a pension or annuity: Identify investment instruments that provide a level of safety as close as possible to security of a pension Identify the kind of asset diversification that will provide the same level of income as a pension (beware of risks!) The retiree has to design an investment policy that allows for capital preservation and provides an adequate return for the risk taken The retiree should consider his beneficiaries: Capital should last enough to provide benefits for beneficiaries (ex. as the survivorship protection of a pension)
Benefits Cash Lump Sum: Pros, cons and considerations Premature death Legacy to family (even before death) Make a large investment (second home) Pay debts (including mortgage) No legal protection Possible lost of initial capital Financial and market risks Long life without resources Spouse’s retirement benefits Health of retiree and spouse Knowledge, will and character to manage assets
Combination of Annuity or Pension and Cash Distribution
Combination of annuity/pension & cash Hybrid option combining the advantages of previous options Provides safe base of monthly income through a reduced pension or annuity Provides the possibility to make a major expense: Pay out a mortgage Buy a second house Leave a legacy to children or other beneficiaries Pension or annuity received in this way will be reduced proportionally according to the cash taken
Comparing benefits offered by the Fund and those obtained in the market
Financial comparison Compare income with responsibilities to be covered Discriminate between the cost of living and the desired life style.
Comparison between the Fund’s annuity and that purchased from an external bank
Annuities, R&P Fund vs. Banks The following text was extracted from an article that appeared on October 31, 2006 in the Business section of the Washington Post, by Allan Sloan and entitled: Cost-of-Living Increases Don’t Come Cheap, “…Vanguard and AIG,…last year began offering lifetime income protection annuities that let you buy an inflation adjustment similar to Social Security’s…” “…Here’s a for-instance. Take $100,000. Seems like a lot. But if you’re a single male born in 1941 … it will produce only $703 of lifetime monthly income from Vanguard/AIG. Buy the inflation-adjusted version, and you get only $501 to start”
Annuities, R&P Fund vs. Banks (continued) “…Here’s a for-instance. Take $100,000. Seems like a lot. But if you’re a single male born in 1941 … it will produce only $703 of lifetime monthly income from Vanguard/AIG. Buy the inflation-adjusted version, and you get only $501 to start” $0 $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000 Banks Annuity w/o adjust. Banks Annuity adjusted by inflation* $703 $501 $714 $676 $717 $963 Retirement and Pension Fund Annuity adjusted by inflation* # $673 *In both cases of inflation adjusted annuities the annual rate of inflation assumed was 3%. # The values of annuities obtained at the OAS Retirement and Pension Fund were obtained using actuarial factors in force on November 9, 2006
Comparing an Annuity at the Fund and Investing in the Market
each 50% prob. surv. one 25% prob. surv.
No Financial Aspects HealthLegal aspects Character Miscellaneous Assessment of these aspects together with the financial ones and feeling comfortable with the final decision can make a big difference
Questions and Comments?
Presentation of Experiences: By Manuel Metz and Pedro Turina