HOOPP recently released their 2022 Annual Report. On their website, they list numerous positives and benefits that the pension plan offers. What was also noted was that these benefits have been given improvements as of late.
“Proudly serving…since 1960!”, “Enhancing retirement security…”, “Successful investment approach”, “Consistently healthy funded status”.. It’s all Sunshine and Lollipops! Then you get to bottom of the page where they drop the transparency bomb of their total investment return for 2022; in small print no less.
-8.60%!!!!
Ohhhh boy… While it is highlighted, HOOPP doesn’t specifically talk about this significant loss of assets. And even though it looks bad, it’s not nearly so dire as the benchmark that they compare themselves too, having lost -13.21%! HOOPP then clarifies that the difference of these two numbers creates a “value-added” return of +4.61%!!! A positive number is a positive number, even if the overall is negative; that makes sense, right?
Another major pension plan in the province, the Teachers’ OTPP, have also released their 2022 returns. They passed through 2022 with a total net increase of +4.0% to their assets. That’s almost 13 percentage points better than HOOPP!!! I mean, if we’re talking about “value-added” returns, well then I think HOOPP was on the wrong bandwagon for 2022.
We’ve already discussed this before, wherein there are many ways to skin the investment cat. There are multiple different strategies and tools available. OTPP doesn’t have the same strategy as HOOPP, and neither does HOOPP have the same strategies as any other pension. But this doesn’t mean we can’t compare them nonetheless!
To HOOPP’s credit, they do eventually get into why they didn’t do so well in 2022. But you have to dig a little deeper. Either reading their “highlights” document, or if you really wanna go full hog, check out their 84 page “2022 Annual Report”! They talk about the effects of the pandemic, and market changes (decreases) with the large inflation numbers we’ve had over the past year also affecting and increasing interest rates, to Russia and Ukraine, potential recession worries, and the global economy in general. Oh, and 10.7 BILLION dollars of net assets lost, in one year!
Having a not so great year didn’t stop them from increasing pension benefits for the 3rdtime over the past 6 years. And that’s what we’re digging into today, on Why I Hate Pensions – Benefit Increases.
The Long Standard
For a number of years, HOOPP had their base calculation consistent for determining retirement pension payments. There was one formula for people who retired before age 65, and one for people who retired at/over age 65. The former included the Bridge Benefit, which most other pensions also include. The latter is without the Bridge Benefit and as such is a lower payment.
The following HOOPP retirement pension formula was the long standard until ~2018.
Under Age 65:
(1.5% + 0.5%[bridge]) x average earnings up to aYMPE x yrs service
+
2% x average earnings above aYMPE x yrs service
Age 65 and over:
1.5% x average earnings up to YMPE x yrs service
+
2% x average earnings above YMPE x yrs service
*In these formulas, “Average earnings” means “Best 5 year period of averaged income”.
Also, “aYMPE” is just the 5 year average of the YMPE (Year’s Maximum Pensionable Earnings) as set by the federal government each year.
Among the recent benefit increases over the past couple years included cost of living increases for current pensioners, which I believe shouldn’t be deemed a benefit, but should be a matter of fact and indexed to inflation. But more importantly, there have been pension value increases for active contributing members of the plan.
1st Improvement: (Jan 1, 2018)
Announced in 2017, this benefit improvement increased benefits for part of the calculation of “up to ” amounts from 1.5%, to 1.75% for each year of service before Jan 1, 2018. Any contribution years after this remained at the 1.5% level.
The Effect: The more service years you had before Jan 2018 the more you would benefit. Someone who retired on Jan 1, 2018 with 30 years of work would be in the best spot. However, anyone just starting their career in 2018 would receive zero benefit from this.
What’s the Catch?
The catch is that in the fine print there is no effectual change on pension amounts until age 65. This is because the bridge benefit is deducted point for point for every amount that the HOOPP pension benefit increases, because of HOOPP’s integration with the CPP.
For example, even though the 2018 benefit increase raised the percentage to 1.75%, the bridge benefit is adjusted and lowered from 0.5% to 0.25% to maintain the 2% combined rate as in the original calculation.
Where you’ll notice the actual tangible change from this benefit is once you hit age 65. At that point, the bridge benefit drops off, but instead of your pension benefit decreasing from 2% down to 1.5%, you’ll only fall to 1.75% for the calculable amount. At least for any time you put in before 2018. Any annual credits input after 2018 will still be calculated at the lower 1.5% rate.
A few other small “benefits” introduced at the same time including the following.
The aYMPE estimate was changed from using an avg of 3 years to an avg of 5 years.
The Effect: since the government sets that annual YMPE amount, which always increases every year, switching from a 3 year aYMPE average to a 5 year aYMPE average lowers the YMPE amount used in the pension calculation. This results in shifting the ratio of annual salary amounts use for calculating pensions below YMPE (1.5%) and above YMPE (2%), to slightly more in favour of the 2% number, at age 65. Thus more of your pension will be paid out at the 2% rate. Again, this only affects a pensioner once they hit age 65, when the bridge benefit drops off. Are you sensing a trend yet?
The Survivor Benefit also increased from 60% to 66-2/3%.
The Effect: considering that the bridge benefit is not included, and you’re likely to live a long-ish time, it’s probably barely causes a small blip HOOPPs overall net worth.
HOOPP also added a new five-year 100% pension payment guarantee to your spouse starting from date of your retirement in case you died prematurely.
The Effect: probably minimal, as if you retire early, age 55, you’re still likely to live quite a few years. Also, retiring at normal age 65, you’re still not really old, thus not likely to die within 5 years. Even if you are, it’ll likely be closer to the end of the 5 years, as well as your death actually being a huge cost benefit to HOOPP by not only not having to pay out a big pension to you, but also keeping any and all contributions and interest that you and your employer made to the plan over your career.
With the changes mentioned above, the 2018 benefit improvement changed the pension formula as follows:
Under Age 65:
1.75% + 0.25% (bridge) x average earnings up to aYMPE x yrs service before 2018)
+
1.5% + 0.5% (bridge) x average earnings up to aYMPE x yrs service starting after Jan 1, 2018
+
2% x average earnings above aYMPE x total yrs service
Age 65 and over:
1.75% x average earnings up to aYMPE x yrs service before 2018
+
1.5% x average earnings upto aYMPE x yrs service after Jan 1, 2018
+
2% x average earnings for amounts above aYMPE x total yrs service
HOOPP has an example on their site of how this may increase your pension. Someone who earns $60k/year, who has their first 10 years of service before 2018, will receive an increase of ~$1365/yr at age 65. Assuming payments until age 85 (death), this is an extra ~$27,300 lifetime amount.
2nd Improvement: (March 13, 2021)
This benefit improvement builds on the 2018 improvement by extending the 1.75% benefit calculation through all of 2018, 2019, and 2020.
The Effect: Similar to the previous improvement, the people who benefit most are those who retired at the end of 2020 with 30 years of service. Those who don’t benefit at all are ones who are just starting their career in 2021.
The pension formula above is slightly affected by now replacing “2018” with “2020”.
HOOPP’s website has an example of the monetary value of this improvement. Someone who worked full time during the affected years (2018, 2019, 2020), would get an additional lifetime annual increase of up to $426, starting at age 65. Assuming payments until age 85 (death), this is worth up to an additional $8,520 lifetime amount.
3rd Improvement: (Jan 1, 2023)
The 3rd benefit improvement increases the pension calculation for amounts up to aYMPE to 1.9% (up from 1.75%) FOR ALL contribution years before 2021, and provides 2% for contributions made in years 2021 and 2022, effective January 1, 2023.
The Effect: No effect on anyone receiving pensions from age 55 – 64, just like the previous improvements, as the bridge benefit still maintains an overall 2% calculation. However, at age 65, pensions will be increased for any historical service from before 2021 from the previous improvement of 1.75% calculation to 1.9%. And any historical service in 2021 and 2022 will now receive 2% instead of 1.5%. Any service after 2022 will remain at the 1.5% level. Again, the people who benefit most are ones who retired at the end of 2022. Anyone who is just starting a career in 2023 receive no benefit from this benefit nor the previous two.
The change in the pension formula is as follows:
Under Age 65:
1.9% + 0.10% (bridge) x average earnings up to aYMPE x yrs service before 2021)
+
2% + 0% (bridge) x average earnings up to aYMPE x yrs service for 2021 and 2022)
+
1.5% + 0.50% (bridge) x average earnings up to aYMPE x yrs service for 2023 and later)
+
2% x average earnings amounts above aYMPE x total yrs service
Age 65 and over:
1.9% x average earnings up to aYMPE x yrs service before 2021)
+
2% x average earnings up to aYMPE x yrs service for 2021 and 2022)
+
1.5% x average earnings up to aYMPE x yrs service for 2023 and later)
+
2% for amounts above aYMPE x total yrs service
HOOPP’s website has an example of the monetary value of this improvement. Someone who has 10 years of service in the plan before 2023 will receive an additional increase in annual lifetime pension payments of $1310/yr, at age 65. Assuming payments until age 85 (death), this is worth $26,200 in total.
If the same person has 20 years of service before 2023 will receive ~$2,200/year at age 65 (~$44,000 lifetime).
If the same person has only 5 years of service before 2023 will receive ~$865/year at age 65 (~$17,300 lifetime).
The Max Benefit
Let’s see what the how the maximum benefits have improved with the most recent improvement versus the original formula.
In this example, we’ll calculate max benefit increases using a $60,000 salary. We’ll also assume you retire with 30 years service as of Jan 1, 2023, and that the aYMPE is $60,000.
Pre-2018 benefit formula:
At age 55:
(1.5 + 0.5% bridge) x 30yr x $60,000 = $36,000
At age 65:
1.5 x 30yr x $60,000 = $27,000
2023 improved benefit formula:
At age 55:
(1.9% + 0.1% bridge) x 28yr x $60,000 = $33,600
2% x 2yr x $60,000 = $2,400
=$36,000
At age 65:
1.9 x 28yr x $60,000 = $31,920
2.0 x 2yr x $60,000 = $2,400
Total = $34,320
The age 55 pension amounts are the same. However, at age 65 is where you notice the benefit improvements. The difference at that point is $7,320/year for the affected 30 years, or $146,400 over a 20 year retirement. And a reminder that this is for the maximum benefit improvement that can be attained if someone retired at the beginning of 2023 with 30 years of service, and applies for age 65+ payments.
My Own Pension Improvement
In my own case, the difference between the (original) pre 2018 calc and the latest 2023 benefit calc at age 65, is ~$2,380/year, or $47,600 over a 20 year retirement. It would have been slightly higher, but I took ~2 years of during parental leaves where I opted out of making contributions during that time.
The RRSP Reduction Effect
Another un-advertised negative effect of this which really shocked me when it happened, is a re-calculation of your pension adjustment number by the Canada Revenue Agency (CRA). Specifically, you receive a Past Service Pension Adjustment (PSPA). This PSPA takes into account any “pension credits” (ie: monetary value increases) that may apply to one’s pension which results in a significant reduction of your RRSP contribution room for that year.
The reason this is done is to help make it fair for people who don’t have access to a pension plan. If you really want to dig more into this about when a PSPA is done, and how it’s calculated, etc, you can check out the CRA site here: Past Service Pension Adjustment Guide – Canada.ca
And you can’t just “Opt Out” of these benefit increases, thereby avoiding a PSPA. Nope, once you’re in the pension fund, you’re forced to ride the waves whether your like it or not. For the good of the pension and what not!!!
In 2019 for example, I had expected to be able to contribute about $9000 to my RRSP with room I had previously accumulated. But after the HOOPP 2018 benefit increase and subsequent PSPA, my RRSP contribution room was reduced to ~$2500.
That is a notable lost opportunity cost. If you don’t have extra funds in general for any type of savings plans, or never plan to contribute to RRSPs, then this doesn’t affect you. However, if you’re the type of person that spends less than you earn, you’re likely have a surplus of cash that you’ve thought about investing and possibly putting into a tax sheltered account like an RRSP. I’m the latter.
I could potentially still invest the surplus funds originally destined for an RRSP into a regular non-tax sheltered investing account, however I would lose not only the significant tax refund of those contributions, but would also have to pay any resulting annual taxes from dividends or other returns from those investments. Over the years, those tax payments can add up to a moderate loss on investment return. I prefer tax arbitrage as the optimal solution in this matter, which is why I really dislike these HOOPP benefit increases.
With all three of HOOPP’s benefit improvements, I will have lost a total of $20,039 of RRSP contribution room as of the 2024 tax year.
Is it worth the cost?
So here’s the deal. These three HOOPP benefit improvements are supposed to provide me with ~$47,600 in extra lifetime pension payments. Alternatively, if we never had any of the 3 benefit improvements in the first place, then I wouldn’t have lost the $20,039 of RRSP contribution room. I also would have been able to make the full contribution of that ~$20k amount, and received back roughly $6,312 as a tax refund (according to where I’d fall on the Ontario/Canada tax bracket combined rates of 31.5%).
If that tax refund I would have gotten is able to produce enough investment growth to accumulate a principal amount of at least $47,600, or provide an equivalent value of $2,380/yr during the 20 year retirement period of age 65 to 85, then the HOOPP benefit improvements would not be worth it, and I’d actually lose out on both opportunity cost, and overall lifetime net worth.
Here’s what could have happened by investing that $6,312 using various long term averaged annual returns throughout both the investment growth period and the retirment drawdown period.
The investment growth period for me would be age 36 to 65, followed by a 20 year drawdown period from age 65 to 85.
@5% returns = ~$26k by age 65, then a 20 year draw down of $2380/yr and 5% returns = Fails at year 19 (age 84), reaching $0
@7% returns = ~$45k, then 20 year draw down of $2380/yr and 7% returns = Ending portfolio of $102k
@9% returns = ~$76k, then 20 year draw down of $2380/yr and 9% returns = Ending portfolio $654k
@11% returns = ~$130k, then 20 year draw down of $2380/yr and 11% returns = Ending portfolio $2.45mill.
Or perhaps using a more realistic retirement returns of just 5% for all examples:
@5% returns = ~26k, then 20 year draw down of 2380/yr and 5% returns = Fails at year 19 (age 84), reaching $0
@7% returns = ~45k, then 20 year draw down of 2380/yr and 5% returns = Ending portfolio of $28k
@9% returns = ~76k, then 20 year draw down of 2380/yr and 5% returns = Ending portfolio $162k
@11% returns = ~130k, then 20 year draw down of 2380/yr and 5% returns = Ending portfolio $396k.
The only scenario here that fails, albeit JUST BARELY (as in by 1 year), is if the future returns provide only 5% avg/year over the next 50 years. Which I would highly bet against that outcome! Every other scenario succeeds, with the lowest providing an extra $28k, whereas the best but perhaps least likely outcome provides an extra $2.45 million. In all probability, the actual result likely lies somewhere in between. But I think it’s still a much better outcome than what was “gained” through HOOPP’s pension benefit increases.
These above results don’t account for any potential taxes during the pre-retirement returns phase from any dividends that may have been provided. Thus, the amounts would be a bit lower, but not enough to significantly discount the overall growth of the principals.
Although not guaranteed, I have no doubt that there will be future pension benefit increases over the coming years. When will that happen? I don’t really know, or care to be honest. As I don’t believe the “benefits” are worth the trade off of lost tax shelter room. I’m not looking forward to them though. And you can’t opt out either, unless you leave the plan, or alternatively, make an employment switch from Full Time to Part Time. I’d be lying if I said that had never crossed my mind.
But until then, I’m stuck with it. Stuck with HOOPP. Stuck with these increases. And yet another reason for why I hate pensions. Such is life.
Are you happy with HOOPP’s benefit increases? Let me know.
