By Stephen Eadie, Chair of the ICPP Management Board

The ICPP delivers greater lifetime retirement income to our members than they could receive within a typical Defined Contribution (DC) arrangement. This is accomplished, in part, by the use of a Variable Payment Life Annuity (VPLA). The ICPP has built its accumulation and decumulation strategy to best utilize a VPLA for its members.

First, the assets supporting the Variable Payment Lifetime Annuities (VPLA) under the ICPP are entirely invested in the ICPP Payout Fund. The ICPP Payout Fund invests approximately 50% of the assets in the stock market and 50% of the assets in universe bonds. This is a balanced mandate and was selected to reduce the short-term volatility of the underlying assets.

Second, the ICPP uses a Hurdle Annuity based on a 4% assumed investment rate of return. This means that pensions-in-pay increase when fund returns exceed 4% and decrease when fund returns fall short of 4%, all else being equal.

Third, the ICPP fund recognizes experience over a five-year period. This means that if experience in a year requires a 5% increase to pensions-in-pay (e.g. the fund earns 9% and everything else balances out), then we grant an additional 1% increase approximately this year, followed by additional 1% increases approximately each year over the next four years. This keeps the actual increases each year less volatile. Of course, the total increase granted January 1, 2022 will be based on one-fifth of the actual experience in 2017 through 2021.

Finally, the ICPP Management Board reviews the scheduled increase each year based on the Plan Actuary’s advice and may delay an increase if it is advisable. For example, if the current scheduled increases are 4% this year, followed by 2% each year for the next three years, and followed by a decrease of 2% in the fifth year, then the Management Board may elect to pay a 2% increase this year in order to eliminate the scheduled decrease five years from now.

All of the above was designed to reduce the chance that a pension-in-pay under the ICPP will need to be reduced and a retiree experiences gradual changes in their annual pension.

How safe is my pension?

I am a member of the ICPP Management Board. I am also just about retirement age. The ICPP Administrator did up some calculations using my personal circumstances.

I have saved $500,000 that I can use to provide retirement income at September 30, 2021 under the ICPP. My pension will be approximately $2,586 per month under the ICPP.  Further, it is currently scheduled to increase five times, with the first increase on January 1, 2022 and the fifth increase on January 1, 2026. On January 1, 2026, my pension is scheduled to be $2,892 per month, which is about 12% higher than at September 30, 2021 based on the actual scheduled increases.  (The figures presented are representative for a new pensioner at September 30, 2021, the ICPP Administrator provides actual quotations for any new pensioner).

The ICPP Administrator built a model, using investment return data since January 1, 1950, to estimate the probability of this member’s ICPP pension declining at any point over the next five years. Remember, the ICPP Payout Fund must earn at least 4% each year for the already scheduled adjustments not to be lowered. How likely is that?

The model indicates that there is only a 1 in 200 chance that my pension will be below the current level (i.e. $2,586) at any time during the next five years. Even more, in the very unlikely scenario that the pension declines at all, the average decline would be to $2,550 per month. Not a material decrease. For the next five years my pension is safe. I will go ahead and set my budgets using the current pension as a guide.

More enlightening, the model also indicates that the average annual increase over the next five years is greater than 2.6% per annum 19 times out of 20. That is my pension is projected, on a statistically significant basis, to be at least $2,940 per month on January 1, 2026 – a 14% increase over current levels. 

The investment markets must be worse, over the next five years, than they have ever been since 1950 for me to have a materially lower pension-in-pay than my current pension-in-pay on January 1, 2026, and I expect my pension to be higher.

I can also expect that my pension 20 years from now will be greater, much greater, than the current $2,586. In fact, if the ICPP Payout Fund earns 6.0% over the next 20 years my monthly pension will increase to approximately $3,850. It is very, very likely that the ICPP Payout Fund will earn 6.0% per annum or more over the next 20 years given the current investment policies and procedures for the fund.

Wouldn’t I be better off with an insured annuity?

The ICPP Administrator estimates I could receive an insured annuity of $2,586 per month. This insured pension, however, will not change.  The administrator’s estimate is rather aggressive and it is entirely possible that the actual insured annuity for me will be as much as $250 per month lower.

Thus I can have $2,586 per month insured now on a best case scenario or $2,586 per month starting now from the ICPP. 

I am overwhelmingly expected to receive at least $2,586 under the ICPP over the next five years based on the administrator’s modelling but am expected to receive higher pensions beginning January 1, 2022.  In fact, currently scheduled increases will result in a pension-in-pay for me of $2,896 on January 1, 2026.

I am also overwhelmingly expected to have a pension of at least $2,586 per month on January 1, 2042 but the expected pension is much, much higher.  If the pension is $3,850 per month on January 1, 2042 as indicated above, then I will have received about $150,000 in extra payments from the ICPP as compared to the potential insured annuity over the period from now to January 1, 2042.   

In conclusion, I would not buy an insured annuity for myself in today’s environment.  If I become a new pensioner under the ICPP, I will also budget, for now, assuming that my monthly ICPP pension will be at least its current amount over the next five years. The ICPP Administrator repeats this analysis annually.