PENSION NEWS

An information bulletin about the York University Pension Plan

 

 

October 1997

 

 

 

First Half 1997 Results

For the first half of the 1997 year ending June 30 1997, the before expense return of the York Pension Fund was 8.4%. (On an annualized basis, this is approximately 16%.) The return in the first quarter year was .7% and the return in the quarter year ending June 30 was 7.7%. In comparison to the performance of 100 similar balanced funds, SEI ranked the York Pension Fund in 59th place. Having recently changed two of our fund managers, see the June bulletin for details, we anticipate better relative performance.

 

The Toronto Stock Exchange 300 Composite Index had a return of approximately 9.7% for the first half year ending June 30 1997 (-0.8% for the first quarter year and 10.6% for the second quarter of 1997). The Scotia Capital Markets Universe Bond Index showed a return of -.4% for the first quarter and 3.8% for the second quarter of 1997.

 

Can I Make Additional Contributions Into The York Pension Plan ?

Yes. According the terms of the plan, "such additional voluntary contributions will be permitted up to the maximum allowable under the Income Tax Act." Such voluntary additional contributions will earn the same rate of the return of the plan. At retirement a member can obtain a refund of these voluntary additional contributions with accumulated interest (subject to income tax), transfer the funds to a non-locked in RRSP, or receive an additional amount of pension on a money purchase basis.

 

At Retirement, Do I Have To Receive A Pension From The York Plan Or Can I Transfer My Funds Elsewhere?

No, you do not have to receive a pension from the York plan. At retirement, you can choose to transfer the funds in your money purchase account plus the value of any supplemental pension under the minimum guarantee provision of the York plan. The funds would have to be transferred to a "locked-in" registered savings plan or life income fund subject to certain restrictions.

 

What Are The Advantages And Disadvantages Of Transferring My Funds Out Of The York Plan At Retirement?

For some members a disadvantage of the York plan is that you have to receive a life pension of some kind at retirement. If you are single, you might choose a straight life pension plan where payments are made over your lifetime and after your death payments stop. Or, you could choose a 10-year guarantee life annuity, meaning that if you die before you have received yearly pension payments for ten years the remaining payments for the ten years go to your beneficiary or estate. If you have a spouse, 60% of the pension payments would normally continue on to your spouse after your death. All of the options you have involve some form of life annuity. Of course, the actual payments you receive will vary depending upon the option you choose.

 

An advantage in opting out of the York plan is the availability of options other than a life annuity, at least up to a certain age. By going to an approved Trust or Life Insurance company you can transfer your funds to a life income fund or, to a "locked-in" registered savings plan until age 69 and then convert to a life income fund. From a Life income fund, you must make withdrawals within minimum and maximum fixed amounts but upon death, the remaining funds in your life income fund or registered savings plan passes to your estate or beneficiary. In Ontario, at age 80 you must convert your life income fund to some kind of life annuity. You can also choose how to invest your funds or leave the investment decision to the institution. Of course, you can also simply transfer your funds and buy a life annuity.

 

Your life expectancy, dependents and other assets are factors to consider in deciding whether you should or should not stay with the York plan.

 

Perhaps the best reason to stay with the York plan is the indexing feature. Your pension payments increase at the beginning of a year if the annualized return of the fund for the previous four years is above 6%. Regardless of previous fund returns your pension payments are never decreased (see the June Bulletin for more information on this topic) but may be increased. In the table below, you will see that payments increased quite substantially over the years. For example, every $1000 of pension payments received in 1986 were increased yearly to $1773.49 in 1997, a total increase of 77.35%.

 

%

increase

at start

ACTUAL PENSION PAYMENTS RECEIVED YEAR BY YEAR FOR EVERY $1000 RECEIVED IN GIVEN YEAR

year

of year

1986

1000.00

1987

9.6859%

1096.86

1000.00

1988

6.1855%

1164.71

1061.86

1000.00

1989

6.9228%

1245.34

1135.37

1069.23

1000.00

1990

4.8664%

1305.94

1190.62

1121.26

1048.66

1000.00

1991

1.5544%

1326.24

1209.12

1138.69

1064.96

1015.54

1000.00

1992

4.6446%

1387.84

1265.28

1191.58

1114.43

1062.71

1046.45

1000.00

1993

3.7918%

1440.46

1313.26

1236.76

1156.68

1103.01

1086.12

1037.92

1000.00

1994

5.2896%

1516.66

1382.73

1302.18

1217.87

1161.35

1143.58

1092.82

1052.90

1000.00

1995

4.9983%

1592.46

1451.84

1367.27

1278.74

1219.40

1200.74

1147.44

1105.52

1049.98

1000.00

1996

4.5191%

1664.43

1517.45

1429.05

1336.53

1274.51

1255.00

1199.30

1155.48

1097.43

1045.19

1000.00

1997

6.5525%

1773.49

1616.88

1522.69

1424.10

1358.02

1337.23

1277.88

1231.20

1169.34

1113.68

1065.53

annualized %

increase to

1997

5.35%

4.92%

4.78%

4.52%

4.47%

4.96%

5.03%

5.34%

5.35%

5.53%

6.55%

Total %

increase to

1997

77.35%

61.69%

52.27%

42.41%

35.80%

33.72%

27.79%

23.12%

16.93%

11.37%

6.55%

pension

year

payment in

increased in 1997 by

1

1986

77.35%

2

1987

61.69%

3

1988

52.27%

4

1989

42.41%

5

1990

35.80%

6

1991

33.72%

7

1992

27.79%

8

1993

23.12%

9

1994

16.93%

10

1995

11.37%

11

1996

6.55%

 

 

 

I Want To Invest In My Own Rrsp. What Is The Ideal Investment?

Most financial analysts will agree that there is no "ideal" investment. There is now feverish interest and investment in mutual funds, especially those investing in equities or common shares. Yearly returns of 20-30% are frequently advertised but, of course, there is no guarantee for such returns in the future.

 

If You Had To Suggest The Most Prudent Investment, What Would It Be?

If restricted to one kind of investment (outside of savings accounts or government saving bonds) the best choice for many might be a "Strip" or "Zero-Coupon" Bond. This kind of investment is considered by many to be a very dull, no-risk investment which will guarantee you a fixed rate of return over a number of years. Others may regard it as a very volatile investment. It should be of particular interest if you already have a stake in the equity market via the York fund. This investment acts just like a long term treasury bill. You receive a lump sum amount at a certain date and the difference between your cost and the lump sum is the total return on your investment. This lump sum can be a single coupon "stripped" from say, a government bond ,or the maturity amount of the bond.

 

For example, if you had bought $50000 principal amount of a Government of Newfoundland bond due February 28, 2008 you would have paid approximately $24000 , which included commission, and receive $50000 on the due date. If held to the due date your effective yield to maturity would be 6.52%. You could also sell your investment at any time before the due date. However, depending on the interest rate environment at the time you sell you could receive more (if rates are lower) or less (if rates are higher) than the book value shown in the table below.

 

Disadvantages of this kind of investment are missing out on higher returns on other kinds of investments and possibly ending up with lower than anticipated returns if the investment is sold sell before the maturity date. For these reason many investors shun this kind of investment.

 

INSERT TABLE

$50000 Principal Amount Province Of Newfoundland Bond

% return

book

Date

to maturity

Interest*

Value

August 1, 1997

6.52%

$25,623.29

invest

December 31, 1997

6.52%

$695.90

26319.19

December 31, 1998

6.52%

1716.46

28035.65

December 31, 1999

6.52%

1828.41

29864.06

December 31, 2000

6.52%

1952.99

31817.05

December 31, 2001

6.52%

2075.02

33892.06

December 31, 2002

6.52%

2210.34

36102.41

December 31, 2003

6.52%

2354.50

38456.90

December 31, 2004

6.52%

2514.92

40971.83

December 31, 2005

6.52%

2672.07

43643.89

December 31, 2006

6.52%

2846.33

46490.22

December 31, 2007

6.52%

3031.96

49522.19

February 23, 2008

6.52%

477.82

$50,000.00

receive

*If investment is made outside of tax shelter such as RRSP you would include the yearly interest in your taxable

income for the year. If held within an RRSP you can ignore this table since no tax is payable.

Suppose you sell on:

Interest rate per year

you will receive

your yearly yield

environment is

approximately

to date of sale

December 31, 2003

6.52%

$38,456.90

6.52%

December 31, 2003

4.00%

$42,488.36

8.20%

December 31, 2003

10.00%

$33,663.71

4.34%

 

 

What Happens To My Pension Benefits if I die Before Retirement?

Subject to certain conditions detailed in the pension plan there are a number of options available depending whether or not you have a surviving spouse. For example, a surviving spouse may elect to receive a pension or a lump sum payment while the beneficiary or estate of a member without a surviving spouse might receive a lump sum settlement. If children under the age of 18 survive the member, dependent children’s benefit subject to a total maximum benefit of $300 a month is also payable.

 

What About Life Insurance If I Die Before Retirement?

Through employer sponsored group life insurance, most employees have lump sum death benefits equal to a multiple of their current salary, usually to a maximum of three times salary, payable to their designated beneficiaries. Life insurance is perhaps one of the most neglected areas when people are dealing with their financial affairs. Very rarely do you hear of life insurance benefits raised during negotiations. You should at all times be asking, "do I have enough life insurance?" Buying private supplemental life insurance should be a consideration, especially if you have dependents. Most financial advisors would normally suggest that you should not rely solely on your group insurance benefits.

 

 

The contents and interpretations given in this newsletter are those of Morton Abramson, Professor in the Department of Mathematics and Statistics and member of the Board of Trustees of the York Pension Fund. If you have comments or questions, please contact Prof. Abramson at Dept. of Maths. N505R, X66087, or at abramson@mathstat.yorku.ca. Other Pension information can be found at http://www.math.yorku.ca/Who/Faculty/Abramson/Fund.