Honda Canada Inc. Presentation on the Associates Pension Plan. March Steve Gendron, FCIA, Principal, Eckler Ltd.

Transcription

1 Honda Canada Inc. Presentation on the Associates Pension Plan March 2017 Steve Gendron, FCIA, Principal, Eckler Ltd.

2 Agenda Bill C-27 CPP Enhancements Associates Pension Formula and CPP Access to Associates Pension Plan Assets Competitive Position of Associates Pension Plan Questions Appendix Associates Pension Plan Actuarial Valuation Results 1

3 Agenda Bill C-27 CPP Enhancements Associates Pension Formula and CPP Access to Associates Pension Plan Assets Competitive Position of Associates Pension Plan Questions Appendix Associates Pension Plan Actuarial Valuation Results 2

4 Bill C-27 October 2016; Bill C-27, Amend the Pension Benefits Standards Act PBSA is applicable to federally registered pension plans sponsored by federally regulated organizations such as banks, marine/air/railway companies, phone and cable companies, etc. Not applicable to Honda Canada or the Associates Pension Plan Key provisions of C-27: 1. Introduce legislation for Target Benefit Plans (TBP) A TBP is a cross between a DB and a DC pension plan TBPs introduce risk-sharing on behalf of the employees in that the target benefit pension can be adjusted based on the plan s funding status (i.e. accrued pensions can be reduced if the plan s assets are less than liabilities) The Associates Pension Plan is a defined benefit plan registered in Ontario and cannot reduce accrued benefits. If the assets in the Associates plan are less than the liabilities, Honda is required by law to make additional contributions 2. Plans may purchase immediate or deferred annuities from Canadian insurance companies to fully settle the plan s obligations 3

5 Agenda Bill C-27 CPP Enhancements Associates Pension Formula and CPP Access to Associates Pension Plan Assets Competitive Position of Associates Pension Plan Questions Appendix Associates Pension Plan Actuarial Valuation Results 4

6 CPP Enhancements Some facts about the Canada Pension Plan (CPP) CPP started in 1966, with minor changes since CPP is 100% financed by equal employee and employer contributions it is not funded by the federal or provincial government Contributions required by all working Canadians between the ages of 18 and 65 Contributions have increased from an initial 3.6% of earnings to 9.9% today The 9.9% contribution rate was put in place for the next 75 years Contributions apply on earnings between $3,500 (YBE) and the Year s Maximum Pensionable Earnings or YMPE In 2017 the YMPE is $55,300, so the 2017 maximum employee contribution is: 4.95% x [ $55,300 $3,500 ] = $2,564 At 65, CPP provides a maximum pension equal to 25% x [average of the YMPEs in the 5 years prior to retirement], or for 2017: 25% x [ $53,480 ] = $13,370 5

7 CPP Enhancements CPP should form only part of your retirement income Other sources of retirement income include: Old Age Security 100% paid for by Federal government Payable at age 65 Associates Pension Plan DB or DC Your DC contributions are tax deductible and interest is not taxable Income is taxable when taken Registered Retirement Savings Plan (RRSP) Contributions are tax deductible and interest is not taxable Income is taxable when taken Tax Free Saving Account (TFSA) Contributions are not tax deductible and interest is not taxable Income is not taxable when taken Non-registered savings Contributions are not tax deductible and interest is taxable annually Income is not taxable when taken Government Honda Associate 6

8 CPP Enhancements Why Enhance the CPP? Federal government concerned that Canadians are not saving enough for retirement Canadians favoured expanding CPP vs. other options such as Ontario s ORPP What is changing? Employee and employer contributions are increasing starting in 2019 Retirement pension will gradually increase over a 40-year period with pro-rated enhancements for those that retire before 40 years of higher contributions No changes for those currently retired and receiving CPP pension Impact to Employer Sponsored Pension / Savings Plans? All employers will face increased CPP contributions starting in 2019 Too early at this point to say whether employers will embrace the CPP enhancements or offset their increased costs in some fashion 7

9 CPP Enhancements What s new: 3 Tiers of Employee Contributions: Tier 1 ( Base Contributions ) Current contribution rate of 4.95% of earnings between YBE and YMPE No change from existing CPP Tier 2 ( First Additional Contributions ) Additional 1.0% of earnings between YBE and YMPE Phased in gradually starting in 2019 over 7 years 0.15% in 2019, 0.3% in 2020, 0.5% in 2021, 0.75% in 2022 and 1.0% > 2023 Tier 3 ( Second Additional Contributions ) Additional 4.0% of earnings between YMPE and new YAMPE Starting in 2024 YAMPE will be 7% higher than YMPE in 2024 and 14% higher in 2025 Employer must match employee contribution rate 8

10 CPP Enhancements Three Tiers of Employee CPP Contributions* Three Tiers of Employee CPP Contributions* *This diagram shows the three tiers of employee CPP contribution rates that will be in effect, as well as the pensionable earnings to which the rates will apply. Honda will be required to contribute the same amount. 9

11 CPP Enhancements Impact on Employee Contributions in 2025 Associate A Associate B Earnings in 2025 $50,000 $100,000 YBE $3,500 $3,500 Projected 2025 YMPE $72,500 $72,500 Projected 2025 YAMPE $82,700 $82,700 Tier 1: 4.95% x [ Earnings between YBE and YMPE ] $2,301 $3,415 Tier 2: 1.0% x [ Earnings between YBE and YMPE ] $465 $690 Tier 3: 4.0% x [ Earnings between YMPE and YAMPE] $0 $408 Total $2,766 $4,513 % increase in employee contributions 20.2% 32.2% % increase in employer contributions 20.2% 32.2% 10

12 CPP Enhancements CPP replacement ratio at 65 Rate of earnings replaced by CPP at 65 35% 30% 25% 20% 15% 10% 5% 0% Basic CPP Enhanced CPP Age in 2016 Workers earning Workers earning Workers earning Workers earning $40,000 $60,000 $80,000 $100,000 in 2016 in 2016 in 2016 in 2016 Note: Assumes all wor ker s star t contr ibuting to the CPP at age

13 Agenda Bill C-27 CPP Enhancements Associates Pension Formula and CPP Access to Associates Pension Plan Assets Competitive Position of Associates Pension Plan Questions Appendix Associates Pension Plan Actuarial Valuation Results 12

14 Associates Pension Formula & CPP Question: Will CPP enhancements impact my Associates DB Pension? Answer: No Associates Pension Plan lifetime pension formula: [1.25% x Best 5-year average earnings up to 5-year average YMPE plus 1.75% x Best 5-year average earnings over 5-year average YMPE ] times Service (to a maximum of 35 years) Associates Plan does not reference the new YAMPE, therefore any enhancement to the CPP will not impact your Associates pension 13

15 Associates Pension Formula & CPP Question: Can my projected pension decrease on my annual statement? Answer: Yes, if your salary increase is less than the increase in YMPE Your accrued pension (for service to date) can never decrease! Your projected pension (for all service) is estimated on your annual pension statement and assumes that your earnings will remain constant until retirement If your actual earnings do not increase in a given year, your projected pension at retirement will decrease when the YMPE increases Example 2015 Annual Statement 2016 Annual Statement Projected best average earnings $90,000 $90,000 Projected average YMPE $52,200 $53,200 Projected service at retirement Pension formula [1.25% x $52, x ( $90,000 - $52,200 )] x 30 = $39,420 [1.25% x $53, x ( $90,000 - $53,200 )] x 30 = $39,270 14

16 Agenda Bill C-27 CPP Enhancements Associates Pension Formula and CPP Access to Associates Pension Plan Assets Competitive Position of Associates Pension Plan Questions Appendix Associates Pension Plan Actuarial Valuation Results 15

17 Access to Honda Pension Assets The Associates Plan is governed by the Ontario Pension Benefits Act (PBA) The Ontario PBA specifies: The administrator of a pension plan shall exercise the care, diligence and skill in the administration and investment of the pension fund that a person of ordinary prudence would exercise in dealing with the property of another person employer who is required to make contributions under a pension plan shall make payments to the pension fund The assets of the Associates Plan are held in a trust separate and distinct from Honda. Northern Trust is the trustee for the Associates Plan. The Ontario PBA requires Honda to file audited financial statements in respect of the Associates Plan annually. The audit is conducted by KPMG, who reviews all transactions that occurred during the year, such as contributions, benefit payments, fees, etc. Copies of the audited financial statements are available upon request. 16

18 Agenda Bill C-27 CPP Enhancements Associates Pension Formula and CPP Access to Honda Canada Pension Assets Competitive Position of Associates Pension Plan Questions Appendix Associates Pension Plan Actuarial Valuation Results 17

19 Competitive Position of Honda Plan DB Plan For Associates hired before January 1, 2014 Non-contributory Final average earnings Most plans require member contributions Your pension is based on your average earnings at retirement Early retirement provisions Unreduced at earliest of 30 years service, 85 points or age 60 & 10 Pension Enhancement Account Allows you to make tax-deductible contributions and buy benefits The DB plan would be in the top 25% of all private sector employer sponsored plans DC Plan For Associates hired after December 31, 2013 Honda s Base contribution Your optional contributions 4%, 5% or 6% of earnings (based on your years of service) 0% - 8% of earnings Honda s matching contributions 100% match of your contributions up to 4% The DC plan would be in the top 25% of all private sector employer sponsored plans 18

20 Monthly pension Monthly pension Competitive Position of Honda Plan (DB) Lifetime Pension Comparison - from age 65 Minimum Pension Comparison - prior to age 65 3,500 3,000 2,500 2,000 1,500 2,809 2,410 2,183 2,055 2,070 2,050 2,131 2,055 2,070 3,246 2,910 2,430 2,448 5,000 4,500 4,000 3,500 3,000 2,500 2,000 4,629 4,191 4,010 3,515 3,545 3,615 3,566 3,515 3,515 3,545 3,615 3,515 3,545 1,000 1, , ,800 70,000 80,000 80,000 90,000 90,000 Annual earnings 0 71,800 70,000 80,000 90,000 Annual earnings GM/Chrysler Ford Toyota Honda GM/Chrysler Ford Toyota Honda All pension amounts assume 30 years of service. Detroit 3 pension amounts are based on current collective agreements. Observations: Honda and Toyota DB plans are final average earnings type plans, therefore pensions increase automatically as earnings increase (Detroit-3 have to negotiate pension increases) Honda s DB plan provides the highest lifetime pension 19

21 Agenda Bill C-27 CPP Enhancements Associate s Pension Formula and CPP Access to Associates Pension Plan Assets Competitive Position of Associates Pension Plan Questions Appendix Associates Pension Plan Actuarial Valuation Results 20

22 Appendix: Associates Pension Plan Actuarial Valuation Results 21

23 Associates Plan Valuation Results Going concern results: In $,000s April 1, 2013 Dec. 1, 2013 July 1, 2015 Assets $1,076,870 $1,153,327 $1,419,510 Liabilities (972,069) (1,033,984) (1,159,604) Surplus / (deficit) $104,801 $119,343 $259,906 Funded Ratio 110.8% 111.5% 122.4% Special payments to fund deficit Not applicable Not applicable Not applicable Observations / comments: Strong going concern position with a surplus at each valuation date Going concern position is a more appropriate measure in Honda s case 22

24 Associates Plan Valuation Results Wind-up results: In $,000s April 1, 2013 Dec. 1, 2013 July 1, 2015 Assets $1,067,823 $1,199,721 $1,451,830 Liabilities (1,302,625) (1,241,831) (1,630,825) Surplus / (deficit) ($234,802) ($42,110) ($178,995) Funded Ratio 81.8% 96.6% 89.0% Special payments to fund deficit $50.1M per year for 5 years $50.1M per year for 11 months $38.9M per year for 5 years Observations / comments: Significant fluctuation in results which are almost entirely due to fluctuations in prescribed interest rates Wind-up position is only appropriate if the plan is wound up 23

25 Associates Plan Valuation Results Honda s annual contribution requirements: In $,000s April 1, 2013 December 1, 2013 July 1, 2015 Defined benefit component $52,175 $53,542 $54,215 Defined contribution component n/a 1,000 1,828 Special payments towards deficit 50,116 42,110 38,909 Total contributions $102,291 $96,652 $94,952 Observations / comments: Honda s contributions have averaged around $97M per year for the last four years 24

26 Associates Plan Investment returns Historical investment returns: Calendar Year Benchmark Return Honda s Fund Return % 8.6% % 2.1% % 8.8% % 10.9% % 8.5% % -1.0% % 8.5% % 16.3% % -14.6% % 0.1% % 13.3% % 11.9% % 10.0% % 12.3% % -3.2% 10-year annualized return of 4.5% 15-year annualized return of 5.9% 25