Alternative Investments – Supplemental Pension Plan

Alternative Investments can provide lucrative returns that are unavailable by investing in the stock or bond market. In earlier posts, I profiled alternative investments in the following categories: farmland, rooftop solar system, private equity, collectibles, real estate, gold and P2P lending. In this article I profile a different form of alternative investment – Supplemental Pension Plans.

Note that a popular alternative to buying supplemental pension plan is to buy annuities from private companies – most likely insurance companies. Most private insurance companies have annuity products that may suit your needs. Of course, the setup is slightly different (otherwise it would simply be called a ‘pension plan’). With annuities, you deposit a lump sum of money and the insurance company agrees to pay you a guaranteed income for a set period of time or life. But in this article, we look at supplemental pension plans instead – as an alternative investment.

This blog is dedicated to achieving financial freedom that is achieved by saving regularly and investing in appreciating assets to generate passive income. This is done by investing in companies (equities), government bonds (fixed income) and other forms available. In essence, my plan is to build my own pension to fund my retirement. However, there may be other options available depending on your country of residence.

Pension Plan

The following is an excerpt from Wikipedia:

A pension is a fund into which payments are made during a person’s employment years, and from which payments are drawn to support the person’s retirement from work. A pension may be a “defined benefit plan” where a fixed sum is paid regularly to a person, or a “defined contribution plan” where a fixed sum is invested and then becomes available at retirement age. The terms “retirement plan” and “superannuation” tend to refer to a pension granted upon retirement of the individual. Retirement plans may be set up by employers, insurance companies, the government or other institutions such as employer associations or trade unions. Called retirement plans in the United States, they are commonly known as pension schemes in the United Kingdom and Ireland and superannuation plans (or super) in Australia and New Zealand. Retirement pensions are typically in the form of a guaranteed life annuity, thus insuring against the risk of longevity.

Pension Plans have been around for a long time and the world’s largest pension funds are listed below.

pension-funds-world

As you can see, the size of these pension funds are massive and the fund managers carry a lot of firepower that is not wielded by some private investors. As a result, the fund managers are able to leverage the size of their assets and scale well globally for investment opportunities. Another positive aspect here is that the fund managers look for extremely long term investments. While individuals/private investors may invest from a range of months to years and investing for a couple of decades is considered long term; pension funds look to invest for even longer terms. Some fund managers have gone on record to state that they look out as far as 60-75 years.

Alternative Investment – Supplemental Pension Plan

While each country is different in providing some sort of social security, the amount may not be enough for individuals to lead a comfortable retirement. Now that humans are living longer, some countries have resorted to raising the retirement age or slowing down the growth in pension payout per individual to protect eroding the assets. Whatever the case may be, individuals will not be able to completely rely on the social security and need to resort to supplementing that pension with personal savings or other forms of income.

Here in Ontario Canada – pension plans have been under discussion quite a bit lately. The Ontario liberal government has insisted that the citizens do not have enough saved up and wanted the national plan (Canada Pension Plan) expanded to higher contributions and higher future payouts. The previous federal conservative government disagreed and the two parties went separate ways – and Ontario has now decided to implement its own pension plan called the Ontario Retirement Pension Plan. While there are pros and cons to the approach proposed, residents are left with no option but to sign up and contribute to this plan.

The following are the Top 10 Canadian pension funds

pension-funds-canada

Top 10 Canadian Pension Funds

Saskatchewan Pension Plan

Most of the pension plans listed above are only available to the employees of the sector or the residents of that province. One fund that is smaller, but can provide private investors to contribute is the Saskatchewan Pension Plan (SPP). The SPP has $365M in assets under management (28th largest in Canada, as of Sep 2014), but what makes it unique is that any Canadian resident can contribute to it.

A Canadian resident between the ages of 18-71 and available RRSP room (to a max of $2,500 per year, or transfer upto $10,000 from another RRSP/RRIF) can contribute to the plan providing a supplemental pension in retirement. There no setup fees when joining.

One extra perk available is that plan subscribers can use a credit card to contribute to the plan. So, if you have a cash-back/reward credit card, you can earn an extra 1-2% on the returns depending on the credit card program.

Two types of funds are available – ‘Balanced’ and ‘Short Term’. The balanced fund has returned ~8% annually, and the short-term fund has returned ~0.5% annually.

SPP-plans

Holdings and Asset Mix of Balanced Fund and Short-Term Fund of Saskatchewan Pension Plan

The Pros and Cons of Supplemental Pension Plans

As with any investment program, contributing to a supplemental pension plan has its pros and cons.

Pros:

  • Guaranteed income for you/your spouse until death.
  • If its a government-backed pension fund, the chances of bankruptcy are extremely low, if not non-existent; which is a risk for some private funds.
  • Professionally managed money – and record has shown that the pension fund investments have performed well over the years.
  • Fund managers look at extremely long term investment opportunities and do not try to time the market for quick gains.

Cons:

  • Trust in an external entity to manage your funds.
  • (Usually) No choice of what type of investments are chosen.
  • No access to funds until retirement age.
  • While income is guaranteed in retirement until death, any leftover money is forfeited and cannot be passed down to your heirs.

What are your thoughts on pension programs? Do you rely completely on the social security programs available in your country? How are you planning on supplementing the social security in retirement? Share your thoughts below.

Further Reading

6 thoughts on “Alternative Investments – Supplemental Pension Plan

  1. We have a state pension plan, which pays a pretty small weekly allowance. You would have to live very frugally and have paid off your mortgage if you were to rely on it. Recently, the UK gov’t introduced an ‘auto-enrolment’ scheme for employees in private companies. As long as they’re earning £833/month or more, they should be automatically enrolled. The company is also obliged to pay a contribution, and the gov’t pay a tax relief. In total, it’s 2%, rising to 5%, and then 8% over the next few years. This is currently in addition to the state pension which is pretty much universal.

    However, I have a private pension called a SIPP (self invested personal pension), which allows me to trade stocks etc. like a normal investment account. We also have a tax-free investment account which is my primary retirement savings vehicle, mostly because I don’t know what kind of changes the gov’t will continue making to pensions (they have been meddled with quite a lot under Gordon Brown and George Osborne). Therefore, I am stuffing my tax-free accounts and contributing the minimum to the SIPP.

    I also have P2P accounts and a taxable investment account… can you say I’m diversified?!

    • Sounds like you have things well under control, M. Thanks for sharing…its always great to hear stories to learn how things are setup in other countries. The ‘auto-enrolment’ seems pretty extensive and sounds very similar to what our provincial government is introducing (the Ontario Retirement Pension Plan ORPP). Its being set at 1.9% from individuals and employers have to match it, bringing it up to 3.8%. I dont think there is a plan to increase that amount, but I think that should be enough to rile some feathers. Personally, I am not crazy about the extra tax on my income – and I’d rather manage the money myself, but I understand that a majority of the people do not have a handle on their finances and need to be looked-after.

      Tax free accounts are the best thing available for us investors. We have a relatively new one as well – its a national plan that was started in 2009 and its been a hit amongst Canadians – although I hear that a lot of folks dont really understand it (are you surprised?) and dont contribute and take advantage of the tax free account. I didnt see the UK fund listed in the largest pension funds of the world – wonder why? I have to look it up.

      Thanks for stopping by and sharing your thoughts

      cheers
      R2R

  2. Here in the US, we have Social Security. It’s terrible. You don’t get your full stake until the age of 67, and the government has declined seniors a cost of living raise this year. For my generation, best case scenario is that we get 70% of everything we put in, according to the Social Security Administration. We’ve been scammed, as far as I’m concerned, and I’ve completely written it off as a source of income in retirement.

    For the lifetime income option in a supplemental pension, do they not have beneficiary or period certain options like in an annuity? It seems weird to me that something like that wouldn’t be offered. The lifetime income option would certainly pay you the highest amount, but it is certainly the riskiest. I would be surprised if a period certain payment option isn’t offered to mitigate that risk, and REALLY shocked if you couldn’t set up your plan with a beneficiary.

    Sincerely,
    ARB–Angry Retail Banker

    • I have same thoughts about social security here in Canada as well. So far the fund has been run well, but who knows how it will be managed over the coming years/decades. We might be left with a smaller pot and they might resort to raising retirement ages to preserve the fund. I am not relying on the pension at all and am focused on building my own pension for my retirement. If there is some social security when I reach retirement age, that will simply be icing on the cake for me.

      I think you are right about the beneficiaries. Some pensions can have your kids as beneficiaries and the funds can be passed on, but I think it depends on the fund you choose. I havent researched all the pension plans deeply – so this is what I gathered from just reading on the surface. Thanks for sharing your thoughts – I will look into it more carefully.

      R2R

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