OASOASRetirementRetirement

and Pensionand PensionFundFund

AssociationAssociationof Retireesof Retireesof the OASof the OAS

(AROAS)(AROAS)

Department of Department of HumanHuman

ResourcesResourcesof the OASof the OAS

OAS Staff OAS Staff AssociationAssociation

OAS StaffOAS StaffFederalFederalCredit UnionCredit Union

Association of Association of Pensioners of Pensioners of the OAS the OAS Retirement and Retirement and Pension Fund Pension Fund (ASPEN)(ASPEN)

PRE-RETIREMENT LECTURE

SERIES

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Pre-Retirement Lecture Series:I. Retirement Benefit Options

Presents:

OAS Retirement and Pension Fund

and Association of Pensioners of the OAS Retirement and Pension Fund

November 9, 2006

Washington, DC

For participantsclose to retirement

Retirement

¿Benefits?¿Beneficiarie

s?

¿Administration?

¿Life style?

Future Retiree

80% - 100%of net income for a similar life style

RetirementSeparation5 yearsbefore

retirement

10 yearsbefore

retirement

Formulate some financial planning

AdjustmentMore serious planning

Medical examinationAssessment of retirement optionsAccumulation

PeriodDistribution

Period

Chronology:

*To facilitate the lecture, throughout this presentation masculine and feminine terms will be alternated

Considerations

Only the future retiree knows what is the best for him* and her beneficiaries (if there are beneficiaries)

After retirement, the retiree will need a periodic source of income to sustain her during the rest of her life

Considerations (continued)

Assets Desired life style Civil status Spouse retirement benefits (if she has...) Health (own and beneficiaries) Knowledge and will to manage assets Family expectations Be realistic with the assessment of the

situation Feel comfortable with the final decision

taken

Retirement benefits have theRetirement benefits have theobjective to provide for a safe andobjective to provide for a safe andreliable source of income for the reliable source of income for the remainder of the retiree life andremainder of the retiree life andthat of his beneficiaries, whenthat of his beneficiaries, when

applicableapplicable

Starting point

The retiree must compare the available financial resources under the different retirement options with the desired life style after retirement

Be open minded to carry out this process

Assessment of the participant situation

>=<

Obtain the most complete possible image of your situation and that of your beneficiaries. Consult your:

Personal situation (and family situation):

LawyerFinancial analyst

Accountant Doctor

Retirement Benefits

Retirement Benefits:

The participant must perform a very careful analysis of the different benefit options for her retirement

Be careful, avoid external influences (even good natured ones). It is YOUR retirement. And each case is different!!

R&P Fund Retirement Options

Payment of a Payment of a cash lump sumcash lump sum

DBDB

DCDC

A pension A pension determined by determined by

a Defined a Defined Benefit FormulaBenefit Formula

An annuity An annuity acquired with acquired with

the funds in the the funds in the participant’s participant’s

accountaccount

Participantretiring or separating

Participantretiring or separating

The proportion the participant can take in cash depends on the elected scheme.

If the participant decides to acquire an annuity, the annuity must respect certain minimums.

R&P Fund Retirement Options:

A pension A pension determined by determined by

a Defined a Defined Benefit FormulaBenefit Formula

ParticipantRetiring or separating

ParticipantRetiring or separating

A participant that had a low income level, may opt to take an alternative minimum pension, if that is better for him. This benefit can be divided in up to 1/3 in cash and 2/3 in a pension

An alternative An alternative minimum minimum pension pension

determined by determined by the the

participant’s participant’s basic salarybasic salary

Alternative Alternative minimum minimum pension pension

reduced in reduced in proportion proportion to the cash to the cash

takentaken

Up to Up to 1/3 in 1/3 in cashcash

Eligibility to take annuity or pension

15 years or 15 years or more of more of

participatioparticipation in the Plann in the Plan

55 years 55 years or more or more of ageof age

Participant qualifies for Pension or

Annuity

Less than 15 years of participatio

n

Less than 55 years of

age

Participant receives

benefit in cash

What happens if you DO NOT qualify for Pension or Annuity?

Separation

If the employee participation is less than 7 years, her account will be liquidated as per the vesting scale.

Separation is not considered retirement.

Participation < 7 years

If the participation is between 7 and 15 years or if the age is less than 55 years (but the participants has more than 7 years of participation), his account will be liquidated with 100% of the vesting. However, this participant cannot retire because he does not comply with the minimum retirement requirements.

Participation < 15 years

Age < 55 years

o

If the participant DOES qualify for Pension or Annuity there are

several options

Pension through the 2% Formula (Defined Benefit)

Benefits

Participation ≥ 15 yearsAge = 65 years

Compulsory Retirement

No actuarial reduction

Age + Participation ≥ 85

Participation ≥ 15 years65 > Age ≥ 55 years

Voluntary RetirementNo actuarial reduction

Age + Participation < 85

Participation ≥ 15 years65 > Age ≥ 55 years

Early RetirementActuarial reduction

Defined Benefit: depending on the situation it can be pension, cash or

combination

Retirement benefits begin at age 65

Participation ≥ 15 years65 > Age ≥ 55 years

Deferred Retirement

No actuarial reduction

Age: End of participation

Retirement Age

Retirement Age

Retirement Age

Retirement Age = 65 years

Benefits Defined Benefit: depending on the situation it can be pension, cash or

combination

No. of years of

Participation in the Plan

Average Pensionable

Remuneration (best 3 of last 5 years)

Annual Pension

Actuarial Tables

Life actuarial value of a pension

2/3 or more dedicated to a pension

Up to 1/3 can be taken in cash

Defined Benefit Formula

Age

Actuarial Reduction?

BenefitsDefined Benefit: Computation of a Pension under the 2% Formula

It is a life pension with automatic spouse survivorship benefit (50%)

Based on number of years of participation Considers the Average Pensionable Remuneration

(ξ) during the best 36 consecutive months within the last 5 years of participation

It is 2% of ξ times the number of years of participation up to a maximum of 30 years. If employee participated more than 30 years, adds 1⅔% of ξ for each additional year during the next 10, up to a total of 40 years (years 31 to 40)

A participant with 40 or more years of participation will receive a maximum pension of 76.67% of ξ

Benefits Defined Benefit: Example of

computation of pension under the 2% Formula

year 31 year 32 year 33 year 34 year 353500 3600 3900 4200 38003500 3600 3900 4200 38003500 3600 3900 4200 38003500 3600 3900 4200 38003500 3600 3900 4200 38003500 3600 3900 4200 38003600 3900 4000 4200 35003600 3900 4000 4200 35003600 3900 4000 4200 35003600 3900 4000 4200 35003600 3900 4000 4200 35003600 3900 4000 4200 3500

ξ = (3900*12+4000*6+4200*12+3800*6)/36 = 4000

Pension = 4000*0.02*30 + 4000*0.0166667*5 = 2733.33

Actuarial reduction factors will be applied in case of age below 65 or non compliance with rule of 85

Annuity (Defined Contribution)

BenefitsDefined Contribution: depending on the

situation it can be pension, cash or combination

Can betaken part inan Annuity,part in Cash

Can be totally dedicated to acquire an

annuity

Can be taken as a cash lump sum

Funds in Participant’s

Account

Acquisition is offered to participants that entered the Plan before January 1st, 1982 and under certain conditions to participants that entered the Plan after that date

Benefits Defined Contribution:

Determination of Annuity

Funds taken in Cash

Funds in Participant’s

Account

Level of Spouse’s

protection (0, 50, 100%)

Actuarial Tables

Spouse’s Age (if married)

Participant’s Age

Funds to acquire Annuity

Annuity

These are Life Annuities adjusted by Cost of Living

BenefitsDefined Contribution: Example of

Annuity Determination

Cash: $400,000

Funds: $1,000,000

Level of Protection:

50%

Actuarial Factor: 14.159

Spouse’s Age:65 Female

Participant’s Age: 65 Male

For Annuity: $600,000

Annuity*:$42,376 per

year

$3,531 per month

These are Life Annuities adjusted by Cost of Living

*The value of the annuity at the OAS Retirement and Pension Fund is obtained using the actuarial factors in force as of November 9, 2006

BenefitsDefined Contribution: Acquisition

of Annuity

The Office of the Retirement and Pension Fund will calculate if this option is better than taking a pension through the 2% formula

Generally, this option will be more convenient for participants that: Are not married (do not have to set aside funds

for protection of spouse) Whose accounts are larger than the actuarial

value of the pensions calculated through the 2% formula

Whose spouses have a good pension This option can combine cash distribution

Advantages shared by Pensions and Annuities

BenefitsPensions and Annuities: Pros,

cons and considerations

Legal protection

Life pensions and life annuities

No worries!on financial and market risks

Cost of living adjustments

Premature death

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nd

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Priority claim

Representation in the Committee

Provides diversification

Cash Lump Sum

It is a unique payment in cashIt is a unique payment in cashFor the amount on the accountFor the amount on the account

Of the future retiree at theOf the future retiree at theMoment of retirement.Moment of retirement.

All these decisions are irreversibleAll these decisions are irreversible

Cash Lump Sum

Benefits Cash Lump Sum: Considerations

Once retired, the retiree will have to invest her assets to generate income

The retiree will have to make this option as comparable as possible to a pension or annuity: Identify investment instruments that provide a level of

safety as close as possible to security of a pension Identify the kind of asset diversification that will provide the

same level of income as a pension (beware of risks!)

The retiree has to design an investment policy that allows for capital preservation and provides an adequate return for the risk taken

The retiree should consider his beneficiaries: Capital should last enough to provide benefits for

beneficiaries (ex. as the survivorship protection of a pension)

BenefitsCash Lump Sum: Pros, cons and

considerations

Premature death

Legacy to family (even before death)

Make a large investment (second home)

Pay debts (including mortgage)

No legal protection

Possible lost of initial capital

Financial and market risks

Long life without resources

Spouse’s retirement benefits

Health of retiree and spouse

Knowledge, will and character to manage assets

Combination of Annuity or Pension and Cash Distribution

Combination of annuity/pension & cash

Hybrid option combining the advantages of previous options

Provides safe base of monthly income through a reduced pension or annuity

Provides the possibility to make a major expense: Pay out a mortgage Buy a second house Leave a legacy to children or other beneficiaries

Pension or annuity received in this way will be reduced proportionally according to the cash taken

Comparing benefits offered by the Fund and those obtained in

the market

Financial comparison

Compare income with responsibilities to be covered

Discriminate between the cost of living and the desired life style.

Comparison between the Fund’s annuity and that purchased

from an external bank

Annuities, R&P Fund vs. Banks

The following text was extracted from an article that appeared on October 31, 2006 in the Business section of the Washington Post, by Allan Sloan and entitled: Cost-of-Living Increases Don’t Come Cheap,

“…Vanguard and AIG,…last year began offering lifetime income protection annuities that let you buy an inflation adjustment similar to Social Security’s…” “…Here’s a for-instance. Take $100,000. Seems like a lot. But if you’re a single male born in 1941 … it will produce only $703 of lifetime monthly income from Vanguard/AIG. Buy the inflation-adjusted version, and you get only $501 to start”

Annuities, R&P Fund vs. Banks (continued)

“…Here’s a for-instance. Take $100,000. Seems like a lot. But if you’re a single male born in 1941 … it will produce only $703 of lifetime monthly income from Vanguard/AIG. Buy the inflation-adjusted version, and you get only $501 to start”

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Comparing an Annuity at the Fund and Investing in the

Market

Scenario: Man 65 years old, Wife 65 years oldInvesting $1,000,000 to purchase annuity with 100% survivorshipActuarial factor: 15.985 Color code:Inflation: 3.00% No more funds available

COLA: 3.50% Funds available are below $1,000,000

Management Fee: 100bps Funds available are below the future value of $1,000,000

Annualized return during the last 10 years Funds available are above the future value of $1,000,000

Tbills 3months 3.57% Future value of Fund's accumulated annuity below the future value of $1,000,000

LB Aggregate Index 6.22% Future value of Fund's accumulated annuity above the future value of $1,000,000

LB Long Term Index 7.57%Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5 Future Value of Future Value of

Inviests $1,000,000 Invests $1,000,000 Invests $1,000,000 Invests $1,000,000 Invests $1,000,000 $1,000,000 AccumulatedAnnuity Accumulated at 3.57% at 5% at 6.22% at 7.57% at 9% assuming 3% Annuity of the

Year Age Value per year Annuity Same Annuity Same Annuity Same Annuity Same Annuity Same Annuity annual inflation Fund1 65 $62,558.65 $62,558.65 $963,141.35 $977,441.35 $989,641.35 $1,003,141.35 $1,017,441.35 $1,000,000.00 $62,558.652 66 $64,748.20 $127,306.85 $923,145.88 $951,790.80 $976,552.43 $1,004,299.54 $1,034,088.46 $1,030,000.00 $129,183.613 67 $67,014.39 $194,321.24 $879,856.34 $922,848.05 $960,514.08 $1,003,267.63 $1,049,801.15 $1,060,900.00 $200,073.514 68 $69,359.89 $263,681.13 $833,108.76 $890,402.08 $941,293.02 $999,822.42 $1,064,425.35 $1,092,727.00 $275,435.605 69 $71,787.49 $335,468.62 $782,732.17 $854,230.67 $918,641.03 $993,723.26 $1,077,791.89 $1,125,508.81 $355,486.166 70 $74,300.05 $409,768.67 $728,548.33 $814,099.85 $892,294.04 $984,710.83 $1,089,715.19 $1,159,274.07 $440,450.807 71 $76,900.55 $486,669.22 $670,371.47 $769,763.29 $861,971.23 $972,505.78 $1,099,991.85 $1,194,052.30 $530,564.878 72 $79,592.07 $566,261.29 $608,007.95 $720,961.75 $827,374.06 $956,807.34 $1,108,399.12 $1,229,873.87 $626,073.899 73 $82,377.79 $648,639.09 $541,255.96 $667,422.43 $788,185.19 $937,291.79 $1,114,693.26 $1,266,770.08 $727,233.90

10 74 $85,261.02 $733,900.10 $469,905.22 $608,858.31 $744,067.44 $913,610.84 $1,118,607.70 $1,304,773.18 $834,311.9311 75 $88,245.15 $822,145.26 $393,736.63 $544,967.49 $694,662.61 $885,389.92 $1,119,851.17 $1,343,916.38 $947,586.4412 76 $91,333.73 $913,478.99 $312,521.93 $475,432.45 $639,590.27 $852,226.31 $1,118,105.53 $1,384,233.87 $1,067,347.7713 77 $94,530.41 $1,008,009.40 $226,023.33 $399,919.34 $578,446.47 $813,687.16 $1,113,023.56 $1,425,760.89 $1,193,898.6214 78 $97,838.98 $1,105,848.38 $133,993.15 $318,077.13 $510,802.39 $769,307.43 $1,104,226.47 $1,468,533.71 $1,327,554.5515 79 $101,263.34 $1,207,111.72 $36,173.43 $229,536.88 $436,202.94 $718,587.59 $1,091,301.24 $1,512,589.72 $1,468,644.5316 80 $104,807.56 $1,311,919.28 -$67,704.47 $133,910.79 $354,165.17 $660,991.23 $1,073,797.78 $1,557,967.42 $1,617,511.4317 81 $108,475.82 $1,420,395.10 -$177,920.30 $30,791.40 $264,176.77 $595,942.53 $1,051,225.78 $1,604,706.44 $1,774,512.5918 82 $112,272.48 $1,532,667.58 -$294,765.33 -$80,249.42 $165,694.32 $522,823.48 $1,023,051.36 $1,652,847.63 $1,940,020.4519 83 $116,202.01 $1,648,869.60 -$418,542.81 -$199,661.41 $58,141.55 $440,970.97 $988,693.46 $1,702,433.06 $2,114,423.0820 84 $120,269.08 $1,769,138.68 -$549,568.44 -$327,916.95 -$59,092.55 $349,673.67 $947,519.85 $1,753,506.05 $2,298,124.8521 85 $124,478.50 $1,893,617.18 -$688,170.85 -$465,512.13 -$186,655.68 $248,168.73 $898,842.94 $1,806,111.23 $2,491,547.1022 86 $128,835.25 $2,022,452.43 -$834,692.10 -$612,967.87 -$325,234.36 $135,638.17 $841,915.12 $1,860,294.57 $2,695,128.7623 87 $133,344.48 $2,155,796.92 -$989,488.17 -$770,831.07 -$475,556.07 $11,205.11 $775,923.85 $1,916,103.41 $2,909,327.1124 88 $138,011.54 $2,293,808.46 -$1,152,929.55 -$939,675.85 -$638,391.64 -$126,070.25 $699,986.21 $1,973,586.51 $3,134,618.4625 89 $142,841.94 $2,436,650.40 -$1,325,401.79 -$1,120,104.83 -$814,557.63 -$277,195.01 $613,143.17 $2,032,794.11 $3,371,498.9626 90 $147,841.41 $2,584,491.82 -$1,507,306.03 -$1,312,750.43 -$1,004,918.95 -$443,248.14 $514,353.21 $2,093,777.93 $3,620,485.3427 91 $153,015.86 $2,737,507.68 -$1,699,059.65 -$1,518,276.31 -$1,210,391.58 -$625,385.40 $402,485.60 $2,156,591.27 $3,882,115.7728 92 $158,371.42 $2,895,879.10 -$1,901,096.90 -$1,737,378.78 -$1,431,945.44 -$824,844.64 $276,313.03 $2,221,289.01 $4,156,950.6629 93 $163,914.42 $3,059,793.51 -$2,113,869.51 -$1,970,788.35 -$1,670,607.41 -$1,042,951.35 $134,503.66 $2,287,927.68 $4,445,573.5930 94 $169,651.42 $3,229,444.93 -$2,337,847.38 -$2,219,271.31 -$1,927,464.54 -$1,281,124.68 -$24,387.47 $2,356,565.51 $4,748,592.2231 95 $175,589.22 $3,405,034.16 -$2,573,519.28 -$2,483,631.38 -$2,203,667.41 -$1,540,883.79 -$201,927.69 $2,427,262.47 $5,066,639.2132 96 $181,734.84 $3,586,769.00 -$2,821,393.57 -$2,764,711.48 -$2,500,433.69 -$1,823,854.70 -$399,816.75 $2,500,080.35 $5,400,373.2333 97 $188,095.56 $3,774,864.56 -$3,081,998.95 -$3,063,395.50 -$2,819,051.90 -$2,131,777.52 -$619,897.65 $2,575,082.76 $5,750,479.9934 98 $194,678.91 $3,969,543.47 -$3,355,885.23 -$3,380,610.23 -$3,160,885.31 -$2,466,514.21 -$864,168.37 $2,652,335.24 $6,117,673.3035 99 $201,492.67 $4,171,036.14 -$3,643,624.15 -$3,717,327.31 -$3,527,376.20 -$2,830,056.86 -$1,134,794.51 $2,731,905.30 $6,502,696.1736 100 $208,544.91 $4,379,581.06 -$3,945,810.20 -$4,074,565.32 -$3,920,050.15 -$3,224,536.51 -$1,434,122.99 $2,813,862.45 $6,906,321.97

each50%prob.surv.

one25%prob.surv.

No Financial Aspects

Health Legal aspects

Character Miscellaneous

Assessment of these aspects together with the financial ones and feeling comfortable with the

final decision can make a big difference

Questions and Comments?

Presentation of Experiences:By Manuel Metz and Pedro

Turina