Danielle Kubes is a trained journalist and investor who has written about personal finance for the past six years. Her writing has been published in The Globe and Mail, National Post, MoneySense, Vice and RateHub.ca. Danielle writes about investing and personal finance for Wealthsimple. She has a Bachelor of Humanities from Carleton University and a Master of Journalism from Ryerson University.
The Great White North is home to some of the best-run public-sector pension plans in the world, such as the Ontario Teachers’ Pension Plan, the Ontario Municipal Employees’ Retirement System, and the Alberta Investment Management Corp. These large institutional investors control billions in assets and are run by expert actuaries. They invest in projects inaccessible to individual investors and, so far, have managed to get consistent, safe returns.When it comes to retirement planning, the sooner you start, the more time your money has to grow. In just five minutes we’ll build a personalized investment portfolio to help meet your retirement goals — get started.
Pensions like these create good value. They incentive members to stash away a consistent portion of their paycheque and pool risk across a large body of contributors, and they’re run by managers with a direct fiduciary responsibility—all for a relatively low fee. Members receive a steady monthly income when they retire, until they die.
If you are lucky enough to work for an employer that offers a defined-benefit pension plan like this then your retirement is fairly secure (although nothing is 100% guaranteed). You can spend your golden years confident in the knowledge that your next payment is just around the corner.
But, while 80% of public-sector workers participate in a defined-benefit pension, just 10% of workers in the private sector do. And since the private sector is four times larger than the public one, most Canadians are on their own, responsible for building up enough assets and savings, and figuring out how to make it last for the decades between retirement and death. It’s unlikely any of us will starve—the government offers Old Age Security, the Canadian Pension Plan and various other income supplements to keep seniors out of poverty. But that’s just a safety net, and it isn’t enough dough to go traveling, help out the grandkids, renovate the house, or pay for a caregiver.
To really thrive in retirement, Canadians have to build up a solid investment portfolio and then correctly calculate how much to withdraw every month—no easy task when no one knows how long they’re going to be around for and what health complications may come up. It can be stressful, erratic, and insecure.
It also makes us poorer: For every dollar you contribute to a Canadian-style-public sector pension plan you would get back $5.32 in retirement. But if you plan retirement by yourself? You’re likely see just $1.70. That makes members of a pension plan 212% richer, all without any anxiety about how or where to invest and the blissful security of knowing the next cash infusion will be deposited in 30 days.
And that’s where the Saskatchewan Pension Plan (SPP) comes in.
Saskatchewan is the only province in Canada that operates a pension plan open to the general public, including residents of other provinces.
What is the Saskatchewan Pension Plan (SPP)
The SPP was created to help fill the retirement gap, so that ordinary people, no matter who they are or where they worked, can enjoy the perk of having a steady monthly income in retirement.
While the SPP is not exactly the same as a public-sector style defined-benefit pension plan, it operates similarly.
Essentially, the SPP offers Canadians the chance to invest in a low-to-medium risk, actively managed mutual fund for half the usual fee, inside their RRSP. At retirement the money moves to an extremely conservative fund and pays out an annuity. It offers the same tax advantages as an RRSP.
Currently the plan has 33,000 members and over $500 million of assets.
Like all pensions, there is a contribution limit, and the retirement payout may not be enough on its own to support your desired lifestyle—but it will likely help.
How does SPP work?
The SPP is simple: You contribute a certain amount to the plan over the course of your working life. The plan invests that money. It uses earnings from those investments to pay out a consistent monthly income to its members once you stop working until you die. The contributions are tax-deductible and grow tax-free, but the retirement income is taxable (exactly the same as an RRSP).
Now, for the details.
Despite the name, this pension plan is open to all Canadians who have RRSP contribution room. Contributions count toward your RRSP limit.
You can contribute up to $6,200 in 2019, although that amount may change year to year. There is no minimum contribution—you can deposit as little as $10 a month.
Contributions are incredibly easy: you can set up an automatic withdrawal from your bank account, set up the SPP as a bill payee through online banking or pay by credit card.
The money is locked-in until age 55, which is fairly standard for most pensions. (If you’re uncomfortable with your money being under lock and key then you should consider simultaneously stashing about three to six months of living expenses in a high interest savings account or TFSA to prepare for any financial emergencies. These accounts offer maximum flexibility.)
Your contributions are pooled with other members’ contributions, and this money is invested in one of two low-to-medium risk funds. A Board of Trustees looks over the operations but the day-to-day money management is handled by the investment fund management firms TD Greystone Asset Management and Leith Wheeler Investment Counsel.
The earnings from those funds enable the SPP to payout a steady monthly income to their members upon retirement. Like any investment, there are no guarantees.
How do the payouts work?
How much you get depends on how much you’ve contributed to the plan, the type of pension you choose and the month you retire. The SPP will provide a personal pension estimate upon request.
The SPP also offers some flexibility in how it pays out.
It offers three kinds of annuities, and you can decide which option you’d prefer upon retirement, depending upon your circumstances. There’s no need to choose upon starting the plan.
Life-only: consistent monthly income until death
Refund-life: Death benefit to a beneficiary of your choice in case you die before you receive your account balance at retirement in pension payments
Joint-survivor: continuing benefits to your spouse after you die, at a predetermined percentage of annuity payments
If your pension amount is very low, under $25 a month, you may be eligible to receive a lump-sum payment, minus a 10% withholding tax.
You may also be able to transfer your pension into a few different kinds of registered accounts, such as a Prescribed Registered Retirement Income Fund or a Locked-in Retirement account, with another financial institution.
No matter what option you choose, you must start receiving your pension between 55 and 71 years old.
What does the SPP invest in?
The SPP’s investment goal is slow and steady growth with minimal risk. Its main focus is to preserve wealth in order to fulfill its commitment to its members.
The average annual return of the fund since it opened in 1986 is 8%. Over five years its averaged 5.82%, with a 10 year average of 7.35%. That’s about equal to the S&P 500 returns over the past 20 years, and much greater returns compared to the average mutual fund.
SPP members can choose one of two funds to contribute to:
The Balanced Fund, which seeks to maximize earnings and minimize risk by buying securities spread across asset classes and countries, or a Short-term Investment Fund, which seeks only to preserve your money by buying mainly treasury bills and bankers acceptances from Canada and America.
Fees and the SPP
Compared to most other hassle-free options, the SPP’s fees are competitive, at under 1%. It’s much lower than mutual fund fees, which, in Canada, charge the highest management-expense ratios (MER) in the world at over 2%. But it’s much higher than automated investing, which charges around 0.5%, and manages to keep costs low by using an algorithm instead of a human to run a portfolio.
While all these percentages may sound low, even shaving half a percentage off a fee can save you tens of thousands of dollars over several decades.
Saskatchewan Pension Plan vs RRSP
The SPP is basically held inside a RRSP account, with a tighter contribution limit and much stricter withdrawal rules.
Otherwise, the SPP follows identical tax rules.
Even if you have additional RRSP room you can only contribute up to $6200 a year into the SPP. You can, however, transfer up to $10,000 from a different RRSP into the plan. You can also repay any amounts for your Home Buyers Plan and the Lifelong Learning Plan into the SPP. You cannot, however, withdraw funds to use for either of those plans.
But remember: You can always open an additional RRSP account elsewhere. There is no limit to the number of RRSP accounts that you can have, as long as you don’t exceed your contribution limit across the accounts.
So, if you have the room, you can deposit $6,200 annually in the SPP, plus any additional cash in different RRSP. Within that RRSP you can purchase securities of your choice.
By opening an SPP, plus other RRSP accounts you get the benefit of having a secure income line when you retire, plus the option to withdraw for any financial emergency or the Home Buyers Plan and the Lifelong Learning Plan.
Saskatchewan Pension Plan regulations
The fund is designed as simple as possible to encourage everyone to join. For that reason, there are few regulations or bureaucratic red tape.
Saskatchewan Pension Plan benefits
Easy to join
Open to all Canadians
No commissions or set-up fees
Flexible: no minimum contributions, and can skip contributions when necessary
Great for small business owners who don’t want to set up a pension plan for their employees
Great for freelancers and the self-employed who don’t contribute to the Canadian Pension Plan
Option to use credit cards for contributions and earn reward points at the same time
Spousal contributions are permitted, tax-deferred contributions and tax-free growth, like any RRSP
Saskatchewan Pension Plan drawbacks
Locked-in funds (this could be a pro for those who have a tendency to dip their hands in the cookie jar)
Low-fees compared to mutual funds, but high compared to automated investing and self-directed investing
Low contribution limit
Must have employment income in order to contribute
Must have available RRSP room to contribute
Unnecessary if you already have an employer sponsored defined-benefit pension plan
Ultimately, the SPP isn’t the only option for a secure retirement. You could easily do the same on your own—simply deposit funds in a balanced mutual fund or low to medium risk automated investment portfolio in your RRSP. Upon retirement, simply use your nest egg to buy a fixed annuity from an insurance company. But the SPP offers a straightforward, one-stop shop to do all of this.