Planit:Calculating and Entering Defined Benefit Pension Plans Exercise Answer Key
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This case study is specific to financial planning in Canada, so has fixed values rather than indices by country. For a similar case study applicable to other countries, please see Planit:UK Defined Benefit Pension Plans Exercise, Planit:Malaysian Civil Servant Pension Exercise or Planit:Entering Other Revenues Exercise.
Contents |
Question One:
Miss Mary Joe is a 40-year old teacher, who will receive a Defined Benefit Pension Plan upon retirement. She has been working there for 10 years, currently earning a $40,000 salary, and plans to retire in another 20 years. Her assumed inflation is 3.0%, and her pension plan is integrated with CPP. Her FAE are based on the last 3 years, and the Benefit Rate is 1.5%. The Normal Retirement Age is age 60, with an Early Retirement Reduction factor of 5.0%
What is the value of Mary Joe’s Lifetime Pension and Pension Bridge?
Answer:
Use the Defined Pension Plan Calculator, a calculator spreadsheet tool. The yellow boxes show where data entry is necessary.
1. In the Client’s Age Today field, enter Mary’s age 40.
2. Set the Current Years of Service field to 10 as Mary identified.
3. Set the Target Retirement Age to the age 60 (age 40 + 20 years until retirement).
4. Set the Current Annual Salary to $40,000.
5. The Inflation Assumption should be 3.0% as Mary indicated.
6. The Final Average Earnings Period can be set to 3, since this is what Mary’s pension booklet identified.
7. The YMPE can be left at the default since it is set by the government every year and is set as a default in the spreadsheet.
8. The Pension Formula to YMPE is the same as the Benefit Rate, which is 1.5%
9. The Pension Formula on Excess is a field for when the pension is two-tiered and has a different rate for the amount exceeding the YMPE. Mary’s pension is not two tiered, so this field should be set to the same rate as the Pension Formula to YMPE field: 1.5%.
10. The Reduction Factor per Year can be set to 5.0%
11. The Normal Retirement Age or Age Plus Service Factor can be set to 60 as identified.
Note: you do not need to identify which type of pension plan your data is reflecting.
12. The Maximum Reduction field can be left at the default of 100%.
13. Since Mary is single (Miss Mary), it is unlikely she will want survivor benefit options, so in the Further Reduction for Survivor Benefit Upgrades field, enter a value of 0%.
14. Beside Is the Pension Integrated with CPP, type “Yes” in full, since Mary is also receiving a pension bridge.
On rows 37 and 39 of the calculator, the value of the Lifetime Pension and Pension Bridge will be displayed.
Question Two:
David Lastname is 40 years old, and expects to receive a pension when he retires at age 55. David has been working at his place of business for 14 years. David elected to reduce his pension to gain 60% survivor death benefits, and his Final Average Earnings are based on the past 5 years. His pension plan is not integrated with CPP, and the pension formula is 1.5%. The Normal Retirement Age is 65, with an early retirement factor of 4.04%.
What did you enter for the following data entry fields?
- Amount Per Year: $
- From Year:
- To Year:
- Percent Taxable: %
- Amount on Death: %
- Model As:
- Additional Increase: %
Answer:
Use the Defined Pension Plan Calculator, a calculator spreadsheet tool. The yellow boxes show where data entry is necessary.
1. In the Client’s Age Today field, enter David’s age 40.
2. Set the Current Years of Service field to 14 as David identified.
3. Set the Target Retirement Age to the age 55.
4. Set the Current Annual Salary to $75,000 as was entered in the Cash Flow screen.
5. The Inflation Assumption should be 3.0%.
6. The Final Average Earnings Period can be set to 5, since this is what David’s pension booklet identified.
7. The YMPE can be left at the default since it is set by the government every year and is set as a default in the spreadsheet.
8. The Pension Formula to YMPE is the same as the Benefit Rate, which in this case is 1.5%
9. The Pension Formula on Excess is a field for when the pension is two-tiered and has a different rate for the amount exceeding the YMPE. David’s pension is not two tiered, so this field should be set to the same rate as the Pension Formula to YMPE field: 1.5%.
10. The Reduction Factor per Year can be set to 4.04%
11. The Normal Retirement Age or Age Plus Service Factor can be set to 65 as identified.
Note: you do not need to identify which type of pension plan your number is reflecting.
12. The Maximum Reduction field can be left at the default of 100%.
13. Since David indicated he wanted 60% survivor options, according to the paragraph at the bottom of the calculator spreadsheet, this would require a 10% reduction in the overall benefit. So in the Further Reduction for Survivor Benefit Upgrades field, a value of 10% should be input.
14. Beside Is the Pension Integrated with CPP, type “No” in full.
On row 37 of the calculator, the value of the Lifetime Pension will be displayed.
Returning to the Home page of the Web Advisor, use the Navigation Panel to go directly to the Pensions and Other Revenues screen to add in David’s pension.
1. Click on the Add button at the top of the screen.
- Amount Per Year: value of the pension as shown on row 37 of the Pension Calculator Spreadsheet.
- From Year: 15 years from the current year (year David starts his retirement)
- To Year: 50 years from the current year (Year David is age 90)
- Percent Taxable: 100%
- Amount on Death: 20% (even though the pension will cover 60% for the survivor options, this does not apply until the pension actually commences at retirement).
- Model As: Start During Retirement (the start year of the pension will be pushed back if David delays retirement, but not the end year).
- Additional Increase: 1.5% (should be the same as the benefit rate/pension formula).
2. You will also have to enter information for additional fields to properly complete the entry of the pension: Owner: Client; Index Rate: 3.0% (it will be the same as the inflation assumption in the Personal Information screen, and that you used when calculating the pension amount); Amount on Disability: 20%.
3. Click Save to have the pension included in later planning.
