Page 6 The Retirees' Newsletter

The Faculty and Librarian Retirees' Association, University of Windsor, Windsor, Canada

Vol.VII , No.3, June, 1997

(Second in a series, from a GUIDE being prepared by Norm Shklov, explaining our Pension Plan, in principle and in practice. Further articles will cover "How Does My Canada Pension Plan Work?", "How Much did I Contribute to the University Plan and to the Canada Plan when Working?", "How Much did the University Contribute?", "How do Surpluses Arise?").

I AM RECEIVING MY MINIMUM GUARANTEED PENSION. HOW LONG WILL IT BE BEFORE MY MONEY PURCHASE PENSION OVERTAKES IT?

AS WE SAW IN THE FIRST ARTICLE in this series, when you retired, two independent calculations were made. These were (1) the amount of your Money Purchase Pension at the time of retirement, and (2) the amount of your Minimum Guaranteed Pension at the time of retirement. Thereafter, these amounts are recalculated each year, as described in the first article in this Series, and your pension for the subsequent year becomes whichever is the higher of the two amounts. (Each retiree is advised of these calculations each year, by the University's Human Resources).

ESPECIALLY DURING TIMES OF RISING INVESTMENT MARKETS, it is natural that retirees receiving their Minimum Guaranteed Pensions, should ask how long before their Money Purchase Pensions will exceed their Minimum Guaranteed, so that they will be eligible to receive increases equivalent to the earnings of the Pension Fund, and not just the increases due to rises in the cost of living.

HOW LONG IT WILL TAKE to reach this point cannot, of course, be stated with certainty. However, a good prediction can be made, based on the following four factors:

1) the Minimum Guaranteed Pension -- call this A -- at a certain time;

2) the Money Purchase Pension -- call this B -- at the same time;

3) the average yearly rate of increase, say "i" percent, in the cost of living; and

4) the average yearly rate of earnings, say "r" percent, of the Pension Fund.

KEEP IN MIND THE BASIC DIAGRAM, Figure 3 in the preceding article in this Series.¹ In it, the Money Purchase Pension was shown overtaking the Minimum Guaranteed Pension after n years. Now let's examine more closely how this comes about. (Be patient. This all leads to a very simplified table!)

STARTING FROM ANY GIVEN POINT IN TIME, the Minimum Guaranteed Pension, A, growing at the average yearly rate of i per cent, will, after n years, amount to A(1+ i)ⁿ. Likewise, after n years, the Money Purchase Pension, B, growing at a (presumed) higher average yearly rate of r per cent, will amount to B(1+r)ⁿ.

WHEN WILL THESE AMOUNTS BE EQUAL -- that is to say, what will be the numerical value of year n, the year where the lines in the table crossed? To find this, we can put the two expressions equal to one another, as follows: A(1+i)ⁿ = B(1+r)ⁿ and solve for n, which comes out to:

READY TO THROW IN THE TOWEL? ... DON'T ... NOT YET!!! ThingsDO get better!

¹ In the earlier article, the Minimum Guaranteed Pension was referred to as , and the Money Purchase Pension as . There is no significance implied in the fact that they are here being referred to as A and B respectively. We're simply being a mite inconsistent!

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