Get to Know Your Pension Plan
Posted by Gail | Filed under Retirement Planning
If you have a pension plan at work, you’re one of the lucky ones. Of the 17.6 million Canadians in the work force, only about 6.5 million have a pension plan. There are about 10,000 pensions in Canada, and 55% of those are held in the public sector. So while you might think that loads of people have company pension plans, the truth is those people are in the minority. Even worse, many of you who are enrolled (or eligible to enroll) don’t understand how your plans work.
Geeze! You think because your pension is “taken care of” you can just stick your head in the sand? Really? If you’re not socking away a bunch of money because you’re sure your pension is going to do it for you, you’d better know what you’re doing. Do you even know what kind of pension you have?
Pension plans fall into one of three basic categories:
- Defined benefit plans (DBPs),
- Defined contribution plans (DCPs), and
- Group RRSPs.
DBPs promise to pay out a regular income calculated according to a predetermined formula. You know exactly how much you’ll receive at retirement, but until then the rest will be a bit of a mystery.
DCPs define the annual contributions required by the employer (and in many cases by the employee). The size of the pension depends on the amount of money accumulated through contributions and earnings in the plan.
Group RRSPs function a lot like regular RRSPs except that your employer runs the plan and you make contributions by payroll deduction. Some employers match contributions, but that’s not a given. If contributions are made by the employer, those contributions are taxable as income to you, and your total contributions can’t exceed the annual maximum RRSP contribution limit.
You (and your partner) should have a good understanding of your pension benefits. Here are three things you’ll want to know for sure.
Will your plan will continue to pay your spouse an income after you die? Some company pensions end with the death of the pensioner. Others pay a reduced percentage to the surviving spouse. If there is no continuation of income, or if that income will be reduced significantly, both of you will have to make some decisions about how you structure your other sources of retirement income.
Is your pension is indexed? Inflation can eat away at your pension benefits. Check to see if your pension provides for full or partial indexing, and find out when that indexing kicks in.
Is your pension integrated? In other words, will your pension benefits be blended with CPP to provide your income? If your company pension plan is integrated, whenever you get pension income estimates from your employer don’t double-count your CPP benefits.
While we like to think that having a pension means “set it and forget it,” only fools don’t pay attention to what’s happening with their money. Your mother didn’t raise no fool, did she?
September 25, 2012 at 6:32 am
A local employer went bankrupt and investigations revealed that they spent the $ in the company pension fund. None of those workers are getting anything, illegal or not.
September 25, 2012 at 8:33 am
excellent bit of information. I think the term integrated is one that many people misunderstand. Thanks.
September 25, 2012 at 8:53 am
Thanks so much for this post! I know I’m very fortunate to have a pension with work – especially a defined benefit plan. But it’s super important to understand all the details about how it works. Good reminder to follow up on some of those questions i’d been wondering about for a while
September 25, 2012 at 10:00 am
Although I have a DBP as a member of OPSEU, in fact the NDP under Bob Rae looted all the pension funds and replaced them with an IOU. Since pensions now have to be paid out of the Consolidated Revenue fund, I expect future governments to reduce or do away with the pensions altogether. They simply won’t be able to afford to pay with their declining revenues.
A DBP is only as good as the money/company that backs it.
September 25, 2012 at 10:33 am
Excellent post, thanks!
I think everyone should still contribute to their RRSP/TFSA, even if they have a pension plan, especially if they are in the private sector. You never know whether there will be changes in your life or if the rules of your pension will change.
I’m one of the lucky few in the public sector with a good DB pension plan. Still, I contribute to my RRSP and TFSA (almost to the max), because I’d like to have a very comfortable retirement.
One advantage of having a good pension plan for me is that I get to be more aggressive with the rest of my investments, as I consider the pension to be the “safe” investment.
September 25, 2012 at 11:09 am
One of the biggest misconceptions that people without pensions have is that it’s free money. And sadly, that’s the way it’s often portrayed in the media. I think it gives the people who didn’t save aything to complain about in others. Occasionally somebody will say to me, “Yeah, but you have a big, fat government pension coming your way.” To which I reply, “They took $8000 off my paycheque last year for that stupid thing! Did you sock away and extra 8K? …No, probably not.”
September 25, 2012 at 11:26 am
My husband will have a healthy DBP that is index but we are still saving as if we dont have it. What if we say enough with the job that comes with it? It will be only a very small amount if he leaves early so we save in a spousal so as to avoid some taxs later. Some people think its enough, and it can be but you have to do the math!
Also want to say, yes we are lucky that it is a DBP, but i hate how a lot of books and poeple think that it is unfair that we get it… 1st, we pay 6000$ a year into the pension plan… take 6000$ of your money and save it every year (and increasing every year) and you should be fine. 2nd) for the risks and all the time my husband cant kiss our kids good night, for the missed holidays and birthdays, milestones and kids crying asking where thier father is, my 2 year old in his 3rd house and my 3 year old in his 5th, all in the name of serving our country… ya, we deserve it.
September 25, 2012 at 11:32 am
Edward, we’ve socked away way more than $8k every year for a very long time and with the way the stock market has been, retirement won’t be what we expected. You’re very, very lucky to have a DBP that you only have to pay $8k into every year. Keep in mind, your pension is not just based on what you’ve contributed, but also the large amount the gov’t contributes.
September 25, 2012 at 11:43 am
My husband joined a company a couple of years ago that has a DBP. As he is starting there later in life (43), the amount won’t be near what people who have been there their entire careers will have but we are grateful for it nonetheless.
For the spouses out there, I found out that the “pension dept” is willing to answer general questions about the way the pension is set up ie. the questions in Gail’s post but won’t talk about specific numbers. I just identified myself and provided the employee number.
So if your spouse doesn’t have the time to call, you can!
September 25, 2012 at 1:13 pm
Great summary Gail! In my line of work, this is extremely important to understand. Thank you!
September 25, 2012 at 2:57 pm
@ Edward – your argument would also have a lot more weight if they opened it up so that anyone who wanted to could contribute the same funds and get the same benefits. Remember, you also get the best of the best money managers who charge the least fees to manage your pension funds; access to people that us mere workers (who pay your salary, an oft-repeated but still true statement) do not have.
September 25, 2012 at 4:48 pm
As a retired banker, I could tell you lots about pensions that don’t work:
A DB union pension in BC seriously mismanaged its assets for a number of years. Eventually it was reviewed and found to be seriously underfunded, requiring a major reduction of pension payments to both future and current members. Unfortunately, this had to happen twice in the year and pensions were cut by over 40% within a 6 month period. Needless to say it was a nightmare for the members who had no idea there was anything wrong. What caused it – a lack of new members coming into that trade therefore fewer contributors, a stock market based portfolio that was hit in one of the big bear markets, and poor management choices. No fraud, just a lack of understanding in risk management on every level.
Too many Canadians just assume that they will get what they were told when they signed up – it doesn’t work that way! Even ‘high-quality’ pensions for civil servants are under pressure. Side benefits that at one time included medical and dental for retirees have been stripped away.
If you read pension documentation, pensions are estimated not guaranteed, and if income earned by the plan, lack of deposits by a reduced contributing workforce, or inappropriate actions by stakeholders bring risk to the members. Indexing is not guaranteed, in case you are wondering.
As I recall, many DB pensions are underfunded, seriously underfunded, with companies either not fulfilling their obligations to pay in their portion or a drop in young members joining, as has been happening in some trades. Or, for example, Air Canada’s using its own shares vs. cash to make their contributions (shares being a non secure investment). And of course, there are a few companies and/or unions raiding their pensions which is outright fraud.
Everyone has the responsibility to save money on their own. If your RRSPs are maxed out because of your pension plan, that doesn’t stop you from saving in other accounts. Even if you have to pay tax on the earnings at the maximum tax rate 50% of $1.00 is more in your hands than 50% of $0.
Too many people claim they don’t understand, but there are people around who can help you find out what you have and what it can do for you and what your responsibilities are. Just like you are not shielded by a lack of knowledge of the law when committing an offense, being ignorant of your finances doesn’t help you either.
I don’t have a pension myself – therefore I save every month, but my husband does have a DB pension, and we review it every time we get a statement. Take up the responsibility and make sure you are not ignoring your future.
September 25, 2012 at 8:12 pm
We have group RRSPs at my work where the company matches 50% up to a maximum amount that increases with each year of service. In some ways it’s not as good as some of the other types of pension plans, but on the other hand the company can’t mismanage or fradulently use the funds. Overall I am happy to have anything and I make sure to put enough in to max out what the company will contribute, after that’s like getting free money for having retirement savings I should be contributing to anyways! My RRSPs are very conservative, so I don’t make as much, but I also didn’t lose anything during the recession. I have other non registered investments that I will be more risky (relatively) with.
September 25, 2012 at 10:09 pm
Wow, I didn’t realize that so few Canadian employees had company pension plans. I consider myself fortunate that I belong to a defined benefit plan. The plan has changed a few times since I joined 14 years ago, with employees shouldering an increasing level of the contributions, but the company seems committed to keeping it as a DB plan.
One word of advice I would have to those who are new to companies with pension plans is to start contributing as soon as you can. I had the option to start contributing after 6 months, and had to start contributing after a year. Rather than contacting HR to ask to start contributing after 6 months, I waited until the one year mark to join the pension plan. Of course, now I can’t buy back those months, and my accumulated pension isn’t as strong as it would have been.
September 25, 2012 at 10:42 pm
Thanks for the prod Gail. I went online and registered for my pension seminar in January.
September 26, 2012 at 11:30 am
“If contributions are made by the employer, those contributions are taxable as income to you, and your total contributions can’t exceed the annual maximum RRSP contribution limit.”
How would I should this to my accountant? Do I take a copy of my pay stub for the end of the year? I feel that my employer has never provided me with anything to do this?
Can someone give me some feedback?
Thanks
September 26, 2012 at 1:00 pm
@Theresa, I know with my group RRSPs the employers contribution is just included on the slip I get for tax purposes that shows your total contributions.
September 26, 2012 at 6:33 pm
Pensions can be a tricky thing. They can be safety nets but if the company ever goes under, workers go on strike, etc, your safety net can be taken away just like that. Know exactly what you’re getting into.
September 28, 2012 at 11:37 pm
@ Geoff, if I hear one more person say that “they pay my wages” I will lose my mind!! If you think about it….EVERYONE pays everyone’s wages!! Society does not exist in a vacuum. We buy goods and services and PAY for them which in turn pays wages. We utilize parks, pools, eat out in restaurants, pay for lawyers, accountants, dentists, mechanics, carpenters,etc…so let’s knock off the tired notion that government workers are getting a free ride!!!
October 1, 2012 at 1:34 pm
@Diana – Thanks. I, too, get really tired of hearing that. I’m grateful for my good job and my DFB pension, and I don’t take my health and dental benefits for granted. All of those benefits factored in to why I chose to work for the government. But I do get frustrated when people feel that it’s fine to make generalized assumptions about all government workers, justified with the “I pay your salary” statement. I thought you made your point very eloquently.
May 9, 2013 at 2:02 am
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