SERP Pension Comparison Worksheet

The attached worksheet is intended to serve as a tool for the members who have received letters from CLA in respect of their entitlement from the Supplementary Pension Plan.  This note provides the necessary instructions for the use of the spreadsheet.

1. The Nature of Communication Received from CLA

All terminated members who had not yet started their pensions and were entitled to some benefits under the CLA Supplementary Pension Plan, have been advised that the supplementary plan will be wound up for such individuals.  While most of these individuals would not have reached the earliest age at which the pension could commence (i.e. age 55), there would be some who were over age 55 and had not yet commenced their pension.  These individuals have been advised as follows:

· A lump sum representing the benefit derived from the supplementary pension plan.  In calculating this amount, the CLA is understood to have made the calculations at an optimum age.  Further, in commuting the benefit to the present date, the discount rate of interest is understood to have allowed for the fact that the commuted value will grow at an after-tax interest rate.

· The pension from the registered pension plan.  The pensions payable at all ages from 55 (or from the present age – for those over 55) to 65 are shown.  In addition, the table also shows the total pensions (from the registered and supplementary plans) that would have been payable at the same ages.

2. Nature of Testing done by the Spreadsheet

The following approach is used for determining the age at which the member could consider to commence the pension from the registered plan:

· The member is assumed to have commenced the pension from the registered plan at different ages from 55 (or the next integral age, if over 55) to 65.  The financial implications of such commencement of pensions are quantified at all subsequent ages (up to age 65).

· Assume that the pension from the registered plan commences at age 55.  The starting monthly pension will be as shown in the table in the CLA letter.  This pension, which will be fully taxed as income, will increase with indexation.

· Assume that a comparison is to be made at age 62.  The initial commuted value of the SERP benefit (less tax) and the net pension payments that would have been made from ages 55 to 62 would have been accumulated at a rate of interest net of tax; providing a fund from which an annuity could be purchased.

· The table included in the CLA letter would have shown the total pension (registered plus supplementary) the member would have received from age 62.  The excess of this pension over the indexed pension payable from the registered plan would be indicative of the loss of income that is to be funded from the accumulated fund.

· The cost of the annuity that will replenish the above loss would be deducted from the fund on hand.  In making this calculation, the annuity rates for non-registered funds are used.  Also the difference in taxation basis is reflected – while the pension loss would have been taxed in full as income, the annuity would be taxed on the interest component only.  In other words, the replacement of income loss is made on after-tax basis.

· Any amount left after the purchase of the annuity represents the “profit” generated by starting the pension at age 55 and buying the annuity for the balance at age 62.  For the sake of a common reference point, this profit is accumulated to age 65 using the after-tax accumulation rate.

· The above calculation can be made at ages 56 to 65 (remember, the pension commencement date was 55).

· The above calculations can be done for pension commencement ages 56 through 65.  The matrix of “profits” generated by these computations would provide a guide for determining the optimum age for commencing the pension from the registered plan and for determining the age at which the annuity could be purchased to replace the pension loss.

3. Parameters used in the Calculations

The spreadsheet uses the following parameters (to be input by the member):

· The age at which the pension from the pension plan is to be commenced.

· The period of deferral from the effective date of the computation of the SERP commuted value to the date of commencement of pension.

· The amount of commuted value.

· Gross rate of interest at which the commuted value and the pension payments will be accumulated.

· Different tax rates – for commuted value, for pension payments from the early pension commencement age to the planned retirement age, for pension payments from the planned retirement age and for the accumulation interest rate.  Some of these rates may be the same.  The tax rate used for accumulation interest rate can reflect the different manners in which different investments are taxed.

· Annual rate of indexation for the registered plan pension.

4. Annuity Values Purchased from Non-Registered Funds

The annuity values for purchase from non-registered funds are based on the following assumptions (the member can input other values, if necessary):

· The annuity provided is a joint life and last survivor annuity (wife 3 years younger) on the life of a male member, with payments reducing to 60% on member’s death (no guarantee) with return of the single premium on death before the first payment.  The rates used in the spreadsheet apply to male members.  The annuity values for female members may be slightly higher.

· The factors for a monthly annuity of $1 are based on the rates obtained from Cannex.

· The taxable portions of the annuity are based on the following assumptions:

o 94 GAM Male mortality table, with females assumed to be males five years younger.

o Interest rate of 3.75% with pensions increasing at 3% per annum.

5. Caution in Using the Worksheet

It should be borne in mind that the above computations use a number of assumptions for the future.  The member should test the outcome on a variety of assumptions to get comparative numbers.  Once the member examines these numbers, it will be for the member to decide the future course of action.

December 1, 2005