In order to provide MAUT members with a better understanding of the sometime complex aspects of our pension and benefit plans, we have decided to initiate a series of articles about relevant financial matters and benefits issues.
Impact of turning 65 on your University Pension Plan
March 16, 2016
Members in Part A of the McGill University Pension Plan (MUPP)
The focus will be on those MAUT members who are in Part A of the McGill University Pension Plan (MUPP); Plan A is a hybrid plan that applies to all members enrolled prior to 2009. This involves a crystallization calculation that happens automatically when the member turns 65, which will be elaborated below. Those who joined the plan after 2009 are in Part B of the plan. This is not a hybrid plan as in Part A; rather Part B is a defined contribution plan and does not involve any crystallization at 65.
The crystallization calculation that happens when a member in Part A of the plan turns 65 is to determine whether the amount accrued in the members MUPP account is equivalent to the defined benefit minimum (DBM). The calculation of the DBM, which can be found on Page 8 of the 2016 Pension Plan Brochure – Hybrid (Part A) found on the Pension Webpage under Brochures. The calculation incorporates the numbers of years the member has been employed at McGill and the five best salary years. The crystallization involves a separate calculation to determine how much money the member would require to purchase an annuity on the open market to pay for their DBM (see Page 9 of the Brochure). The difference between the amount required and the amount accrued represents the crystallization amount. For the past several years, and probably for several more years to come, the amount of money required to purchase an annuity paying your DBM is significantly greater than the actual value of your account at age 65. Thus, at crystallization time, the university makes up the difference between those two amounts as a "top-up" to your MUPP account. Receiving the top-up is of course very nice, but you should be aware that the Canada Revenue Agency (CRA) places limits on the amount of such top-ups that can be considered tax-free and be added to your pension account. Recent experience is that the top-up payment can exceed this CRA maximum. In this case the university deposits the CRA maximum in your MUPP account and writes you a cheque for the remainder. That remainder, that you receive as a cash payment is considered taxable income. Depending on your particular situation this can be a significant amount (we have heard of tax "bites" upwards of $10,000).
Note that after crystallization at age 65 you are not obliged to remove your money from the MUPP. You do not have to purchase an annuity with the top-up. Although the calculation of the top-up amount is driven by annuity-related factors, in fact the top-up is simply an amount of money added to your MUPP account.
Although you may leave your money in the MUPP after age 65, it no longer remains business as usual. In fact, when you crystallize at age 65 the University ceases making contributions directly into your account as it had been making throughout your career. Furthermore, employee contributions will not be deducted automatically from your paycheque at source, but can continue upon your request. However, crystallization does not mean you have retired! These are entirely independent events. One happens at age 65, the other may happen at any age.
If you do not retire at 65, but continue working, the university will contribute to a Supplemental Notional Account (SNA) and will continue doing so until you reach age 69. If crystallization top-ups become unnecessary due to improved fund performance in the future, the SNA would translate directly into actual money for you, but if you receive a substantial crystallization top-up at age 65, it is likely that the SNA would not provide additional money. We will discuss the Supplemental Notional Account in a future MAUT Newsletter. Also, important changes to your employee benefits occur at age 65 and then at 71, which will be reviewed in later newsletters.
Ken Hastings
MAUT VP Finance 2015-2016
Alenoush Saroyan
MAUT VP Internal 2015-2016
Al Shrier
MAUT VP Communications 2015-2016
