The flexible pension provision, or flex provision, was added to the University of Waterloo Pension Plan in 1998. It allowed members to make additional voluntary contributions on a tax-sheltered basis so the flex balance could be used to purchase optional ancillary benefits, or flex options, at retirement.
Effective January 1, 2014, members were no longer allowed to make flex contributions, however the flex provision will continue to be administered until all obligations have been fulfilled in accordance with the terms of the pension plan. Member flex balances will continue to be credited with the pension fund rate of return until the contributor retires, terminates or dies, at which time the flex balance will be used to purchase an enhancement to the Waterloo pension from the flex options available.
Full technical details of the flex pension provision are available in the official pension plan text, which is the authoritative document and is available from the Human Resources Department.
The accumulated flex balance must be used for retirement income (see flex options below), and cannot be withdrawn for other purposes.
The Income Tax Act restricts the total amount that can be paid to you from the pension plan, including the additional pension from the flex options.
If your flex balance exceeds the cost, or price tag, of permissible flex options when you retire, the excess is forfeited and must remain in the pension fund.
This is the use it or lose it rule under the Income Tax Act which is explained below.
When you retire your flex balance can be used to purchase any one or a combination of the flex options described below, or only part of an option if your flex balance is not large enough for the full enhancement.
Each option will have a price tag (cost) that depends on your age at retirement, basic pension, the level of enhancement sought, and external market factors. Price tags cannot be determined accurately until you retire, but the tables and examples that follow provide a sample of possible amounts.
The price tag of option 1 decreases as you approach age 65.
The price tag of option 2 decreases as you approach age 62.
Option 3 will be the only option available if you retire at age 65 or later.
The Income Tax Act only allows flex options to enhance the portion of your pension earned after 1989 (referred to as eligible flex service). The Income Tax Act also imposes limits that apply to your total lifetime pension, which must include the enhanced pension outlined under flex options 1 and 3 below, as well as a combination limit that applies to total lifetime pension plus a temporary bridge pension outlined under flex option 2 below.
If you retire between age 55 and 62, the lifetime pension determined by the formula will be reduced for early commencement. Your flex balance can be used to eliminate some or all of the reduction due to early retirement, subject to the Income Tax Act limits.
If you retire on or after the age of 62 you will not be able to use your flex balance for this option, which could affect your ability to use your flex balance in full. You should review the use it or lose it rule and ensure you take it into consideration when deciding when you will retire.
If you retire before the age of 65, this option will provide a temporary pension, in addition to the basic lifetime pension paid from the pension plan, paid from your retirement date until the earlier of your date of death or attainment of age 65. This is called a bridge pension because it pays you an additional temporary pension from your early retirement date until age 65 when full Canada pension (CPP) and Old Age Security (OAS) pension become payable. A bridge pension is subject to the Income Tax Act limits on early retirement, maximum pension, and a combined limit on basic plus bridge pension.
If you retire on or after the age of 65 you will not be able to use your flex balance for this option, which could affect your ability to use your flex balance in full. You should review the use it or lose it rule and ensure you take it into consideration when deciding when you will retire.
The pension determined by the formula is a single life pension with a 10 year guarantee. The pension is paid to you for your lifetime, but if you die within the first ten years after you retire, your beneficiary will receive a lump sum payment equal to the value of the remaining guaranteed payments. Alternate forms of pension are available, and if you have a spouse when you retire, pension legislation requires that you receive a joint and survivor pension that provides at least a 60% survivor pension to your spouse when you die, unless you and your spouse sign a waiver form when you retire. Under the joint and survivor pension, your initial monthly pension will be lower than the formula pension to account for the continuing survivor pension after your death.
This flex option can help you pay for a longer guarantee period on a single life pension, or a better joint and survivor pension.
Use it or lose it rule
Your flex balance must be used to purchase one or a combination of the flex options and cannot be withdrawn or used for any other purpose. As noted above, the Income Tax Act imposes limits on the maximum lifetime and bridge pension that can be paid, which includes the pension enhancements purchased by your flex balance.
If your pension exceeds the Income Tax Act limits before adding the pension that can be purchased by your flex balance, your pension cannot be enhanced by the flex options and you will have to forfeit your entire flex balance.
If your Flex balance exceeds the price tag of the flex options available to you when you retire, the excess must be forfeited.
All forfeited amounts must remain in the University of Waterloo pension fund and cannot be refunded to you.
It is your responsibility to plan ahead and monitor your flex balance carefully; the University cannot provide individual help or counseling. You will need to be especially careful if you plan to work to age 65 or beyond, or if your pension will be affected by the Income Tax Act maximum pension limits.
If you are in doubt, you should consult a professional financial advisor.
What happens at retirement?
When you retire you must use your flex balance to purchase one or more flex options. As noted above, if your flex balance exceeds the price tag of the permissible flex options available to you when you retire, the excess is forfeited and must remain in the pension fund.
What happens at termination?
If you leave the University of Waterloo prior to age 55, we still determine the flex options that can be purchased by your flex balance, subject to the Income Tax Act limits, to determine if you must forfeit any portion of your flex balance. Your termination transfer option will include the value of your flex balance, less any portion that must be forfeited. The Income Tax Act maximum transfer value limit also applies and could result in part of your pension value being paid to you as a taxable refund.
Income Tax Act maximum pension limit
The Income Tax Act limits the maximum annual pension payable from the University of Waterloo pension plan to a dollar limit per year of credited service. The 2015 dollar limit is $2,818.89 per year of service. The formula pension attains this limit at final average earnings of about $156,281. This limit increases each year by the average industry wage index.
If you retire early or take a joint and survivor pension, the formula pension is reduced before it is compared with the Income Tax Act limit. For instance, if you retire five years early, the reduction in your pension would be 12%, and your final average earnings could be about 12% higher before the Income Tax Act limit would affect you.
Any enhancements you purchase with your flex balance must be added to your pension before it is compared with the Income Tax Act limit. If you think the Income Tax Act limit will affect you when you retire, you should review the use it or lose it rule and carefully consider when you will retire to avoid forfeiting any portion of your flex balance.
What do I need to do or know?
Members who have a flex balance need to plan ahead for retirement to try to ensure they do not forfeit any portion of their flex balance.
You need to consider how much your flex balance may grow as a result of interest income, and how much you may be able to spend on permissible flex options when you retire. There is a good deal of uncertainty in both considerations, particularly if retirement is many years away.
The University cannot provide individual financial counseling. If you need help, please consult a professional financial advisor.
When would you like to retire?
To estimate the balance in your flex account and the amount you can spend on flex options, you will need to assume a retirement date. The tables below give information for retirement or termination at ages 45, 55, 60, 62 and 65.
How much will your flex balance grow?
Table 1 shows how $1.00 invested now will grow at rates of return of 3.50%, 6.35%, or 9.20%. The actual growth depends on the pension fund rates of return (Note to draft: want to include a link to a chart of historical fund rates of return.) each year and will only be known after the fact. Actual pension fund rates of return since 1998 when flex was introduced have ranged from a low of -21.51% in 2008 to a high of 14.7% in 2009. The actuary uses 6.35% as a planning figure, but the actual returns could be significantly higher or lower than 6.35%.
To determine how large your flex balance might be when you retire, you would multiply your current flex balance by the appropriate factor from table 1. For instance, suppose that your flex balance is $2,500 at the end of 2015 and you intend to retire in ten years. Then, from table 1, the balance in ten years would be
- $2,500 x 1.41 = $3,525 at 3.50% interest;
- $2,500 x 1.85 = $4,625 at 6.35% interest;
- $2,500 x 2.41 = $6,025 at 9.20% interest.
If you joined the Waterloo pension plan after 1989, your eligible flex service is the total number of years of credited service you will have accumulated in the pension plan by the time you retire. If you joined before 1990, your eligible flex service is your credited service from January 1, 1990 to your retirement date. Flex options will only apply in respect of credited service earned after 1989.
For instance, if you joined the pension plan on July 1, 1994 and expect to retire January 1, 2027, you will have 32.5 years of eligible flex service. However, if you joined the plan on January 1, 1985 and expect to on January 1, 2027, you will have 37 years of eligible flex service because the pension in respect of credited service earned between January 1, 1985 and December 31, 1989 cannot be enhance by the flex options.
How much will you be able to spend on flex options?
The top table of tables 2A, 2B and 2C is for members who have a spouse at the time they retire, and who take a joint and survivor pension with the maximum possible improvement under flex option 3. The bottom half is for plan members who choose a single life pension with the maximum possible guarantee period under flex option 3. Where retirement occurs prior to age 65, the figures also include the flex option 1 enhancement of reducing or eliminating the early retirement reduction and flex option 2, the temporary bridge benefit.
The values in these tables are only estimates, calculated by the actuary using assumptions as set out in the appendix. Tables 2A, 2B and 2C provide alternate estimates using different assumptions about future salary increases as set out in the tables. All three tables assume that Waterloo salary increases, including selective and merit components where applicable, will on average be 0.5% plus the percentage increase in the average industrial wage.
Owing to promotions and merit increases, some individual salaries will increase faster or slower than the average. This is one of the reasons why it is important to review your flex balance annually. The actual amount you can spend on flex options will not be known with certainty until you retire.
Value of maximum available flex options
Tables 2A, 2B, and 2C give the estimated value of the maximum available flex options per year of eligible flex service at the time of retirement or termination. The tables give estimated value per year of eligible flex service, which you will need to multiply by your eligible flex service at retirement or termination. Eligible flex service is years of service in the UW pension plan from January 1, 1990, until retirement or termination.
The values in tables 2A, 2B, and 2C are only estimates, calculated by the actuary using different sets of assumptions about the future. These assumptions are described below. The actual amount you can spend on flex options will not be known with certainty until you retire.
Assumptions: table 2A
UWaterloo salary increase: 2%
Increase in average industrial wage and yearly maximum pensionable earnings: 1.0%
Increase in Income Tax Act maximum pension limit: 1.0%
Assumptions: table 2B
UWaterloo salary increase: 4%
Increase in average industrial wage and yearly maximum pensionable earnings: 3.0%
Increase in Income Tax Act maximum pension limit: 3.0%
Assumptions: table 2C
UWaterloo salary increase: 6%
Increase in average industrial wage and yearly maximum pensionable earnings: 5.0%
Increase in Income Tax Act maximum pension limit: 5.0%
Additional Assumptions: tables 2A, 2B, 2C
Real rate of return: 3.85%
Normal form of pension: payable for life, with 120 monthly payments guaranteed
Post retirement indexing: 100% of CPI
Mortality: Uninsured Pensioner table 1994 projected to 2015 (75% male / 25% female split)
Spousal age: Spouse assumed to be 2 years younger than Member
Note: All examples use Table 2B
Anna is 45 years old and her current salary is $40,000. She is married and wants to retire at age 55 and receive a joint and survivor pension. She has been a member of the pension plan since 1988.
Anna’s flex balance as of December 31, 2015 is $11,280. Using table 1, she finds that, at 6.35% interest, that amount would grow in ten years to
$11,280 x 1.85 = $20,868.
Anna's eligible flex service will be about 35 years (from January 1, 1990, until her retirement date in 2025).
The value in table 2B (married) for age 45, salary $40,000, and retirement at age 55 is $13,500. Multiplying by 35 years of eligible flex service gives
$13,500 x 35 = $472,500
as the estimated amount Anna could spend on flex options at age 55.
Anna would be eligible for all three flex options, however her flex balance will not grow large enough in her ten remaining years to purchase all of them. There does not appear to be any significant risk that Anna's flex balance will grow too large to be spent on flex options. However, she should still monitor her flex balance each year, since changes in salary, marital status, retirement plans, investment returns, etc., may affect her situation.
Bob is 55 and earns $40,000. He is married and is expecting to work at UW until he is 65. He joined the pension plan in 1975.
Bob’s flex balance as of December 31, 2015 is about $3,800. Using table 1 he finds that in ten years $7,800 would grow to $14,430 at 6.35% interest, or $18,798 at 9.20% interest.
Bob's eligible flex service will be about 35 years (from January 1, 1990, until his retirement date in 2025).
The value in table 2B (married) for age 55, salary $40,000, and retirement at age 65 is $1,500. Multiplying by 35 years of eligible flex service gives
$1,500 x 35 = $52,500
as the estimated amount Bob could spend on flex options at age 65.
If Bob is not married when he retires, he can extend the guarantee period on his own pension to 15 years. The value from table 2B (single) is $600, and the estimated amount he could spend is
$600 x 35 = $21,000.
It appears that Bob will eligible for option 3, because the growth of his flex balance will not exceed the value of option 3 for a single member, but Bob will need to monitor the growth in his flex balance carefully in future years, because if he is not married when he retires at age 55. flex option 3 will be the only option available to him and if his flex balance exceeds $21,000, he will have to forfeit the portion of his flex balance that exceeds $21,000.
Marian is 55 and earns $150,000. She is single and would like to retire at age 60 or 62. She joined the pension plan before 1990.
Marian’s flex balance as of December 31, 2015 is about $20,000. At 6.35% interest, this would grow to $27,200 in five years, or to $30,800 in seven years.
$6,900 x 30 = $207,000.
At age 62 she will have 32 years of eligible flex service, and the estimated amount is
$2,800 x 32 = $89,600
Marian’s flex balance can provide a better early retirement pension and/or a bridge benefit. Her flex balance likely won’t grow large enough to purchase all of the flex options, but nonetheless she will be able to make a worthwhile improvement to her retirement income at age 60 or 62.
The chief danger for Marian is that, if she changes her plans and decides to continue working to age 65, she might not be able to spend her entire flex balance. At age 65 only Option 3 would be available, and given her salary level, her pension may be affected by the Income Tax Act maximum pension limit.
Rudy is 35 and earns $40,000. He doesn't yet have long-term career or retirement plans. He is married, and he joined the pension plan at the beginning of 2000.
Rudy’s flex balance as of December 31, 2015 is about $1,280.
His flex balance will grow to:
|At age 45 (10 Years)||$1,805||$2,368||$3,085|
|At age 60 (25 years)||$3,021||$5,965||$11,558|
|At age 65 (30 years)||$3,597||$8,115||$17,946|
$11,900 x 26 = $309,400.
If he continues at UW until age 60 the estimated amount he could spend on flex options is
$10,000 x 41 = $410,000.
If he works at UW right through to age 65, the estimated amount is
$2,900 x 46 = $133,400.
Rudy is eligible for all three flex options and has plenty of room for his flex balance to grow.
John is 60 and earns $190,000. He is married and has been a member of the pension plan for 30 years. He would like a better joint and survivor pension, and he expects to work until he is 65.
John’s flex balance as of December 31, 2015 is about $10,630. At 6.35% interest this would grow to $14,457 in five years.
John's pension will be affected by the Income Tax Act maximum pension limit. If John works to age 65, there is a very good chance he will not be able to spend his flex balance. The balance would be forfeited and would have to remain in the pension fund.
If John were to retire a year or two early, he may be able to spend his flex balance by purchasing a bridge benefit, as well as the joint and survivor improvement.
John needs to think very carefully about when he will retire, and should seek help from a financial advisor.
Elizabeth is 32 and earns $80,000. She is single and joined the pension plan at the beginning of 2010. She is an exceptional performer, and expects to receive promotions and larger-than-average salary increases during her career. She hasn't begun to think about retirement - a lot can happen in 30 years! But she wanted to reduce her income tax in prior years so she made flex contributions and now her account balance is about $5,743.
Elizabeth flex balance could grow substantial by the time she retires. If she leaves UW before retirement age, she will probably be able to transfer her full flex balance to a locked-in RRSP. If she stays at UW, she can retire early with an enhanced early retirement pension and bridge benefit.
If Elizabeth works at UW until she is 62 and is single when she retires, then from table 2B, the estimated amount she could spend is $2,500 x 30 = $75,000. Over 30 years, her flex balance would grow to $36,411 at 6.35% interest, or $80,517 at 9.20% interest. It appears that she should be able to spend her flex balance.
However, remember that the values in the tables are calculated using average salary increases. If Elizabeth receives larger-than-average increases, she could be affected by the Income Tax Act maximum pension limit when she retires, and might be unable to spend her flex balance even at age 62. Because of the uncertainties, she might decide to retire before age 62. But who knows, she might meet Mr. Right and take time off work to raise a family!
If you have any further questions, please contact Sue McGrath extension 32046.