Personal Finance

Trudeau going after Personal Services Corps disguised as small businesses

  • Last Updated:
  • Nov 19th, 2017 3:32 pm
Deal Addict
Feb 26, 2008
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mr_raider wrote:
Nov 9th, 2017 9:03 pm
An interesting read on how juicy defined benefit plans are:

http://business.financialpost.com/perso ... -limit/amp

The article barely touched on "how juicy" defined benefit plans are. Instead, it describes how few people actually make use of the existing tax advantaged savings tools (rrsp and tfsa) and suggested that the contribution limits for rrsps be increased to reflect that asset returns are generally lower now than they were 30 years ago.

Fwiw, my experience has been that the "juiciness" of defined benefit plans is really about their simplicity for the recipient. The plan participant has his contribution automatically deducted from his pay cheque and therefore cannot neglect to save. Secondly, the plan administrators make the asset allocation decisions which relieves participants from the pain of making intelligent decisions about their risk preferences and making decisions about the comparative costs of investing. Finally, the defined benefit plan completely simplifies the distribution phase as there is a fixed formula to determine pension benefits (while everyone using an rrsp needs to actively make a decision about how to structure their withdrawals).

Given that most people struggle with deferred gratification and refuse to make a modest investment of time to become financially literate, the simplicity for the user is excellent. However, for those of us who are more financially literate and who are reasonably good at saving and investing, the rrsp route might actually be better.
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Feb 29, 2008
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Montreal
kneevase wrote:
Nov 10th, 2017 4:36 am
The article barely touched on "how juicy" defined benefit plans are. Instead, it describes how few people actually make use of the existing tax advantaged savings tools (rrsp and tfsa) and suggested that the contribution limits for rrsps be increased to reflect that asset returns are generally lower now than they were 30 years ago.

Fwiw, my experience has been that the "juiciness" of defined benefit plans is really about their simplicity for the recipient. The plan participant has his contribution automatically deducted from his pay cheque and therefore cannot neglect to save. Secondly, the plan administrators make the asset allocation decisions which relieves participants from the pain of making intelligent decisions about their risk preferences and making decisions about the comparative costs of investing. Finally, the defined benefit plan completely simplifies the distribution phase as there is a fixed formula to determine pension benefits (while everyone using an rrsp needs to actively make a decision about how to structure their withdrawals).

Given that most people struggle with deferred gratification and refuse to make a modest investment of time to become financially literate, the simplicity for the user is excellent. However, for those of us who are more financially literate and who are reasonably good at saving and investing, the rrsp route might actually be better.
The article essentially argues that the RRSP contribution room needs to be doubled to match the equivalent defined benefit plan, yet still you don't get the risk mitigation available to pension plan beneficiaries.
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Nov 24, 2013
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Kingston, ON
mr_raider wrote:
Nov 10th, 2017 7:25 am
The article essentially argues that the RRSP contribution room needs to be doubled to match the equivalent defined benefit plan, yet still you don't get the risk mitigation available to pension plan beneficiaries.
It's a weird article. So many articles about how CPP represents a poor RoI for the individual and how it would be better to let people invest on their own, at least instead of expanding CPP, but now we get an article claiming that (risk ownership aside) you can't accumulate enough in an RRSP at annual 18% max contributions to purchase an equivalent (indexed/surivorship) life annuity to a DB plan?

It sounds like their definition of "retirement grade" investments is stuck in an era where interest-bearing instruments had higher returns.

Just trying to napkin-math it, say $100K salary, $18K annual RRSP contribution, for 30 years, growing at 4% real return. That's a $1M portfolio after 30 years. $1M isn't enough to buy a $60,000 (2% x 30 years = 60%) annuity anymore? 4% real per annum is pretty conservative for a 30 year average return too.
Member
Jul 20, 2017
269 posts
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mr_raider wrote:
Nov 9th, 2017 9:03 pm
An interesting read on how juicy defined benefit plans are:

http://business.financialpost.com/perso ... -limit/amp
and don't forget that most DB plans also come with the medical and dental benefits for the retirement...all tax free obviously ( as it was widely published in the sears bankruptcy news)
interestingly, morneau and trudauu did not mention these facts in their opening salvo attack on the small businesses...
maybe is now time for them to launch a fairness attack on the public sector....wait, who will write the opening paper?
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Jan 15, 2017
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Sebastian6300 wrote:
Nov 10th, 2017 10:34 am
and don't forget that most DB plans also come with the medical and dental benefits for the retirement...all tax free obviously ( as it was widely published in the sears bankruptcy news)
interestingly, morneau and trudauu did not mention these facts in their opening salvo attack on the small businesses...
maybe is now time for them to launch a fairness attack on the public sector....wait, who will write the opening paper?
Since MPs have the same type of plan, they will never change the public service plan without first changing their own.
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Jul 20, 2017
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taxrage wrote:
Nov 10th, 2017 10:45 am
Since MPs have the same type of plan, they will never change the public service plan without first changing their own.
And the way is structured is not even visible. This allows them to look better when compared with private sector, that is claiming that they make much less...
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Jul 20, 2017
269 posts
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Sebastian6300 wrote:
Nov 10th, 2017 11:11 am
And the way is structured is not even visible. This allows them to look better when compared with private sector, that is claiming that they make much less...
I just don't understand why the actual rrsp adjustment is not based on the actual amount paid into the pension fund by the employer...why do we need all this mumbo-jumbo adjustment factor that no longer has any relation to the new realities...
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Nov 24, 2013
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Kingston, ON
Sebastian6300 wrote:
Nov 10th, 2017 11:14 am
I just don't understand why the actual rrsp adjustment is not based on the actual amount paid into the pension fund by the employer...why do we need all this mumbo-jumbo adjustment factor that no longer has any relation to the new realities...
Putting just the employer pay-in would actually result in a lower pension adjustment, as the employee contributes too to most DB plans I know of. What the "rule of 9" does, 2% benefit accrued in a year of service times 9 = 18%, is take away almost all new RRSP contribution room for an individual on a DB plan. If you just looked at employer pension contributions, the PA would be too low. If you did employee plus employer contributions as the PA like a DC, it's ignoring that the contributions are going to funds that already have significant Assets Under Management, rather than ultimately belonging to the individual contributor. Actual contributions paid for, say, someone in HOOPP or OMERS with well-funded pensions can be under 18%, even after you factor in the employer portion. HOOPP for example looks like 16% for someone making $60,000:

https://hoopp.com/members/hoopp-pension ... alculation

Should Sally (from their example) get that extra 2% in RRSP room each year on top of accruing her well-funded, indexed, DB pension? The Rule of 9 Pension Adjustment is taking more RRSP room away from her than her+employer contributions, not less.
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Feb 26, 2008
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Mike15 wrote:
Nov 10th, 2017 10:09 am
It's a weird article. So many articles about how CPP represents a poor RoI for the individual and how it would be better to let people invest on their own, at least instead of expanding CPP, but now we get an article claiming that (risk ownership aside) you can't accumulate enough in an RRSP at annual 18% max contributions to purchase an equivalent (indexed/surivorship) life annuity to a DB plan?

It sounds like their definition of "retirement grade" investments is stuck in an era where interest-bearing instruments had higher returns.

Just trying to napkin-math it, say $100K salary, $18K annual RRSP contribution, for 30 years, growing at 4% real return. That's a $1M portfolio after 30 years. $1M isn't enough to buy a $60,000 (2% x 30 years = 60%) annuity anymore? 4% real per annum is pretty conservative for a 30 year average return too.


Yes, and we should not forget that DB plans tend to have cpp integrated, meaning that when you turn 65, your pension decreases by the value of your cpp cheque. So to compare apples to apples, you don't need a $60k annuity, but rather a $60k - $13k = $47k annuity. With your million bucks, safe withdrawal rate theory would suggest that you could likely withdraw pretty close to that $47k and there'd be a high likelihood that you'd also leave a big pile of money to your kids too when you finally kick off.

As I suggested up thread, for somebody who has the discipline to actually make rrsp deposits and who invests a bit of time to make intelligent asset allocation and investment fee decisions, an rrsp might even be better than a db plan.
Deal Addict
Feb 26, 2008
1482 posts
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mr_raider wrote:
Nov 10th, 2017 7:25 am
The article essentially argues that the RRSP contribution room needs to be doubled to match the equivalent defined benefit plan, yet still you don't get the risk mitigation available to pension plan beneficiaries.

Well, to be fair, the article was written by someone in the financial planning industry. It makes perfect sense that he'd advocate for expanded contribution limits and complain about DB plans because CIBC does not make any money administering db plans.

That being said, asset returns tended to be a shade higher back when the factor of 9 was implemented, so there's certainly a strong argument to examine whether a factor of 12 shouldn't be used now. That would reflect a long term investment yield of 8.5 per cent, and would result in bumping up contribution limits by about one-third. For the few of us who actually max-out our contributions, that would be helpful, but as the article said damned few Canadians come anywhere close to exhausting the existing rrsp and tfsa combined limits.
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Jul 20, 2017
269 posts
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Mike15 wrote:
Nov 10th, 2017 12:03 pm
Putting just the employer pay-in would actually result in a lower pension adjustment, as the employee contributes too to most DB plans I know of. What the "rule of 9" does, 2% benefit accrued in a year of service times 9 = 18%, is take away almost all new RRSP contribution room for an individual on a DB plan. If you just looked at employer pension contributions, the PA would be too low. If you did employee plus employer contributions as the PA like a DC, it's ignoring that the contributions are going to funds that already have significant Assets Under Management, rather than ultimately belonging to the individual contributor. Actual contributions paid for, say, someone in HOOPP or OMERS with well-funded pensions can be under 18%, even after you factor in the employer portion. HOOPP for example looks like 16% for someone making $60,000:

https://hoopp.com/members/hoopp-pension ... alculation

Should Sally (from their example) get that extra 2% in RRSP room each year on top of accruing her well-funded, indexed, DB pension? The Rule of 9 Pension Adjustment is taking more RRSP room away from her than her+employer contributions, not less.
thanks for the very detailed explanation...unfortunately the way I remembered from my past employment, it looked different.
I also noticed an odd thing, my wife has a DC with some matching...maybe you know how the different amounts are taxed and appear on the T4 and how they affect the RRSP room...I've seen some odd numbers there...I tried to read the CRA guide, but is hard to make sens of it...
1-company contribution
2-employee contribution

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