Amendments to the Canada Pension Plan to be phased in from 2011 to 2016 Technical Presentation Last updated in May 201

1. Amendments to the Canada Pension Planto be phased in from 2011 to 2016Technical Presentation Last updated in May 2011  This document contains information on the Canada Pension Plan (CPP). In case of dispute, the wording and provisions of the Canada Pension Plan and Regulations prevail.

2. About this presentation The following presentation is intended to describe the changes which are currently being implemented to the Canada Pension Plan (CPP) at a technical level. This presentation is primarily directed at financial planners and other individuals well-versed in the current CPP provisions. This presentation is intended to demonstrate the impacts of these changes, and how they interact, in order to assist in making decisions about when to begin benefits in retirement. This presentation is separated in 3 main sections: Pages 3 to 17: General information about the C-51 Changes Pages 18 to 47: Example case studies Pages 48 to 59: CPP Retirement Benefit and Post-Retirement Benefit Calculations tables This presentation was created for information purposes only. Individuals should base their decisions on their personal situations.

3. Outline of presentation Modernizing the Plan to adapt to societal trends Four changes Choices depend on individual wants and needs Summary of effective dates Sources of additional information Examples of the new legislation�s application Annex: Calculation tables and formulas

4. CPP is adapting to societal trends The CPP provides partial income replacement in the case of retirement, disability, and death. Canadians are living longer and healthier lives, and this is creating greater opportunities for employment later in life. Retirement is a process that often occurs in stages, rather than as a one-time event. Changes to the CPP will ensure that the Plan remains actuarially fair and financially sustainable and that it responds to the evolving needs of Canada�s aging population and to changes in the economy and labour market. These amendments will be implemented gradually from 2011 to 2016. Changes to the Plan may affect how and when contributors choose to retire from work and when they decide to apply for a CPP retirement pension.

5. Summary of amendments to the CPP

6. Rebalancing the adjustment factors for early and late retirement pensions is required�

7. � to restore actuarial fairness.

8. Gradually increase pre-65 actuarial adjustment factors Increase post-65 actuarial adjustment factors: Gradual changes with post-65 factors introduced faster

9. Working beneficiaries allowedto gain additional CPP retirement income�

10. �with the new Post-Retirement Benefit!

11. Elimination of work cessation test

12. More years of low or zero earnings will be dropped from benefit calculation

13. Who is affected by the changes? Individuals WILL be affected by changes, if they are: An employee who contributes to the CPP; A self-employed person who contributes to the CPP; Between the ages of 60 and 70 and work while receiving a CPP retirement pension (or work in Canada outside of Quebec while receiving a QPP retirement pension). The changes also affect employers who contribute to the CPP on behalf of their employees. Individuals WILL NOT be affected by these changes if they started receiving a CPP retirement pension before December 31, 2010, and they remain out of the workforce. They may, however, be required to make contributions toward the new Post-Retirement Benefit if they return to work after December 31, 2011.

14. Considerations An individual under age 65 should consider the fact that once they receive the CPP retirement pension, they generally will not be eligible for the CPP disability benefit if they subsequently become disabled. The new adjustment factors will further increase the pension for those who start receiving it after age 65, and further reduce it for those who start receiving it before 65. In general, as a result of these changes, a contributor who applies for the CPP retirement pension at age 70 would receive approximately double the annual benefit they would have received had they applied for the CPP at age 60 (as of 2016), even if they do not continue to work after age 60.

15. Choices depend on an individual�s wants and needs When deciding whether to apply for the CPP retirement pension prior to age 65, at age 65, or after age 65 (up to age 70), contributors should consider their personal life circumstances. Sources of income, current and future Employment status now and in the future Contributor�s health History of employment and CPP contributions Whether CPP pension credits were split following a divorce, separation or the end of a common-law relationship Plans for retirement

16. Summary of effective dates Actuarial Adjustment Factors January 2011: Begin increasing post-65 adjustment factors January 2012: Begin increasing pre-65 adjustment factors Contributions from CPP retirement pension recipients toward the new Post-Retirement Benefit January 2012 (Benefit payable in 2013) Elimination of work cessation test for early receipt of CPP retirement pension January 2012 Enhancement of General Drop-out Provision January 2012 (16%) and January 2014 (17%)

17. Need more information? Useful links Service Canada � Canada Pension Plan (hyperlink) (www.servicecanada.gc.ca/eng/isp/cpp/cpptoc.shtml) Annual Reports of the Canada Pension Plan (hyperlink) � (http://www.rhdcc-hrsdc.gc.ca/eng/oas-cpp/reports/index.shtml) Canada Pension Plan Actuarial Reports (hyperlink) � (http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?DetailID=499) Bill C-51, Economic Recovery Act (stimulus) (hyperlink) (http://www2.parl.gc.ca/HousePublications/Publication.aspx?Docid=4115871&file=4)

18. Examples of the New Legislation�sApplicationThe following examples are not recommendations. Individuals should base their decisions on their personal situations. 

19. Two financial parameters determine the optimal time to receive a CPP retirement pension The CPP provides a great deal of flexibility in choosing the time to take the retirement pension (ages 60 to 70). The amounts that individuals receive are affected by when they choose to take their pensions. Generally, individuals will consider one or both of these factors in choosing the time to begin receiving their CPP retirement pension: the pension amount payable per month; and/or the total retirement benefits collected from the Plan. Influencing these two parameters are: Age of individual and time of CPP retirement Health considerations and Labour market participation before and/or after receiving the pension The following case scenarios examine both parameters and their interaction.

20. With health care advancements and quality of life improvements over the last 40 years, people are living longer than was predicted at the time of their birth. The average life expectancy of an individual who turned 60 in 2010 is projected to be an additional 27.2 years [age 87] for a woman, and 24.7 years [age 84] for a man. The average life expectancy of an individual who turned 65 in 2010 is projected to be an additional 22.6 years [age 87] for a woman, and 20.3 years [age 85] for a man.

21. Sample Case 1Gradual transition to retirement with average career earnings Mr. Brown (born 1953) plans to gradually transition to retirement: he will switch to part-time work at age 63 and fully retire at 68, while continuously contributing to the CPP. Mr. Brown has a work history with few gaps and an employer-sponsored pension. In 2013, his expected unadjusted CPP retirement pension is about 90% of the maximum. Mr. Brown will continue to work full-time at (or above) the year�s maximum pensionable earnings (YMPE), and part-time at 50% of YMPE ($24,150 in earnings, $1,022.18 in contributions) If he is healthy and has an average life expectancy (82), when is the optimal time to take his retirement pension?

22. The monthly PRB is a separate benefit. Each year of contributions results in a new PRB, payable the following year and actuarially adjusted for the age of the contributor. The total monthly pension at age 69 is the sum of all PRBs and the early retirement benefit taken at 60 = $733.00. If life expectancy is 82 years, the total amount collected from the CPP will be $193,825. Sample Case 1: Scenario 1Start CPP at 60, continue contributing while working

23. The monthly PRB is a separate benefit. Each year of contributions results in a new PRB, payable the following year and actuarially adjusted for the age of the contributor. The total monthly pension at age 69 is the sum of all PRBs and the early retirement pension taken at 63 = $856.36. If life expectancy is 82 years, the total amount collected from the CPP will be $201,773. Sample Case 1: Scenario 2Start CPP at 63 when full-time work stops, continue part-time work

24. The monthly PRB is a separate benefit. Each year of contributions results in a new PRB, payable the following year and actuarially adjusted for the age of the contributor. The total monthly pension at age 69 is the sum of all PRBs and the full retirement benefit taken at 65 = $949.54. If Mr. Brown lives to age 82, the total amount collected from the CPP will be $203,298. Sample Case 1: Scenario 3 Work full-time to 63, start CPP at 65, continue part-time work until 68

25. Sample Case 1: Scenario 4 Work full-time to 63, work part-time until 68 (and start CPP then)

26. Sample Case 1: Summary

27. Sample Case 2Interrupted career earnings and small expected pension Ms. Smith reaches 65 in 2017 and plans to supplement her pension by working part-time at 10% of the average wage Annual earnings of $4,830 and contributions of $65.84, in 2011 dollars. Ms. Smith spent 10 years outside the workforce to care for her young children. In addition to this, she has an interrupted employment history and her expected unadjusted CPP retirement pension is 35% of the maximum. She is healthy and has an average life expectancy (85).

28. The monthly PRB is a separate benefit. Each year of contributions results in a new PRB, payable the following year and actuarially adjusted for the age of the contributor. The total monthly benefit amount at age 71 is the sum of all Ms. Smith�s PRBs and her CPP retirement pension (taken at age 64) = $326.25. If Ms. Smith lives to age 85, she will collect a total amount of $85,355 from the CPP. Sample Case 2: Scenario 1Start CPP at age 64, continue contributing until 70

29. The monthly PRB is a separate benefit. Each year of contributions results in a new PRB, payable the following year and actuarially adjusted for the age of the contributor. The total monthly pension at age 71 is the sum of all PRBs and the CPP retirement pension (taken at age 65) = $341.94. If Ms. Smith lives to age 85, she will collect a total amount of $85,604 from the CPP. Sample Case 2: Scenario 2Start CPP at 65, continue contributing until age 70

30. Sample Case 2: Scenarios 3 and 4

31. Sample Case 2: Summary If a contributor has an inconsistent employment history and is able and willing to work and continue contributing to the CPP, postponing receipt of the CPP retirement pension will increase the benefit amounts received (given average or above-average lifespan). Delaying taking the retirement pension by one year (65 vs. 64) results in a small increase in benefits (Scenarios 1 and 2). The largest monthly benefits and total amounts collected over a lifetime can be obtained by continuing to contribute and getting the maximum actuarial adjustment by taking the CPP retirement pension at age 70 (Scenario 4). Continuing to contribute to the CPP after collecting the retirement pension will increase the amount of benefits through the PRB; however, due to the actuarial adjustments, greater total benefit amounts may be received by postponing taking the retirement pension until after age 65.

32. Sample Case 3Poor health and below average life expectancy Mr. Scott reaches 60 in 2012. He was recently laid off and is in poor health. As a result, he now works part-time, earning 10% of the average annual wage (annual earnings $4,830; contributions $65.84). Earlier in his career, Mr. Scott had a few work interruptions and his income was below average. His expected unadjusted pension is 50% of the maximum retirement pension. He has less than an average life expectancy (age 69).

34. Sample Case 3: Scenario 3

35. Sample Case 3: Scenario 4 Scenario 4: Start retirement pension at 60 and continue contributing until 64. Actual CPP retirement pension at age 60 will be $330.24 as in Scenario 1. Earnings from work: The monthly PRB is a separate benefit. Each year of contributions results in a new PRB, payable the following year and actuarially adjusted for the contributor�s age. Retirement benefit with PRBs at age 65 = $338.24 If Mr. Scott lives to age 69, he will collect a total amount of $36,280 from the CPP.

36. Sample Case 3: Summary If a contributor has poor health and a short life expectancy, the total amount they collect from the CPP may be higher if they begin receiving the retirement pension as early as possible. Any delay in taking the pension will increase the monthly amount but may decrease the total amount collected, as the contributor would receive the payments for a limited period of time (Scenario 1 compared to 2 and 3). Working part-time and making CPP contributions toward the new PRB after starting the CPP retirement pension can result in small increases in CPP payments. (Scenario 4).

37. Sample Case 4Retiring before or after introduction of the new adjustment factors Ms. Seguin has reached age 60 in 2011. New adjustment factors will be introduced in 2012. Should she start her retirement pension before the changes occur? Ms. Seguin�s predicted unadjusted retirement pension is 60% of the maximum. Ms. Seguin spent 8 years outside the workforce to care for her young children. She is currently employed full-time at 70% of the average industrial wage and plans to continue working until age 68 or 70, shifting to part-time at age 67. 70% of YMPE reflects earnings of $33,810 and contributions of $1,500.35 20% of YMPE reflects earnings of $9,660 and contributions of $304.92 She is healthy and has an average life expectancy (85).

38. The monthly PRB is a separate benefit. Each year of contributions results in a new PRB, payable the following year and actuarially adjusted for the age of the contributor. The total monthly pension at age 70 is the sum of all PRBs and the early retirement pension taken at 60 = $520.77. If Ms. Seguin lives to age 85, the total collected from CPP will be $154,827. Sample Case 4: Scenario 1Start CPP at 60, continue contributing until 70

39. The monthly PRB is a separate benefit. Each year of contributions results in a new PRB, payable the following year and actuarially adjusted for the age of the contributor. The total monthly pension at age 70 is the sum of all PRBs and the early retirement benefit taken at 64 = $644.21. If Ms. Seguin lives to age 85, the total collected from CPP will be $167,564. Sample Case 4: Scenario 2Start CPP at 64, continue contributing until 70

40. The monthly PRB is a separate benefit. Each year of contributions results in a new PRB, payable the following year and actuarially adjusted for the age of the contributor. The total monthly pension at age 70 is the sum of all PRBs and the CPP retirement benefit taken at 65 = $675.13. If life expectancy is 85 years, the total collected from CPP will be $168,509. Sample Case 4: Scenario 3Start CPP at 65, continue contributing until 70

41. Sample Case 4: Scenarios 4 and 5

42. Sample Case 4: Summary Contributors should make retirement decisions based on their personal life circumstances, not simply on the implementation schedule of the new actuarial factors. If a contributor is healthy and able to work, the new PRB will increase retirement income. However, postponing receipt of the CPP retirement pension, especially after age 65, will produce a larger monthly retirement pension and may increase the total amount collected from the Plan.

43. Sample Case 5: Ceasing contributing, but postponing receipt of retirement pension (different life expectancies) Mr. Mazur will reach 60 in 2016. New adjustment factors will be fully introduced. Mr. Mazur had some career interruptions and in 2016 his predicted unadjusted retirement pension will be 75% of the maximum. He is planning to permanently stop working at age 60. Assuming his life expectancy is average (85), below average (76) or above average (93)�

44. Sample Case 5Stop work at 60, start CPP at 60 or 62

45. Sample Case 5Stop work at 60, take up CPP at 65 or 70

46. Sample Case 5: Summary A contributor who postpones applying for the CPP retirement pension until age 70 will receive approximately double the monthly benefit they would have received had they started the pension at age 60 (as of 2016), if they do not continue to work after age 60. (First row) However, if the contributor�s lifespan is below average, the maximum pension (age 70) would not lead to the highest total amount collected from the CPP. (Second row) If the contributor has an average or above average lifespan, the bigger pension taken at age 70 would lead to a higher total amount collected from the Plan. (Third and fourth rows) Taking the pension at age 60 in the majority of cases would lead to the minimum total amount collected from the Plan.

47. Methodology The preceding examples provide comparisons of pension benefits valued in constant 2011 dollars. The calculations are based on fixing the Year�s Maximum Pensionable Earnings (YMPE) and maximum retirement pension to their 2011 values. YMPE (2011) is $48,300 and the maximum monthly unadjusted retirement pension is $960.00 The maximum annual contribution for employees in 2011 is $2,217.60 The comparison of the net present value (NPV) of future benefits is not provided, as: The YMPE is indexed annually according to average wage growth. The future YMPE and the maximum CPP retirement pension in the year the pension starts would be taken into consideration while calculating an individual�s pension; therefore, the actual pensions will be of higher dollar value than indicated in the examples provided here. Therefore, constant 2011 dollars are a good proxy of the NPV of future benefits.

48. Annex Calculation Tables

49. Calculating CPP Retirement Pension In 2011, contributions are paid on earnings between $3,500, the Year�s Basic Exemption (YBE), and $48,300, the Year�s Maximum Pensionable Earnings (YMPE). Assuming a contributor, aged 65, began contributing to the CPP at its inception in 1966 and is retiring sometime in 2010. Step 1 Determine average YMPE over last five years, including year of retirement. Add the YMPE for the year 2011 and each YMPE for the four previous years, then divide by five: $48,300 + $47,200 + $46,300 + $44,900 + $43,700 = $230,400 $230,400 / 5 = $46,080 The five-year average of the YMPE is called MPEA (Maximum Pensionable Earnings Average) and for the year 2011 is $46,080. Step 2 Convert the earnings for each year since 1966 into 2010 dollars. Suppose the person had earnings of $5,200 in 1978. The YMPE in that year was $10,400. To convert the earnings to 2010 dollars, you look at the relationship of the amounts: $5,200 is to $10,400 As X is to MPEA (that is $46,080) So $5,200 in 1978 dollars is the same as $23,040 in 2011 dollars. Repeat this calculation for each year in the contributory period in which contributions were made from 1966 to 2011. FOR ILLUSTRATION PUPOSES OTHER CONSIDERATIONS This is the simplest example of how to calculate a CPP retirement pension. The calculation would be more complex if it included variables such as the child rearing provision, disability benefits, credit splitting, survivor benefits, or provisions for early or late retirement. One thing to remember: for the sake of simplification, we�re talking in terms of years, however, the actual CPP calculation is performed on a monthly basis (annual income is divided equally into months) � for the purposes of CPP calculation, each month remaining in the contributory period has exactly the same weight in the final calculation of the pension. FOR ILLUSTRATION PUPOSES OTHER CONSIDERATIONS This is the simplest example of how to calculate a CPP retirement pension. The calculation would be more complex if it included variables such as the child rearing provision, disability benefits, credit splitting, survivor benefits, or provisions for early or late retirement. One thing to remember: for the sake of simplification, we�re talking in terms of years, however, the actual CPP calculation is performed on a monthly basis (annual income is divided equally into months) � for the purposes of CPP calculation, each month remaining in the contributory period has exactly the same weight in the final calculation of the pension.

50. Calculating CPP Retirement Pension (cont.) Step 3 Once all the earnings are in 2011 dollars, identify and eliminate from the calculation of the pension the 15 percent of the years with low or no earnings (e.g. due to periods of education, unemployment, etc.). In this example, approximately 7 of the 45 years in the contributory period are eliminated. Step 4 Add the earnings (in 2011 dollars) for each of the remaining 38 years, and divide the total by 38. The result is the yearly average pensionable earnings in 2011 dollars. Step 5 Multiply the yearly average pensionable earnings by 0.25 (the CPP pension replaces up to 25 percent of the average industrial wage). For the monthly pension payment, divide the product by 12. If the contributor�s average pensionable earnings were $37,600, the contributor�s monthly pension would be calculated as follows: $37,600 X 0.25 = $9,400 per year $9,400 / 12 = $783.33 per month. For previous YMPE�s, refer to the document entitled, The CPP and OAS Stats Book, Table # 16 by visiting the following website: http://www.hrsdc.gc.ca/eng/isp/statistics/pdf/statbook.pdf OTHER CONSIDERATIONS This is the simplest example of how to calculate a CPP retirement pension. The calculation would be more complex if it included variables such as the child rearing provision, disability benefits, credit splitting, survivor benefits, or provisions for early or late retirement. It is important to recognize that for the CPP calculation, each year has exactly the same weight in the final calculation of the pension. For previous YMPE�s, refer to the document entitled, The CPP and OAS Stats Book, Table # 16 by visiting the following website: http://www.hrsdc.gc.ca/eng/isp/statistics/pdf/statbook.pdf OTHER CONSIDERATIONS This is the simplest example of how to calculate a CPP retirement pension. The calculation would be more complex if it included variables such as the child rearing provision, disability benefits, credit splitting, survivor benefits, or provisions for early or late retirement. It is important to recognize that for the CPP calculation, each year has exactly the same weight in the final calculation of the pension.

51. Calculating new Post-Retirement Benefit (PRB) The new benefit maximum amount is equal to 1/40th of the maximum CPP retirement pension for the year in pay. Thus, someone with earnings of half of YMPE would receive a PRB of one half of 1/40th of maximum pension. Each year�s PRB is considered its own �new� benefit, and is subject to the actuarial adjustment based on the recipient�s age on January 1 of the year following the year in which contributions were made. The formula for calculating a (monthly) PRB based on earnings in 2012 is: [PE(2012)/YMPE(2012)] x 1/40 x 25% x MPEA(2013) x AAF(1-Jan-2013) /12, where: PE = Pensionable Earnings YMPE = Year�s Maximum Pensionable Earnings MPEA = Maximum Pensionable Earnings Average (25% of this amount is maximum pension for the year) AAF = Actuarial Adjustment factor at age on 1 January 2013. The formula for PRB in this slide reflects calculations for the benefit earned in 2012 and paid in 2013.The formula for PRB in this slide reflects calculations for the benefit earned in 2012 and paid in 2013.

52. PRB Calculation Example Consider the case of Mr. Lee, who took up his retirement pension at age 60 in 2007, and had $50,000 of earnings in 2012. The formula for calculating Mr. Lee�s new monthly (2013) PRB is as follows: [(A/B) � C � D � E] / 12 = $28.02/month Where: A= Pensionable Earnings (2012) = $49,600 (Can�t exceed YMPE) B=YMPE (2012) = $49,600 (Projection from 24th Actuarial Report on the CPP) C= 0.00625 (1/40 x 25%) D= MPEA (2013) = $48,380 (Projection from 24th Actuarial Report on the CPP) E= Actuarial Adjustment Factor = 1.112 Mr. Lee is 66.25 on 1 January 2013, subject to 16 months of adjustment 16 x 0.007 = 0.112 1 + 0.112 = 1.112 Adding those values to the formula: [($49,600/$49,600) x 0.00625 x $48,380 x 1.112]/12 = $28.02/month

53. Pension calculation table for 2010 (adjustment factors: -0.5% per month before 65, +0.5% per month after 65)

54. Pension calculation table for 2011 (adjustment factors : -0.5% per month before 65 [notice period], +0.57% per month after 65)

55. Pension calculation table for 2012 (adjustment factors: -0.52% per month before 65, +0.64% per month after 65)

56. Pension calculation table for 2013 (adjustment factors: -0.54% per month before 65, +0.7% per month after 65)

57. Pension calculation table for 2014 (adjustment factors: -0.56% per month before 65, +0.7% per month after 65)

58. Pension calculation table for 2015 (adjustment factors: -0.58% per month before 65, +0.7% per month after 65)

59. Pension calculation table for 2016 (adjustment factors: -0.6% per month before 65, +0.7% per month after 65)