Pensions are billion dollar businesses. HOOPP for example, is worth ~$114 billion (as of Dec 2021), up from 104 billion in 2020; that’s about an 11.28% gain. But how much of that 10 billion increase do you think that the members of the pension actually benefit from? Was it the full amount? Or perhaps only a fraction of that? And if so, where did the rest go? And more interestingly, how is HOOPP increasing in net value when more pension dollars are being paid out each year than are being contributed? Sounds sketchy to me…
Pension Company Billion Dollar Assets and Curious Descriptions
Having a positive net cash flow is usually a good thing to strive for in any monetary pursuit, pensions included. Going negative is potentially a bad sign and means that more money is going out than coming in. Well, a strange thing happened to HOOPP in 2018. During that year, they actually transitioned from a positive net cash flow to a negative net cash flow in regards to their total member contributions vs benefits paid. This is not unheard of, especially as pension funds mature, and you begin having a larger proportion of members enter their retirement phase and drawing out more pension payments. And HOOPP’s origins go all the way back to 1960.
Looking at the specific numbers for 2021, HOOPP paid out (pg. 20) $3.6 billion in benefits, but only received $2.8 billion in contributions. This means that they had a negative cash flow of $0.8 billion for 2021. Uh oh!
So how does a pension survive if they’re seemingly paying out more than taking in? As mentioned in the previous episode, they use investing as one tool to drive the main growth of the fund’s assets. They did have a fairly solid return of 11.28% in 2021, increasing their overall net assets to ~$114 billion.
So while you might have initially thought that the $0.8 billion negative cash flow is a lot to pay out, it pales in comparison to HOOPP’s overall position of $114 billion. And it represents only about 0.7% of their total assets.
Using simple math, if we subtract HOOPP’s 2021 investment return from how the cost of their negative cash flow, results in ~10.58% net return. This portion wasn’t actually paid out to HOOPP members as pension benefits.
That’s a lot of money left on the table. And as the 0.7% that they are paying out to cover pension payments can also be considered a withdrawal rate of their overall assets, this is still vastly lower than the 4% rule in regards to monetary perpetuity. But where does the extra go? Back in to the fund? To the CEOs? It’s hard to say.* One thing’s for sure. Your pension payments definitely didn’t increase by 10.58%!
Getting Your Money Back
HOOPP has an interesting (sketchy) description about “how” and “when” you get your money back via pension payments. As stated on their website:
“…the first 3-4 years of pension payments are the return of your contributions…”, at which point the remainder of your pension years are described as “income for life”. They also further describe that this also doesn’t include the additional value of benefits you receive from HOOPP such as survivor benefits and inflation protection. When these are factored in, they claim that the apparent the value of your pension increases even further!
Ok. Hold your horses! Let’s break this down a bit. First, in regards to inflation protection, HOOPP specifically states that they do not guarantee this, and also in the event that they do provide it, the actual amount increased is voted on by the HOOPP management. To their credit, they have been keeping up with these COLAs since 2013.* Be that as it may, my expectation is that the LEAST they could do is keep up with inflation. At the BARE MINIMUM! Matching inflation is not a “value add”, it’s just baseline. Come on now!
Now, with respect to “return of your contributions”, that is sort of correct if you’re using a very narrow definition. If you recall from my Pension Wars article, I had used a Register Nurse (RN) as an example to see what a career’s worth of pension contributions would amount to. The RN had contributed ~$201,000 over 30 years.
As a result, they received a $56k/yr pension at retirement, thus technically “recouping” their contributions in less than 4 years. But I highly doubt that HOOPP has a “contributions bank account” and an “income for life account” (aka investment returns). Even if they did, after 30 years of compound interest, that $201k would be worth a hell of a lot more than $201k!
A small detail that seems to be missing (on purpose) in HOOPP’s own description of themselves, is what happens to the employer’s contribution match. Does any of that get returned as well? If you also recall, the employer match in the RN example from Pension Wars totaled a separate $253,000 over 30 years. That would take another 4ish years to get that “returned” to you at $56k/year. But hey, 4 years is much more marketable sounding than 8, right?
It’s misleading is what it is.
And lastly, in regards to “survivor benefits”, I wouldn’t classify those as providing an increase in value to your pension. Perhaps if they were slanted in a way that if you die, then at least “someone gets something”, then I guess that’s better than the alternative of no one but you getting anything. However, survivor pensions actually receive a massive reduction compared to the original pensioner’s amount. But before we delve into those specifics, we need to briefly talk about bridges.
My Beef on a Bridge
Mooo money!?!? Not quite!
Ah, the bridge benefit. A chunk of money that’s advertised by what seems like EVERY pension plan in Canada, which temporarily “bridges” your pension with extra wages until your CPP pension kicks in at age 65. As stated on HOOPP’s website, “If you retire before age 65, you will receive a monthly bridge benefit in addition to your retirement pension. It will be paid until you turn age 65, the age when you can begin receiving Canada Pension Plan (CPP) and Old Age Security (OAS).”
I find it quite interesting the way that the bridge benefit has been marketed to us. Everyone looks at it and thinks, “Hey! This is great! I’ll be able to maintain my standard of living with this awesome benefit! Thanks for doing me such a big favour HOOPP!”.
I say neigh! The bridge irritates me. The way I see it, is that by losing the bridge at age 65, your pension is ultimately decreased from what you were originally receiving from HOOPP. This is made even more apparent if you choose to take CPP early at age 60, as you would have had a higher combined pension/bridge/CPP income from age 60 to 65 than after 65. For my own case in the previously stated scenario, I would be taking an approximate $750/month hit at age 65. That is not insignificant.
Example Time!
Let’s say a HOOPP member retires at age 55 and their pension is $4000/month. Roughly a 1/4 of that is the bridge benefit. So when they turn 65, the amount of the pension that HOOPP is responsible for drops to ~$3000, and the CPP takes over the other ~$1000.
To me, I think at age 65, HOOPP should still be paying you $4000/month, and CPP’s $1000 should be on top of that, for $5000 total.
Why can’t the pension fund just continue to pay you the same amount for life, so then you could also get a boost at 65 with CPP? In effect, it feels like HOOPP is cheaping out by off-loading the bridge to the CPP. Yet it’s disguised as the opposite! Like they’re doing YOU a favor!
WHY do they need to reduce it at 65? Is it because they are losing money? Is it because it’s not maintainable? Or is it because it’s a sneaky way to earn the company profits by reducing money that should be owed to you?
So Many Questions… But Is There An Answer?
Well, as it turns out, back in 1966 when the CPP first came out, pension plans had the option to either integrate with the CPP or stack with the CPP. If the pension fund chose to integrate with CPP, then the pensioner’s retirement payments would remain the same. The fund would also reduce the employee’s contribution amounts to compensate for the additional contributions required for CPP.
On the other hand, if a pension fund chose to stack with the CPP, not only would the employee contributions remain at the rate they originally were, but there would still be the additional contributions required for the CPP. The result however, is higher payments in retirement.
It seems like the majority went with integration.
So, perhaps stopping the bridge at 65 helps keep the pension plan contributions more affordable to employees…. buuut.. I still don’t like it, and it leaves a bad taste in my mouth. I mean, if your pensioners die earlier, that helps decrease costs as well right? Or if they were concerned about costs, then why do a bridge at all? Or even decrease the amount of pensions that you’re paying out? Don’t make it look like YOU’RE doing me a favour, when you’re doing yourself the favour.
And considering most peoples’ financial ineptitude, if the government was so concerned about our seniors’ financial security because we couldn’t get our shit together during our working years so that we all are required to contribute to a mandatory social security based federal pension plan, wouldn’t it be even better to force us to contribute more to one anyway? Thus resulting in a better financial outcome during retirement?
Bridges…sheesh!
Speaking of bridges, you know what else bothers my biscuits? Survivor benefits!
Survivor Benefits
So, you know what else I hate about pensions? You don’t get access to that potentially massive, but forever-locked-in pension amount. Going back to the Pension Wars article again, our example of the nurse’s hypothetical pension after a 30 year career would be receiving a HOOPP pension amount of $56k/yr at age 55. Then at age 65, this would decrease to $47k/yr because of the bridge benefit claw-back. That’s it. Altogether, maybe they’d pull in a total of $1.5 million of payments if they lived until 85; a 30 year retirement. But what if you don’t make it the full 30 years? What happens to any leftover amounts? Because there sure as hell are some!
Sorry, But You Didn’t Make It
With HOOPP, if you’re unlucky enough to die before retiring (let’s say the year before; age 54), then if you have qualifying spouse (survivor), they get essentially two options to choose from (a third being the deferred option). In the first option, the survivor receives a monthly pension immediately until they die. While this all sounds good for the spouse, the bridge benefit is excluded, which means they won’t receive that $56k that you were originally going to receive. They’d receive closer to the $47k amount.
That’s still a nice pension, but the fact that HOOPP was already planning to pay you the bridge benefit in the first place if you had lived, then why don’t they pay your spouse that as well? That’s a value of ~$90,000 over 10 years, up in smoke just like that. I could see if the spouse was already receiving a bridge from their own pension if they had one, but if not, then what gives? I’ll tell you! It’s cheaper for HOOPP. That’s what gives. Then when your spouse dies, that’s it. The end! Any remaining pension principle and related interest, whether it’s $2 dollars or $2 million dollars now officially belongs to HOOPP. *Sigh* ….
The other option a spouse has, is that they can forgo the lifetime pension for the alternative of taking a lump-sum payment representing the value of your pension. This is generally referred to as a pension’s commuted value, which I’ll talk more about in a later episode. The commuted value is roughly the amount it would take right now, in today’s dollars, to pay all your future pension payments with. It’s based on multiple factors such as average life span and bond interest rates.
But it’s sort of a secret calculation that’s a bit complicated to figure out because the pension plans don’t usually disclose all the specific factors that they use. It is usually a fairly large amount, ie: in the $100,000s or even over a million dollars, depending on your predicted annual pension. Interestingly enough, taking this option is generally frowned upon, as many critics take the perspective that receiving an actual pension is better than taking a lump sum.
The catch with this is that you’ll pay taxes on the entire amount! Unless, that is, you transfer some of it to tax sheltered accounts. A portion of the lump sum can be transferred to a Locked-In-Retirement-Account (LIRA). And another part of it can be transferred to RRSPs, if you have room. The rest will considered taxable income which can potentially result in a massive tax bill. Do you know how much tax you pay on a $1 million dollar sum? The answer, is too much…
While this is a notably negative aspect to commuted values, it would allow the pension survivor to take control of the entirety of the pension moneys as well as have access to the principle to do what they wish with. And HOOPP would no longer collect it or any related interest off it if the spouse died. It would remain part of your estate.
You Made It! But Not Very Far…
What about if you die during your retirement? Well this one burns my biscuits too, because unlike dieing before you retire, where your spouse receives 100% of your accrued but non-bridged pension, when you die after retiring, your spouse receives even less!!! That’s right. You read that correctly.
See here. If you die within 5 years after retiring, with HOOPP your spouse will receive 100% of your non-bridged pension for the remainder of the 5 year period. So if you only got 3 years of pension payments and then croaked (at age ~57-58), your spouse would receive 2 years of payments at 100% of your non-bridged pension (the $47k amount). If you made it past 5 years into retirement, then that 100% would not apply.
THEN, and get this, the default pension amount for a spouse drops to 66 2/3% of your non-bridged pension. This means that 66 2/3% of $47,550 is only 31,696. That’s QUITE a bit less! HOOPP benefits from you dieing SOONER than later. The 66 2/3% can be adjusted up to 80% or 100%. However, this comes at a cost to the original pensioner’s annual pension while they’re alive (somewhere between 0.6% and 2.5% reduction depending the situation).
Explain to me this… If HOOPP had already budgeted for me to live for up to a 30 year retirement, then WWWhhhhyyyy would they reduce this amount significantly for my spouse? That’s a load of bull crap right there…
I know why… Because it’s a way to cheap out even more!
I’ll say that again. If HOOPP was already planning on paying me $57k for the first 10 years, then 47k for the next 20 years, WHY would my spouse only be receiving 31k basically from the get go?!?!
And after your spouse dies, any and all leftover money goes POOF! Right back into HOOPP’s bank for their taking. So you better hope your spouse doesn’t die really early after you do too, because there’s a potentially massive amount of leftover money that your estate will NOT get!
If you don’t have a spouse, I hope you’re not too lonely. However, this means that when you pass away before receiving 15 years of payments, your beneficiary will be able to choose either the remainder of the 15 year balance in monthly payments, or a lump sum representing the value of those remaining payments. After that, well, you guessed it. Poof poof! HOOPP gets all the left overs. Grrrr… Biscuits so burnt!
The Pension Matching Snake Oil Salesman
The age old western tale of the snake oil salesman manipulating unsuspecting victims into buying potions and cures that don’t do anything at all. Pension matching is an interesting technical term in this regard. If an employer provides matching contributions, it could be interpreted that the employee is already contributing 100% to their pension. Even the Financial Services Commision of Ontario website describes employer pension contributions as “free money for you!”
Thus if an employer matches the employee’s contribution, then the employee might think they’re getting 200% of what their pension would be; or in HOOPP’s case, 226%.
Ontario employers that provide pensions are obligated to contribute to said pensions. Most all of them provide a match at a 1:1 ratio. Every dollar contributed by the employee is matched by the employer with an equivalent $1.
HOOPP is seemingly a standout among pension plans because for every $1 contributed by an employee, HOOPP will match that with $1.26. Be careful here, because you might think that you’re getting an extra 26% more in pension contributions with that 26 cents.
But there is another term that’s been used to describe pension matching. It’s called pension “Cost sharing”, and the context is that most pensions plans split pension costs 50-50 between the employer and employee.
Time To Math-it Out!
However, to make things equal to compare, we need to convert everything to a 100% scale. For all the other pensions with 1:1 matching, this means that the employee and employer are actually contributing 50% each, totaling 100% combined contributions. This also means that for every $1 of combined pension contributions, both the employer and employee contribute $0.50.
With HOOPP’s ratio of 1:1.26, to do the same, we have to use a bit of math to add those number together to get the 100% value. Therefore, 1+1.26 = 2.26.
Then, 1 / 2.26 = 44%. And 1.26 / 2.26 = 56%. Together they total 100% value.
So in fact, you are not getting anywhere near 26 percent value. You’re just contributing a 44% share to your total pension contributions instead of the standard 50%. While this is an improvement, saving 6 percentage points is nowhere near as impressive a marketing tool than appearing like you’re getting 26% more contributions. A bit of smoke and mirrors don’t you think?
Fundamentals
But a more fundamental question might be “Why do employers match pension in the first place?”. And also, wouldn’t it be cheaper for HOOPP employers to just do the traditional 1:1 match? Why 1:1.26?*
A company match can be a powerful selling point for recruitment and retention. It provides the employee of being valued and financial security for retirement planning. Even with the costs, it helps earning goodwill and loyalty of employees. A happy employee is a productive employee.
Thus in HOOPPS case, that 1:1.26 ratio appears quite attractive compared to the normal 1:1 ratio, even though, as we just proved above that it’s not as great as advertised. However, the average person might see this as enticing enough to choose a HOOPP employer over a non-HOOPP one.
Employers can also receive tax benefits for contributing to a pension plan.
It’s important to remember, that although it may seem like a workplace with a pension plan are one and the same, they are actually two separate entities. So even though employers are putting out a little bit of money through pension matching, in essence, employers are “contracting” out pension plan services to take the major responsibility and excess cost burden off themselves and putting the onus and “risk” of their employees’ retirement planning and goals onto a pension fund like HOOPP.
The last comment I wanted to mention about pension matching comes from the site quickbooks.intuit.com, “From an employee’s perspective, this contribution seems like free money towards their retirement if they can afford to contribute to the plan. The key to getting the most out of the match comes down to providing an attractive percentage that’s cost effective from a business perspective.”
Maximum employee loyalty for the most economical employer price.
Wrapping Up
If you haven’t been able to put the dots together yet, let me hit you over the head with it. The trend so far seems to be that all the purported major benefits to having a pension aren’t actually that beneficial for an employee. There is significant irony regarding the claims of having certain benefits like the survivor benefit, increasing your HOOPP pension value.
In fact, the opposite is true. And what it seems to me, is that it’s more beneficial for the pension fund itself rather than the pensioner. Regardless of the pedestal they portray themselves to be up on, pension funds seem to be more akin to insurance companies, wherein they don’t want to pay out more than they have to. Because if they did, they’d go out of business of course! They cut costs where they can, while making it all seem like you’re getting more value than you actually are. Sketchy descriptions indeed.
Stay tuned for the next episode. The Balrog cometh!
*It remains to be seen if they will match the CPI for 2022, given that inflation has been super high this year (~7ish%), and is predicted to end 2022 at 8% total. This will be especially interesting if the markets remain in the bearish zone that they are in now, and if we enter a recession in 2023. They did approve a 2021 COLA increase of 4.8%, however the markets did end on a high that year.
*UPDATE*: Canada’s 2022 annual inflation rate ended at 6.3%. HOOPP has
recently announced they will provide a 100% match of CPI index for a
COLA increase.
*It’s hard to say where HOOPP’s investment returns go because there’s not a lot of documentation publicly available that I could find in regards to specific decisions that HOOOP has made about this. In their plan text, there is mention of what might be done in the case of “surplus funds”, specifically either increasing plan benefits or decreasing costs. But none of it is very concrete. And the details of any such decision again seem to be kept top secret.
*HOOPP’s pension matching ratio parameters is defined in their plan text, under the “employer contribution corridor” section. The range is a minimum of 120%, upto a maximum of 150%. This changes annually, as reviewed by their actuary, depending on the health of the plan. But as to why the range is that high to begin with? Honestly, I was unable to find that information out. The earliest dates mentioned in regards to this are 1994, shortly after HOOPP had some major amendment changes. Yet details prior to this are bit trickier to find, due to the lack of internet records in those days. Even the earliest archived version of HOOPP’s website using the Wayback Machine is only from the year 2000.
*Most of this was written in the tale half of 2022, and based on the information available at the time. And even though this episode will have been published in early 2023, I’ve left the numbers based on 2022 details. I will update where appropropriate (ie: 2022 final inflation numbers, etc)
