Managed Money Reporter Newsletter — Issue 204, March 2004

Editors: Carl Spiess & Allan McGlade

Featured Articles

Pensions - Fact or Fiction?

Over the last 10 years, there have been several shifts in perception about pension plans.  Pension plans make up two of the three potential sources of retirement income:

  • Government Plans (CPP & OAS)
  • Employer Plans (Group RSPs, DPSPs, ESOPs, DCPPs, and DBPs)
  • Individual Plans (RRSPs and other taxable investment savings)

This month, we'll take a closer look at both Government retirement benefits (Canada Pension Plan and Old Age Security) and employer sponsored plans.

Government Plans

Canada Pension Plan - In the mid 1990s, with crushing government debt levels and low contribution premiums, Canada Pension Plan (CPP) was under scrutiny, and many individuals correctly questioned whether they would actually see the benefits for which they had paid over the years. 

Demographic trends were also cause for concern.  With earlier retirement, and longer life expectancies, people needed more assets for retirement than they previously required.  The chart to the right shows this trend over the last 50 years.  (Note - although we have used U.S. data in this article, the trends in Canada are comparable.)

The number of workers per retiree is estimated to drop from 5:1 to only 2.5:1 active workers supporting each retired person in North America.  Retired baby boomers will be making up a significant portion of the population in the next 50 years.  The bar graphs (see below) show these trends.

The conclusion here is to anticipate more and more retirees drawing pensions for longer, paid for by fewer and fewer workers - obviously not a sustainable scenario. 

These statistics made for an interesting subplot of a recent episode of the hit TV show The West Wing, where the characters seemed to suddenly realize that funding retiree benefits out of current contributions alone (pay as you go) will be difficult in the future when the number of workers per retiree drops.

Luckily, demographics are inherently predictable, and the good people at CPP realized years ago that they needed to move away from having present employee contributions pay for present workers benefits (pay as you go).  Instead, present contributions accumulate to fund future obligations, as well as paying for current retirees.  Thus, CPP contribution rates were increased significantly (employer and employee contribution rates are now up to 9.9% of covered earnings), and the investment mandate of CPP has been expanded to include growth investment classes like equities.  At present actuarial valuations, CPP investment board president John MacNaughton suggests that the CPP is estimated to be viable for 75 years. He also notes that pension revenues and assets are kept separate from government revenue. For more from John MacNaughton, see these links:

Old Age Security - It is true that Old Age Security (OAS) and likely other income assistance will continue to be "means tested" in the future.  Being a low-income supplement, it makes sense that OAS would be clawed back at tax time from those retirees with significant other income.  We sometimes get questions about whether it makes sense to save if you will only lose government assistance by having high income at retirement. Given two choices, being poor and supported by the government or being rich and taxed, most will still elect to be rich an taxed.  OAS claw-backs do not make a good argument against saving for the future.

Regarding Government plans, we certainly include CPP income in retirement projections we make for clients.  Our retirement planning software does factor in that OAS may be clawed back for individuals with significant income.

Employer Plans

Company plans are another component of your retirement income.  Most employers have some form of retirement benefit plan, and Group RRSPs have become very popular over the last decade.  In a group RRSP, each employee owns their assets outright (it is simply a group of individual RRSPs) and the employee assumes all the investment risks but gets all the benefits of good investment performance.  The employer matches the employee's contribution to some degree in many cases, reinforcing the message that saving for retirement is important.  Often, employers utilize the services of full-service firms like ScotiaMcLeod, to ensure that financial planning and investment advice are included components in the plan offered to employees.

Some employees wonder about the differences in the two major kinds of employer pension plans, namely Defined Benefit Plans, and Defined Contribution plans.

Defined Benefit Plan - This type of plan offers a set amount of income, based on years worked.  The assets are held separate from the company. The only risk to employees is the employer is having financial difficulty and, at the same time, the pension assets are underfunded due to poor market conditions, as occurred with Air Canada and Stelco. In most cases, employees can feel confident that even in poor markets, the employer will make up shortfalls with future contributions.  In cases of public organizations, members of Teachers or OMERs pension plans can be very confident that taxpayers (themselves included) will continue to ensure the viability of their pensions.  For employees of these organizations, we generally consider the commuted value (the accrued benefit earned to date) to be a bond in the client's overall asset allocation reviews.

Defined Contribution Plan - These are plans that are similar to Group RRSPs, where the employer and employee contributions are managed by the individual.  Conservative investors may not see the long term growth needed, and equity investors may find that a prolonged bear market near their retirement date can hamper retirement income.  In any case, the employee knows what they own, and assets are not tied to the company in any way.

These are some simplified comments.  I would recommend that you review your employer pension documents with us, or check out an excellent Canadian book: The Pension Puzzle by Bruce Cohen and Brian Fitzgerald (full disclosure required - Bruce Cohen is a long time client of Carl Spiess)

Individual Plans

Your own RRSP contributions (often made into a Group RRSP account for simplicity) round out the savings you will have for retirement.  Naturally, we encourage individuals to follow the 10% "pay your self first" rule, and will cover that topic in future issues of this newsletter.

To summarize, Government and Employer plans will be an important part of the retirement planning we do for you.  We are pleased to be used as a resource to help you understand how they fit into your other investments.  We do not subscribe to the fear mongers who dismiss pensions out of hand, but rather want to ensure that individuals are realistic about how much they can count on pensions in the future.  Please contact us if you have any questions about your financial planning for retirement. 

Time for Prudence and Concern?

"A substantial rise in the market is at once a legitimate reason for satisfaction and a cause for prudent concern."  - Benjamin Graham - renowned investor

We are urging clients who are overweight equities as a result of the recent market rise, to review their asset allocation with us.  It may be time to make some adjustments.

Regular market updates from ScotiaMcLeod are available online.  Fred Ketchen, Managing Director of Equity Trading at ScotiaMcLeod, posts his market updates and analyses regularly as podcasts on the ScotiaMcLeod website.

2004 Budget Update

The recent budget had little in the way of changes for individual investors. RRSP limits remain unchanged, and there are no new tax prepaid savings plans that had been mentioned in the past as a possible new investment vehicle.

RESP grants will be increasing for lower income families, and there will be new Canada Learning Bond, also for lower income families. We will be reviewing those changes in a future issue of this newsletter. The Federal Government Budget site dealing with Education is at:

The income trust market will see some changes for pension plans and foreign investors, but the impact on individual Canadian investors in income trusts is not terribly significant.

For Scotiabank's 5 page summary report, please see:


Most RRSP tax receipts were mailed as the contributions were made.  For clients in payroll deduction plans, one receipt, for contributions made from March to December of 2003, was mailed in January.  A second receipt, for contributions made from January 1, 2004 to March 1, 2004, was mailed March 8, 2004.  Contributions made in the first two months of the year can be claimed for either the 2003 or the 2004 tax year.

For non registered accounts, investment trading summaries, T5s, T3s, etc. will be mailed out by the end of March, 2004.

Labour fund receipts will also go out by the end of March, 2004. See "How to Claim Your LSIF Tax Credits" for more information how to get your credits.

Fun with Numbers 

The cost of happiness, as reported by Yahoo UK is $6,238,498. That is roughly what the average person interviewed would need (£2,658,144 in British Pounds) to afford the lifestyle that equates to their idea of contentment.

2,500 people were interviewed about their dreams and wishes.  Under half wanted a simpler lifestyle.  For the rest, their material desires were then priced. The list of required items included salary, savings, house, cars, holidays etc.  Add to that the luxury items required to woo the ideal partner and the grand total was arrived at.

The average person would have to save 100% of their salary for 94 years to get to that level - perhaps not a realistic goal. For most, happiness will need to be found elsewhere, like in the contentment one gets by spending less that you earn.

Due Diligence - Recommended Reading

The annual report of Warren Buffet's Berkshire Hathaway is usually a good read.  The 2003 report is no exception.  Find it at the amazingly bland website of the world's most successful investor.

If you can't afford the $80,000 US share price, consider the lower priced B class shares AIC American Advantage, AIC Value or Dynamic Focus plus American funds, the 3 funds that have Berkshire Hathaway as their #1 holdings.  Each of those funds shares Warren's buy and hold philosophy.

Mutual Fund Reporter Recommended Website of the Month 

Two links caught our eyes this month so we included them both.

Mackenzie Tax Guide

This helpful tool from Mackenzie is a tax preparation aid for mutual fund investors:

HRDC OAS/CPP Calculator Tool

And relevant to our article, Pensions - Fact or Fiction, Human Resources and Development Canada recently updated its OAS/CPP calculator tool:


Contact Us

T.  416.863.RRSP (7777)
F.  416.863.7479

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