Why DC is better for us

1. Why DC is better for us Andrey Pavlov Professor of Finance Beedie School of Business

2. Why Defined Contribution is Better for Us • Pays you (much) better at retirement • DC is tax efficient • If you leave you get all your money • DC is safe and secure even if the plan goes bust • It’s fair

3. Why DC is Better for Us • Pays you (much) better at retirement • DC is tax efficient • If you leave you get all your money • DC is safe and secure even if the plan goes bust • It’s fair

4. This 60/40 portfolio is simple, Requires no expertise to implement, Does not employ active mutual fund managers, Fees and expenses that are the same or lower than the BC College Plan. If you can pay your bills online you can set up this portfolio. Average annual return, including the financial crisis = 7.15% Portfolio value was below previous peak for 27 months

6. DC and DB Annual Pension (7% rate of return) • Contribute 20% of salary each year • Invest in the 60/40 portfolio • Use up all funds over 20 years • Contribute 20% of salary each year • Invest in the 60/40 portfolio • Use ONLY investment gains, do not touch the capital DB assumptions: 2% * highest average salary * pensionable service 5-year guarantee Retire at age 65 A switch to DB benefits only people who are 60 or older!!! Source: https://www.pensionsbc.ca/portal/page/portal/general_pension_estimator/cpp_general_estimator

7. DC and DB Annual Pension (5% rate of return) • Contribute 20% of salary each year • Invest in the 60/40 portfolio • Use up all funds over 20 years • Contribute 20% of salary each year • Invest in the 60/40 portfolio • Use ONLY investment gains, do not touch the capital DB assumptions: 2% * highest average salary * pensionable service 5-year guarantee Retire at age 65 A switch to DB benefits only people who are 55 and older!!! Source: https://www.pensionsbc.ca/portal/page/portal/general_pension_estimator/cpp_general_estimator

8. What about annuities • A common concern is that nobody has enough to buy a proper annuity • Annuities are some of the worst investments possible (Banks are booking huge profits because of these types of retail products) • If the BC College Plan were buying annuities (or using them to calculate solvency), they would be insolvent. • Sticking to a balanced diversified portfolio will almost certainly pay you better • Even if you start right before a financial crisis

9. Why DC is Better for Us • Pays you (much) better at retirement • DC is tax efficient • If you leave you get all your money • DC is safe and secure even if the plan goes bust • It’s fair

10. SFU plan is tax efficient • The contributions YOU make should go into • Spousal RRSP (this is golden) • TSFA (excellent) • You should let your spouse save • If he/she has lower income • If he/she is paid as a contractor • If you make over $170,000 • Much of your DB contributions are from AFTER-TAX dollars (as per Dominique Roelants’ presentation on the BC College Plan)

11. Why DC is Better for Us • Pays you (much) better at retirement • DC is tax efficient • If you leave you get all your money • DC is safe and secure even if the plan goes bust • It’s fair

12. If you leave (7% return) The actuarial value of your pension is next to nothing because it is so far in the future DB assumptions: Retirement pay based on 2% * highest average salary * pensionable service Start work at age 30, retire at age 65 Receive pension for 20 years No spouse 7% annualized rate of return

13. If you leave (5% return) The actuarial value of your pension is next to nothing because it is so far in the future DB assumptions: Retirement pay based on 2% * highest average salary * pensionable service Start work at age 30, retire at age 65 Receive pension for 20 years No spouse 5% annualized rate of return

14. Why DC is Better for Us • Pays you (much) better at retirement • DC is tax efficient • If you leave you get all your money • DC is safe and secure even if the plan goes bust • It’s fair

16. DB plans often default • Detroit (2014) • Orange County (1994) • Dominique Roelants(of BC College Plan) did not inspire confidence: • Mr. Roelants’ explanation for the compulsory nature of the BC College Plan was misleading • He overstated the impact of the 2008 financial crisis on a balanced and diversified portfolio • His comparison between our current plan and the BC College Plan at the end of his talk completely ignored the member contributions the College Plan requires

17. Why DC is Better for Us • Pays you (much) better at retirement • DC is tax efficient • If you leave you get all your money • DC is safe and secure even if the plan goes bust • DC is fair • DB takes from the young to subsidize the old • DB takes from everyone and pays the government • Because it is tax inefficient • DB magnifies the effects of any discrimination • DB benefits people who progress fast through the ranks and penalizes people who have relatively flat salary over their career

18. Appendix

19. DC and DB Annual Pension (7% rate of return) DB assumptions: 2% * highest average salary * pensionable service 5-year guarantee Retire at age 65 Source: https://www.pensionsbc.ca/portal/page/portal/general_pension_estimator/cpp_general_estimator

20. DC and DB Annual Pension (5% rate of return) DB assumptions: 2% * highest average salary * pensionable service 5-year guarantee Retire at age 65 Source: https://www.pensionsbc.ca/portal/page/portal/general_pension_estimator/cpp_general_estimator