The current regulatory environment in Canada makes it difficult, if not impossible, to provide cost effective pension solutions for small employers and the self-employed. Likewise, large employers are increasingly reluctant to sponsor complicated retirement solutions. The ICPP offers access to a good pension plan to those who are otherwise shut out of affordable, reliable pensions.
Given that the ICPP is a Collective Defined Contribution plan, a Participating Employer does not “own the pension plan directly”. The Participating Employer accounts for the pension plan by recording its contributions to the ICPP as a pension expense only. This means there are no corporate balance sheet implications. In other words, the ICPP removes the fiduciary, governance and administrative burden from the plan sponsor. The ICPP management board oversees and governs the plan. Participating employers do not have to report to regulators. The plan administrator completes all reporting.
ICPP Members focus on their retirement lifestyle choices (their personal benefit targets) and not on the investment process that supports these targets. This is a paradigm shift from traditional defined contribution pension plan approaches that require Members to focus on individual investment decision making. The ICPP is designed with several targeted benefit payout options that can be used to meet all of our Members' potential needs. Members select their retirement targets and then we help them determine the realistic contributions needed to support those targets.
Individual Lifestyle Maintenance Benefit: The Individual Lifestyle Maintenance Benefit is the primary benefit offered under the ICPP. It is designed to meet Canadians’ basic needs in retirement, when combined with their Old Age Security (OAS) and Canada Pension Plan (CPP). This benefit is intended to provide inflation protected payments during the Member’s, and the Member’s Spouse’s, entire lifetime. The Individual Lifestyle Maintenance Benefit is provided through an uninsured variable annuity. You will be asked to establish a targeted amount for your Individual Lifestyle Maintenance Benefit.
Extra Lifetime Income Benefit: The Extra Lifetime Income Benefit allows a Member, typically a high income Member, to target an additional fully insured pension payable for the Member’s, and the Member’s Spouse’s, lifetime. This benefit is completely discretionary and payable once your targeted Individual Lifestyle Maintenance Benefit is fully funded.
Minimum Taxable Benefit: The Minimum Taxable Benefit is the final benefit payable under the ICPP. It is designed to ensure that the total benefit paid to a Member each year respects the Income Tax Act requirements. This benefit is provided through any remaining funds after the targeted Individual Lifestyle Maintenance Benefit and the targeted Extra Lifetime Income Benefit are fully funded.
Traditional insured annuities are priced to produce profit and reflect sub-optimal investments required by insurance regulation. Through more appropriate investments, the ICPP’s Variable Payment Life Annuity (VPLA) provides higher expected payouts. It also guarantees Members receive payments from the plan for their lifetime with expected increases in line with inflation. The payment is a pension that is not required to be managed by an individual member into old age.
The ICPP clearly distinguishes between assets that are supporting benefits that are payable later and assets that are supporting benefits that are payable now. There is an Accumulation Fund for assets supporting benefits payable later, an automatic transition process for assets being transitioned from the Accumulation Fund into a Payout Fund, and a number of Payout Funds to support the various targeted benefits under the ICPP when they are in “payout” mode.
Each fund has its own investment policy and its assets are managed separately from all of the other funds’ assets. The Accumulation Fund’s assets are invested differently than any Payout Funds’ assets. A member does not have to manage the transfer of assets between the various funds: this happens automatically based on the Member’s individual retirement targets as the member approaches retirement.
Assets are held entirely in the Accumulation Fund until the member is within ten years of his anticipated first payout date. At that point the transition begins. The transition is completed when the assets are first needed to pay for the member’s targeted benefit.
All a member has to do is prioritize his targeted benefits, establish his contribution rate and select his first payout date(s). All investments and transitions will then be automatic under the ICPP. Members are not asked to make investment choices. There is a single pooled investment fund for all members. Member’s may change their contributions or targets at any time.
The investment goal is to maximize the pension plan member’s utility. We will therefore invest in the asset class that is expected to provide the best risk adjusted return for any potential benefit target. For example, the Accumulation Fund is invested in equities only given its long-term investment horizon (i.e. longer than ten years).
Careful consideration of the investment structures and administration of the ICPP, together with the collective nature of pooling, result in significantly lower overall fees for the ICPP compared with typical fees for small to medium sized DC arrangements currently offered in the marketplace. The fees are similar or better than fees charged to large defined benefit or target benefit pension plans in Canada.
Simply put, the ICPP achieves greater efficiency and effectiveness than current retirement savings solutions offered in the private sector. The result is more money available to pay for Member benefits.