Honda Canada Inc.
Presentation on theAssociates Pension Plan
March 2017
Steve Gendron, FCIA, Principal, Eckler Ltd.
Agenda
1
Bill C-27
CPP Enhancements
Associates Pension Formula and CPP
Access to Associates Pension Plan Assets
Competitive Position of Associates Pension Plan
Questions
Appendix Associates Pension Plan Actuarial Valuation Results
Agenda
2
Bill C-27
CPP Enhancements
Associates Pension Formula and CPP
Access to Associates Pension Plan Assets
Competitive Position of Associates Pension Plan
Questions
Appendix Associates Pension Plan Actuarial Valuation Results
Bill C-27
3
October 2016; Bill C-27, Amend the Pension Benefits Standards Act
“PBSA” is applicable to federally registered pension plans sponsored by federally
regulated organizations such as banks, marine/air/railway companies, phone and
cable companies, etc.
Not applicable to Honda Canada or the Associates Pension Plan
Key provisions of C-27:
1. Introduce legislation for “Target Benefit Plans” (TBP)
A TBP is a cross between a DB and a DC pension plan
TBPs introduce risk-sharing on behalf of the employees in that the target benefit pension
can be adjusted based on the plan’s funding status (i.e. accrued pensions can be reduced
if the plan’s assets are less than liabilities)
2. Plans may purchase immediate or deferred annuities from Canadian insurance
companies to fully settle the plan’s obligations
The Associates Pension Plan is a defined benefit plan registered in Ontario and cannot reduce accrued benefits. If the assets in the Associates plan are less than the liabilities, Honda is required by law to make additional contributions
Agenda
4
Bill C-27
CPP Enhancements
Associates Pension Formula and CPP
Access to Associates Pension Plan Assets
Competitive Position of Associates Pension Plan
Questions
Appendix Associates Pension Plan Actuarial Valuation Results
CPP Enhancements
5
Some facts about the Canada Pension Plan (CPP)
CPP started in 1966, with minor changes since
CPP is 100% financed by equal employee and employer contributions – it is not
funded by the federal or provincial government
Contributions required by all working Canadians between the ages of 18 and 65
Contributions have increased from an initial 3.6% of earnings to 9.9% today
The 9.9% contribution rate was put in place for the next 75 years
Contributions apply on earnings between $3,500 (YBE) and the Year’s Maximum
Pensionable Earnings or YMPE
In 2017 the YMPE is $55,300, so the 2017 maximum employee contribution is:
4.95% x [ $55,300 – $3,500 ] = $2,564
At 65, CPP provides a maximum pension equal to 25% x [average of the YMPEs
in the 5 years prior to retirement], or for 2017:
25% x [ $53,480 ] = $13,370
CPP Enhancements
6
CPP should form only part of your retirement income
Other sources of retirement income include:
Old Age Security
100% paid for by Federal government
Payable at age 65
Associates Pension Plan – DB or DC
Your DC contributions are tax deductible and interest is not taxable
Income is taxable when taken
Registered Retirement Savings Plan (RRSP)
Contributions are tax deductible and interest is not taxable
Income is taxable when taken
Tax Free Saving Account (TFSA)
Contributions are not tax deductible and interest is not taxable
Income is not taxable when taken
Non-registered savings
Contributions are not tax deductible and interest is taxable annually
Income is not taxable when taken
Government
Honda
Associate
CPP Enhancements
7
Why Enhance the CPP?
Federal government concerned that Canadians are not saving enough for
retirement
Canadians favoured expanding CPP vs. other options such as Ontario’s “ORPP”
What is changing?
Employee and employer contributions are increasing starting in 2019
Retirement pension will gradually increase over a 40-year period with pro-rated
enhancements for those that retire before 40 years of higher contributions
No changes for those currently retired and receiving CPP pension
Impact to Employer Sponsored Pension / Savings Plans?
All employers will face increased CPP contributions starting in 2019
Too early at this point to say whether employers will embrace the CPP
enhancements or offset their increased costs in some fashion
CPP Enhancements
8
What’s new: 3 Tiers of Employee Contributions:
Tier 1 (“Base Contributions”)
Current contribution rate of 4.95% of earnings between YBE and YMPE
No change from existing CPP
Tier 2 (“First Additional Contributions”)
Additional 1.0% of earnings between YBE and YMPE
Phased in gradually starting in 2019 over 7 years
0.15% in 2019, 0.3% in 2020, 0.5% in 2021, 0.75% in 2022 and 1.0% > 2023
Tier 3 (“Second Additional Contributions”)
Additional 4.0% of earnings between YMPE and new YAMPE
Starting in 2024
YAMPE will be 7% higher than YMPE in 2024 and 14% higher in 2025
Employer must match employee contribution rate
CPP Enhancements
9
Three Tiers of Employee CPP Contributions*
*This diagram shows the three tiers of employee CPP contribution rates that will be in effect, as well as the pensionable earnings to which the rates will apply. Honda will be required to contribute the same amount.
Three Tiers of Employee CPP Contributions*
CPP Enhancements
10
Impact on Employee Contributions in 2025 Associate A Associate B
Earnings in 2025 $50,000 $100,000
YBE $3,500 $3,500
Projected 2025 YMPE $72,500 $72,500
Projected 2025 YAMPE $82,700 $82,700
Tier 1: 4.95% x [ Earnings between YBE and YMPE ] $2,301 $3,415
Tier 2: 1.0% x [ Earnings between YBE and YMPE ] $465 $690
Tier 3: 4.0% x [ Earnings between YMPE and YAMPE] $0 $408
Total $2,766 $4,513
% increase in employee contributions 20.2% 32.2%
% increase in employer contributions 20.2% 32.2%
CPP replacement ratio at 65
35%
30%
25%
20%
15%
10%
5%
0%
20 40 60 20 40 60 20 40 60 20 40 60
Age in 2016
Note: Assumes all wor ker s star t contr ibut ing to the CPP at age 20.
Workers
earning
Workers
earning
Workers
earning
Workers
earning
$40,000 $60,000 $80,000 $100,000
in 2016 in 2016 in 2016 in 2016
Basic CPP
Enhanced CPP
Rat
e of
ea
rnin
gs r
epl
ace
d by
CP
P a
t 6
5
CPP Enhancements
11
Agenda
12
Bill C-27
CPP Enhancements
Associates Pension Formula and CPP
Access to Associates Pension Plan Assets
Competitive Position of Associates Pension Plan
Questions
Appendix Associates Pension Plan Actuarial Valuation Results
Associates Pension Formula & CPP
13
Associates Pension Plan lifetime pension formula:
[1.25% x Best 5-year average earnings up to 5-year average YMPE
plus
1.75% x Best 5-year average earnings over 5-year average YMPE ]
times
Service (to a maximum of 35 years)
Associates Plan does not reference the new YAMPE, therefore any
enhancement to the CPP will not impact your Associates pension
Question: Will CPP enhancements impact my Associates DB Pension?Answer: No
Associates Pension Formula & CPP
14
Your accrued pension (for service to date) can never decrease!
Your projected pension (for all service) is estimated on your annual pension
statement and assumes that your earnings will remain constant until
retirement
If your actual earnings do not increase in a given year, your projected
pension at retirement will decrease when the YMPE increases
Example 2015 Annual Statement 2016 Annual Statement
Projected best average earnings $90,000 $90,000
Projected average YMPE $52,200 $53,200
Projected service at retirement 30 30
Pension formula[1.25% x $52,200 +
1.75 x ( $90,000 - $52,200 )] x 30= $39,420
[1.25% x $53,200 +1.75 x ( $90,000 - $53,200 )] x 30
= $39,270
Question: Can my projected pension decrease on my annual statement?Answer: Yes, if your salary increase is less than the increase in YMPE
Agenda
15
Bill C-27
CPP Enhancements
Associates Pension Formula and CPP
Access to Associates Pension Plan Assets
Competitive Position of Associates Pension Plan
Questions
Appendix Associates Pension Plan Actuarial Valuation Results
Access to Honda Pension Assets
16
The Associates Plan is governed by the Ontario Pension Benefits Act (PBA)
The Ontario PBA specifies:
“The administrator of a pension plan shall exercise the care, diligence and skill in
the administration and investment of the pension fund that a person of ordinary
prudence would exercise in dealing with the property of another person”
“…employer who is required to make contributions under a pension plan…shall
make payments to the pension fund”
The assets of the Associates Plan are held in a trust – separate and distinct
from Honda. Northern Trust is the trustee for the Associates Plan.
The Ontario PBA requires Honda to file audited financial statements in
respect of the Associates Plan annually. The audit is conducted by KPMG,
who reviews all transactions that occurred during the year, such as
contributions, benefit payments, fees, etc. Copies of the audited financial
statements are available upon request.
Agenda
17
Bill C-27
CPP Enhancements
Associates Pension Formula and CPP
Access to Honda Canada Pension Assets
Competitive Position of Associates Pension Plan
Questions
Appendix Associates Pension Plan Actuarial Valuation Results
Competitive Position of Honda Plan
18
DB Plan – For Associates hired before January 1, 2014
Non-contributory Most plans require member contributions
Final average earnings Your pension is based on your average earnings at retirement
Early retirement provisions Unreduced at earliest of 30 years service, 85 points or age 60 & 10
Pension Enhancement Account Allows you to make tax-deductible contributions and “buy” benefits
The DB plan would be in the top 25% of all private sector employer sponsored plans
DC Plan – For Associates hired after December 31, 2013
Honda’s Base contribution 4%, 5% or 6% of earnings (based on your years of service)
Your optional contributions 0% - 8% of earnings
Honda’s matching contributions 100% match of your contributions up to 4%
The DC plan would be in the top 25% of all private sector employer sponsored plans
Competitive Position of Honda Plan (DB)
19
Observations:
Honda and Toyota DB plans are final average earnings type plans, therefore pensions
increase automatically as earnings increase (Detroit-3 have to negotiate pension
increases)
Honda’s DB plan provides the highest lifetime pension
All pension amounts assume 30 years of service. Detroit 3 pension amounts are based on current collective agreements.
2,055 2,055
2,430
2,070 2,070
2,448
2,050
2,410
2,910
2,183
2,809
3,246
2,131
0
500
1,000
1,500
2,000
2,500
3,000
3,500
70,000 80,000 90,000
Mo
nth
ly p
en
sio
n
Annual earnings
Lifetime Pension Comparison - from age 65
GM/Chrysler Ford Toyota Honda
71,800 80,000 90,000
3,515 3,515 3,5153,545 3,545 3,5453,615 3,615
4,010
3,566
4,191
4,629
3,515
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
70,000 80,000 90,000
Mo
nth
ly p
en
sio
n
Annual earnings
Minimum Pension Comparison - prior to age 65
GM/Chrysler Ford Toyota Honda
71,800 80,000 90,000
Agenda
20
Bill C-27
CPP Enhancements
Associate’s Pension Formula and CPP
Access to Associates Pension Plan Assets
Competitive Position of Associates Pension Plan
Questions
Appendix Associates Pension Plan Actuarial Valuation Results
Associates Plan – Valuation Results
22
Going concern results:
In $,000s April 1, 2013 Dec. 1, 2013 July 1, 2015
Assets $1,076,870 $1,153,327 $1,419,510
Liabilities (972,069) (1,033,984) (1,159,604)
Surplus / (deficit) $104,801 $119,343 $259,906
Funded Ratio 110.8% 111.5% 122.4%
Special payments to fund deficit Not applicable Not applicable Not applicable
Observations / comments:
Strong going concern position with a surplus at each valuation date
Going concern position is a more appropriate measure in Honda’s case
Associates Plan – Valuation Results
23
Wind-up results:
In $,000s April 1, 2013 Dec. 1, 2013 July 1, 2015
Assets $1,067,823 $1,199,721 $1,451,830
Liabilities (1,302,625) (1,241,831) (1,630,825)
Surplus / (deficit) ($234,802) ($42,110) ($178,995)
Funded Ratio 81.8% 96.6% 89.0%
Special payments to fund deficit$50.1M per year
for 5 years$50.1M per year
for 11 months$38.9M per year
for 5 years
Observations / comments:
Significant fluctuation in results which are almost entirely due to fluctuations in prescribed interest rates
Wind-up position is only appropriate if the plan is wound up
Associates Plan – Valuation Results
24
Honda’s annual contribution requirements:
In $,000s April 1, 2013 December 1, 2013 July 1, 2015
Defined benefit component $52,175 $53,542 $54,215
Defined contribution component n/a 1,000 1,828
Special payments towards deficit 50,116 42,110 38,909
Total contributions $102,291 $96,652 $94,952
Observations / comments:
Honda’s contributions have averaged around $97M per year for the last four years
Associates Plan – Investment returns
25
Historical investment returns:
Calendar Year “Benchmark” Return Honda’s Fund Return
2016 7.2% 8.6%
2015 3.6% 2.1%
2014 9.6% 8.8%
2013 10.2% 10.9%
2012 8.1% 8.5%
2011 -0.6% -1.0%
2010 10.0% 8.5%
2009 15.5% 16.3%
2008 -15.9% -14.6%
2007 2.1% 0.1%
2006 12.1% 13.3%
2005 12.0% 11.9%
2004 9.4% 10.0%
2003 14.1% 12.3%
2002 -4.1% -3.2%
10-year annualized return of 4.5%
15-year annualized return of 5.9%