That's my point.Keebler Elf said:
They paid WAY more into their pensions than they or their estate ever got out.
If that money had been put into an RRSP, it would have gone to their estate.
To me, that is a drawback of an employer pension plan.
Pension Plans
- Thread starter drlove
- Start date
They paid WAY more into their pensions than they or their estate ever got out.
If that money had been put into an RRSP, it would have gone to their estate.
To me, that is a drawback of an employer pension plan.
Not the case as far as I am aware.polisci said:
My mother was a teacher, she designated my father as her beneficiary (you can only designate a spouce)
In order to do so, her pension payments were reduced rather than if she collected the entire pension herself. My father collected her survivor benefits for perhaps 4 years, then he passed away.
The end.
My father decided to collect his entire pension himself.
When he passed away, there was a funeral benefit, and then end of story.
All in all, they both paid far more than they ever came close to collecting.
That's the way it goes. The actuarials have it down to a science.
The original poster had asked what were the drawbacks to company run pensions. Immediately, this popped into my head.
The other draw back as a previous poster mentioned is that the company goes broke - Stelco, Air Canada, and the pensions are lost.
There was also a case 10 or so years ago when one construction union (operators??) went down and with it the pension plans.
I would think in a perfect world (for me) that you would set up a self directed RRSP and your company would contribute to the same level as they would in say the teacher's pension plan (dream on white boy). Then the money is yours and no-one can touch it but you.
True, but that's the risk you take. Unfortunately, most plans are mandatory so if you're not planning on living past working age then you're really getting hosed. But really, if you're dead you won't be caring that you're not collecting a pension.james t kirk said:
If it truly was money in = money out, the plans probably wouldn't be feasible.
The problem with self-funding RRSPs is:
1) Most people won't do it (in the same numbers or amounts); and
2) No employer contribution (probably, as the employer will just not have a plan at all).
And when #1 happens, that leaves the rest of society on the hook for supporting them in their old age. Better to have forced savings, IMO.
I don't believe so, but I could be wrong.polisci said:
I don't think they want someone who is 65 designating a 20 year old to receive survivor benefits.
I'm pretty sure that's the case for me. I get to choose how the money is invested (i.e. I pick the funds) and the investment firm has an appointed advisor to administer it. The benefit that I can see here is that my employer will match my contributions equally on a percentage basis. The downside seems to be that it is a pension plan, which means I will be stuck getting monthly cheques without the freedom to take out whatever, whenever I want. Luckily, I also have my own investments as well that I can draw on.james t kirk said:
There are people at my company's defined contribution pension plan who do not have a spouse & they can designate anyone else as beneficiary. I know this for sure.james t kirk said:
I hope you're not confusing the Federal gov't survivor benefits with your father receiving benefits from your mother's company pension plan.
Re: Defined Benefit Plans
If someone starts to receive a monthly pension on May 1, 2006, and has a life pension guaranteed for 10 years, payments will be made until April 1, 2016 regardless of whether the annuitant is still living or not. Beginning May 1, 2016, payments would only be made if the annuitant is living. The beneficiary does not have to be the spouse, even if there is a spouse, (the spouse must sign a waiver to allow for the single lifetime pension in the first place).
In the above example, if the annuitant dies after receiving 8 years and 6 months of payments, the beneficiary will receive payments for 1½ years, then payments will cease. If the annuitant dies in 2018, the beneficiary receives nothing, because the minimum number of payments, (10 years guaranteed), had already been paid to the annuitant. Most Plans would allow for the beneficiary's benefits, if any, to be payable in a lump sum, (commuted value), which would be less than the sum of the remaining guaranteed payments, (because the benefit would be paid in advance, rather than in installments). Commuted values would also be suject to taxation at a higher rate.
Using the same dates above, a joint annuitant would receive payments for life, beginning in the month next following the annuitant's death. If the joint annuitant dies first, the pension ends with the annuitant's death, as payments would have been made payable for the full lengths of both lifetimes.
Beneficiaries can be changed at any time. Joint annuitants are designated at the pension commencement date, and are irrevocable. Beficiaries are not applicable after the guaranteed payment period has expired.
It sucks that james t kirk's parents received a much lesser benefit than the value of what they had contributed, but the purpose of the pension was fulfilled. A pension was payable as long as both or either one lived. Some collect more than others. The funding and benefits are based on average, rather than individual lifespans.
In the example of the 65 year old guy with the 20 year old spouse, there would likely be some provision written into the Plan text to reduce the amount of a j&s pension where the age differences at retirement exceed a certain number of years. The spouse's age would not reduce her entitlements to a j&s pension under the legislation.
In a lot of defined benefit pension plans, the employee contributes either nothing, a specied amount per month, or a percentage of earnings. Often the employee contribution amount is integrated with CPP contributions that are payable only up to the Yearly Maximum Pensionable Earnings (YMPE). For 2006, the YMPE is $42,100 and the CPP contribution rate is 4.95% of gross earnings* (*calculations are different for the self-employed). A typical employee contribution amount to the company plan might be 3.05% of gross earnings on the first $42,100, and 8% on any additional earnings, so that the total contributions to pension, company plan and CPP combined, would be 8% of earnings.
The amount of benefits payable at pension commencement would be set out under the Plan. The Employee contributions would fund part of the benefits, and the Employer contributions would fund the remainder, so the Employee's contributions, (if any), and the benefit amount are defined, but the Employer's cost is variable.
The following circumstances will cause a pension plan to become underfunded:
1) Below average returns on the pension fund's investment income. Low interest rates on cash or bonds, a drop in real estate values, or a bear market can seriously damage the solvency of the Plan's assets. Legislation limits the amount of a funds assets that can be held in real estate, as it is a more volatile investment.
2) An unfunded liability: A Plan makes improvements to the benefit structure, such as increasing the monthly amount for living pensioners, or improving the benefit formula for those currently participating. Typically the improvement is amortized, (payments spread out over time), through a portion of the new contributions over several years. If the anticipated new contributions are not received, (for example, if the Plan has fewer members than had been anticipated, through layoff, termination, early retirement, or ceased participation), the new contributions will be insufficient to cover both the current benefit accruals and the amortized unfunded liability.
3) A poor actuary: It is the actuary's job to determine what the Employees and Employer must contribute in order to ensure that the funding will be available to pay the benefits set out in the Plan text. An actuary is sort of an accountant with a Oija board, using present and anticipated contributions, investment income, and mortality tables to determine how much money the Plan needs to stay afloat. Since much of the actuary's job is speculative, the fund can appear to be in better standing than it is, if unusually optimistic investment return projections are used, or if the instances of special circumstances are understated,(see 4,6 & 8 below).
The actuary may also use creative bookkeeping to appease both sides, by convincing the Employer that the cost of pension benefits is likely to be a certain amount, but in reality, it will be more.
4) A change of circumstances: Plan members who are disabled may qualify for an unreduced benefit much sooner than they would if they retired from the company, or if they had terminated employment after being vested. A large increase in the number of disability pensions can have a negative effect on the funding. This may be prompted by an ammemdment to the Plan which redefines who is disabled, or what a disabled member receives.
5) Longer lifespans: all pensions are payable for life, (unlike a RRIF, which is payable until age 90). When people live longer, they receive pension for a longer period. Mortality tables are not updated as quickly as life expectancies have increased.
6) The average age of the Plan membership increases: This is often true of Union plans, where the workforce is reduced through layoff. Those with more seniority, (usually older), keep their jobs, and those with less, (usually younger), do not. The plan members then, on average, qualify to receive a full or reduced benefit much sooner than they would if the average age was younger.
As a general rule, Defined Benefit plans favour the older employee at the expense of the younger ones, because the contribution and benefit rates are not dependent on age, but the date of benefit entitlement is entirely based on age.
This is also very true of the Canada Pension Plan. The baby boom generation is just starting to reach age 60, where they can qualify for early CPP. As a group, they significanly outnumber those workers now in their 20's and 30's. With CPP, you're not paying for your own retirement benefits. You're paying for people who have already retired, and people younger than you will pay for yours. This works fine as long as the working population is shaped like a pyramid, with pensioners filling the smallest part on top, and young workers filling the largest part at the bottom. That arrangement is going to change significantly over the next ten years.
7) Earlier vesting of Employer contributions: Prior to January 1, 1987, the minimum period to be vested, (entitled to receive benefits based on Employer contributions), was age 45 or more, and ten or more years of service at the time of termination, (Plans had the option of vesting benefits sooner, but this was the minimum). When a Plan member was not vested at termination of employment, all of the contributions that the Employer had made to the Plan on his/her behalf remained in the Plan to fund the benefits of other members who did meet the vesting rules. Fewer Plan members are not vested on termination anymore.
Note: vesting applies on the earlier of termination of employment or death. A Plan member who is participating at the date of pension commencement is vested in the Employer portion of the benefit, regardless of the length of Plan membership.
8) A rapid increase in earnings: Many defined benefit formulae are based on the number of years in the Plan multiplied by a percentage of earnings, such as the average of the best five years, or the average of the last five years of membership. If a long term Plan member is promoted to an executive position shortly before retirement, the pension would largely reflect earnings from the executive years, but the contributions that the employee had made might be skewed towards the lesser position. For example, the 30 year employee had an average salary for all years of $40,000, but the average salary for the last five years, (on which the pension is based), was $200,000.
Of the above, 1) poor investment performance, and 2), the unfunded liability, are the largest factors, because the benefits are increased immediately, but paid for over time. Every time increases are given to those who have already retired, someone who is contributing now is paying for that, and hoping that someone else, down the line, will pay for their increases.
There's a distinct difference between a beneficiary and a joint annuitant. A beneficiary is only eligible to receive benefits if the annuitant dies during a minimum guaranteed payments period under the annuity, (if the pension has a guaranteed period). A joint annuitant is entitled to benefits for life.james t kirk said:
If someone starts to receive a monthly pension on May 1, 2006, and has a life pension guaranteed for 10 years, payments will be made until April 1, 2016 regardless of whether the annuitant is still living or not. Beginning May 1, 2016, payments would only be made if the annuitant is living. The beneficiary does not have to be the spouse, even if there is a spouse, (the spouse must sign a waiver to allow for the single lifetime pension in the first place).
In the above example, if the annuitant dies after receiving 8 years and 6 months of payments, the beneficiary will receive payments for 1½ years, then payments will cease. If the annuitant dies in 2018, the beneficiary receives nothing, because the minimum number of payments, (10 years guaranteed), had already been paid to the annuitant. Most Plans would allow for the beneficiary's benefits, if any, to be payable in a lump sum, (commuted value), which would be less than the sum of the remaining guaranteed payments, (because the benefit would be paid in advance, rather than in installments). Commuted values would also be suject to taxation at a higher rate.
Using the same dates above, a joint annuitant would receive payments for life, beginning in the month next following the annuitant's death. If the joint annuitant dies first, the pension ends with the annuitant's death, as payments would have been made payable for the full lengths of both lifetimes.
Beneficiaries can be changed at any time. Joint annuitants are designated at the pension commencement date, and are irrevocable. Beficiaries are not applicable after the guaranteed payment period has expired.
It sucks that james t kirk's parents received a much lesser benefit than the value of what they had contributed, but the purpose of the pension was fulfilled. A pension was payable as long as both or either one lived. Some collect more than others. The funding and benefits are based on average, rather than individual lifespans.
In the example of the 65 year old guy with the 20 year old spouse, there would likely be some provision written into the Plan text to reduce the amount of a j&s pension where the age differences at retirement exceed a certain number of years. The spouse's age would not reduce her entitlements to a j&s pension under the legislation.
In a lot of defined benefit pension plans, the employee contributes either nothing, a specied amount per month, or a percentage of earnings. Often the employee contribution amount is integrated with CPP contributions that are payable only up to the Yearly Maximum Pensionable Earnings (YMPE). For 2006, the YMPE is $42,100 and the CPP contribution rate is 4.95% of gross earnings* (*calculations are different for the self-employed). A typical employee contribution amount to the company plan might be 3.05% of gross earnings on the first $42,100, and 8% on any additional earnings, so that the total contributions to pension, company plan and CPP combined, would be 8% of earnings.
The amount of benefits payable at pension commencement would be set out under the Plan. The Employee contributions would fund part of the benefits, and the Employer contributions would fund the remainder, so the Employee's contributions, (if any), and the benefit amount are defined, but the Employer's cost is variable.
The following circumstances will cause a pension plan to become underfunded:
1) Below average returns on the pension fund's investment income. Low interest rates on cash or bonds, a drop in real estate values, or a bear market can seriously damage the solvency of the Plan's assets. Legislation limits the amount of a funds assets that can be held in real estate, as it is a more volatile investment.
2) An unfunded liability: A Plan makes improvements to the benefit structure, such as increasing the monthly amount for living pensioners, or improving the benefit formula for those currently participating. Typically the improvement is amortized, (payments spread out over time), through a portion of the new contributions over several years. If the anticipated new contributions are not received, (for example, if the Plan has fewer members than had been anticipated, through layoff, termination, early retirement, or ceased participation), the new contributions will be insufficient to cover both the current benefit accruals and the amortized unfunded liability.
3) A poor actuary: It is the actuary's job to determine what the Employees and Employer must contribute in order to ensure that the funding will be available to pay the benefits set out in the Plan text. An actuary is sort of an accountant with a Oija board, using present and anticipated contributions, investment income, and mortality tables to determine how much money the Plan needs to stay afloat. Since much of the actuary's job is speculative, the fund can appear to be in better standing than it is, if unusually optimistic investment return projections are used, or if the instances of special circumstances are understated,(see 4,6 & 8 below).
The actuary may also use creative bookkeeping to appease both sides, by convincing the Employer that the cost of pension benefits is likely to be a certain amount, but in reality, it will be more.
4) A change of circumstances: Plan members who are disabled may qualify for an unreduced benefit much sooner than they would if they retired from the company, or if they had terminated employment after being vested. A large increase in the number of disability pensions can have a negative effect on the funding. This may be prompted by an ammemdment to the Plan which redefines who is disabled, or what a disabled member receives.
5) Longer lifespans: all pensions are payable for life, (unlike a RRIF, which is payable until age 90). When people live longer, they receive pension for a longer period. Mortality tables are not updated as quickly as life expectancies have increased.
6) The average age of the Plan membership increases: This is often true of Union plans, where the workforce is reduced through layoff. Those with more seniority, (usually older), keep their jobs, and those with less, (usually younger), do not. The plan members then, on average, qualify to receive a full or reduced benefit much sooner than they would if the average age was younger.
As a general rule, Defined Benefit plans favour the older employee at the expense of the younger ones, because the contribution and benefit rates are not dependent on age, but the date of benefit entitlement is entirely based on age.
This is also very true of the Canada Pension Plan. The baby boom generation is just starting to reach age 60, where they can qualify for early CPP. As a group, they significanly outnumber those workers now in their 20's and 30's. With CPP, you're not paying for your own retirement benefits. You're paying for people who have already retired, and people younger than you will pay for yours. This works fine as long as the working population is shaped like a pyramid, with pensioners filling the smallest part on top, and young workers filling the largest part at the bottom. That arrangement is going to change significantly over the next ten years.
7) Earlier vesting of Employer contributions: Prior to January 1, 1987, the minimum period to be vested, (entitled to receive benefits based on Employer contributions), was age 45 or more, and ten or more years of service at the time of termination, (Plans had the option of vesting benefits sooner, but this was the minimum). When a Plan member was not vested at termination of employment, all of the contributions that the Employer had made to the Plan on his/her behalf remained in the Plan to fund the benefits of other members who did meet the vesting rules. Fewer Plan members are not vested on termination anymore.
Note: vesting applies on the earlier of termination of employment or death. A Plan member who is participating at the date of pension commencement is vested in the Employer portion of the benefit, regardless of the length of Plan membership.
8) A rapid increase in earnings: Many defined benefit formulae are based on the number of years in the Plan multiplied by a percentage of earnings, such as the average of the best five years, or the average of the last five years of membership. If a long term Plan member is promoted to an executive position shortly before retirement, the pension would largely reflect earnings from the executive years, but the contributions that the employee had made might be skewed towards the lesser position. For example, the 30 year employee had an average salary for all years of $40,000, but the average salary for the last five years, (on which the pension is based), was $200,000.
Of the above, 1) poor investment performance, and 2), the unfunded liability, are the largest factors, because the benefits are increased immediately, but paid for over time. Every time increases are given to those who have already retired, someone who is contributing now is paying for that, and hoping that someone else, down the line, will pay for their increases.
Another question re: pensions - does my RRSP contribution room get reduced only by the amount that I contribute personally, or is it reduced by the total amount of both personal and employer contributions??
Both employer and employee contributions to a registered pension plan will reduce the amount that you can contribute to a person RRSP. The amount of reduction to your RRSP limit will be dependent on your income, contributions to the RPP, and the type of RPP it is.drlove said:
As a general rule calculate the amount that you could contribute to an RRSP, subtract employee contributions to the RPP, and subtract the pension adjustment amount that should be included on the T4A, (the employer or the pension plan administrator could give you the PA amount). For those who are self employed, ask an accountant.
Bob, good reply.
My beef are the unrealistic earnings & formulas with high PA number from my past employer that reduced my RRSP room for many years.
Beware that few Employers are eyeing the profit of RSP, whether in take-overs as their pot to cover the acquistion. There's few multi-year cases and talk of closing the loopholes but still years away and not enough public awareness to move things along.
My beef are the unrealistic earnings & formulas with high PA number from my past employer that reduced my RRSP room for many years.
Beware that few Employers are eyeing the profit of RSP, whether in take-overs as their pot to cover the acquistion. There's few multi-year cases and talk of closing the loopholes but still years away and not enough public awareness to move things along.
I'm a bit confused by this statement. Where mine is a defined contribution plan, the funds are registered in my name, with the company contributing their portion to it. I've always viewed this investment as being divorced from the company itself; perhaps I'm wrong. Would the pension plan be in danger of going under, or misused??goodtime said:
Pension Surplusses
Unless the Plan has more favourable vesting rules than those prescribed under the applicable legislation, those with less than two years of membership on termination do not qualify for any vesting, meaning that the Employer does not need to pay any contributions to the Plan on their behalf, although contributions may have been made during the period of membership.
Some Employers claim that these contributions belong to them. The Plan members usually feel that this money belong to the pension fund, and should be used to improve the funding ratio, reduce Employee costs, or enhance the benefit entitlements of current or retired members.
If the investment performance of the fund has been better than that forcast by the actuary, a surplus, real or virtual, can exist, based on the assumption that the current Plan assets + expected investment income + anticipated future employee contributions are more than sufficient to cover both current, (pensions currently being paid), and future, (accrued benefit entitlements of current members and vested former members), fund obligations. In this situation, the Employer may not need to make any further contributions to the pension fund so long as the surplus exists. A 'creative' actuary can cook the books to some extent, and either create a theoretical surplus, or overstate an existing one, usually by raising the future investment return percentage.
Prior to January 1, 1987, plan members who terminated employment prior to attaining both age 45 and ten years of service were not subject to locking-in provisions, meaning that they could withdraw the current value of the employee portion of their pension without restrictions, and often surrenderring the employer portion in the process. If they were vested, but not locked-in, the vesting would often only have applied if they did not elect a cash refund of Employee monies, but chose a deferred pension instead.
It's important to note the difference between vesting and locking in on pre 1987 benefits. Vesting means that the plan member qualifies for benefits based on Employer contributions. Locking in means that the pension benefits must ultimately be received as the retirement annuity. Current legislation, Ontario Provincial and Federal, provided for both vesting and locking in after two years of RPP membership.
Most defined benefit plans do not give any improvements to former members who terminated while vested, but prior to early or normal retirement age.
Take, for instance, the employee born December 31,1965, who contributes 5% of wages to the pension plan from age 25-35, then terminates employment in January, 2001.
His normal retirement date will be in January, 2031, and he can apply for a reduced pension, on or after January, 2021. Typically, the reduction for early retirement of a former member is 6% per year, (as in CPP), so he could apply for 100% of his monthly pension at age 65, or 70% at age 60, or 40% at age 55.
That pension will be based on benefit rates in effect from 1991-2001, rather than those that may be in effect between 2021 and 2031. Although his benefit entitlement is fixed, his Employee contributions continue to accrue investment income, meaning that he pays for more and more of the pension himself, and the Employer funds the difference. If the benefit formula is low, and the employee contribution rate is high, it's very common that the present value of the Employee portion may exceed the total value of the pension.
Changes were made to pension legislation at January 1, 1987 that require Employers to fund at least half of the benefit earned after December 31, 1986.
Take the example of two men, born December 31, 1955, and December 31, 1979, who join a Union defined benefit pension plan on the same day, January 1, 2001. Let's also assume, for illustrative purposes, that one dollar, with compound interest, will double every 6 years. We'll also assume that, at age 65, one dollar of monthly pension for life is equivelent to $100 in an RRSP.
Each man participates in the plan for 8 years. They would have received the same wages and pension benefits under a Union Collective Bargaining Agreement. Let's also assume that the monthly pension entitlement at age 65is $50 for each year of membership.
Both employees will be entitled to a monthly pension of $400 at age 65, or a reduced amount on or after age 55. Using the 6% per year reduction rate, $160 per month if the pension starts at age 55, or $280 per month if it starts at age 60.
The older employee is age 53 at the date of termination of employment. He can apply for his full pension of $400 per month in twelve years, or a reduced amount in two years. In addition, prior to age 55, he can elect to transfer the commuted value, (calculated present day value of the benefit), to a locked-in RRSP, or other locked-in Plan.
The younger employee is age 29 at the date of termination of employment. He can apply for his full pension of $400 per month in 36 years, or a reduced amount in 26 years. He also has the option, prior to attaining age 55, of transferring the commuted value of the benefit to a locked-in RRSP, or other locked-in Plan.
At the termination date, the older employee's commuted value will be $10,000: $400/month @ age 65 X $100 for each dollar of monthly pension at age 65, divided by 4, because one dollar would increase four fold in 12 years.
At the termination date, the younger employee's commuted value would be $625: $400/month @ age 65 X $100 for each dollar of monthly pension at age 65, divided by 64, because one dollar would increase 64 fold in 36 years. And yet, the Employer contributed the same amount on behalf of each during their period of membership in the Plan.
This is an extreme example for illustration only. Rather than using the value at age 65, the calculation would most likely be done based on the 70% entitlement at age 60, and an assumed interest rate much lower, usually based on the average CANSIM bond rate from the previous 12 months for the first five years of the calculation, and 6% thereafter, but the concept is accurate. Each would have a commuted value calculated to be equivelent to the lump sum which, if left to accrue interest until age 65, would be sufficient to purchase a benefit of $400 per month.
For anyone who is considerring a transfer from an RPP to a locked-in RRSP, the crucial information is the interest assumptions used in calculating the commuted value. If you believe that your rate of return in the RRSP will exceed the assumptions used in the CV calculation, you may ultimatley get a better pension when the RRSP is annuitized. If you think the pension plan may no longer exist when you reach retirement age, consider transferring. If you think the interst rates used in the CV calculation are too high, consider the transfer option at a later date; it will be available to you provided that you have not yet attained age 55 at the transfer date.
Note that the option of CV transfer to a locked-in RRSP is not guaranteed under legislation if Plan membership terminated prior to January 1, 1987. If that's the case, you probably have to wait until attaining age 55 to receive any benefits, (Registered plans must allow for early commencement of benefits on or after attained age 55; they can't make you wait until you're 65).
If there is any doubt as to what your decision should be, hire a professional investment advisor, don't base your retirement decisions on what you read on an escort review board! Do, however, bring up some of the points listed above, and if he/she can't explain your entitlements, options, and risks, to your satisfaction, hire someone else!
Surplusses only come into effect with defined benefit plans, because the employee contributions, (if any), and the benefit entitlement are defined, but the employer's funding obligation is not. I'll use a few illustrations to explain this further:goodtime said:
Unless the Plan has more favourable vesting rules than those prescribed under the applicable legislation, those with less than two years of membership on termination do not qualify for any vesting, meaning that the Employer does not need to pay any contributions to the Plan on their behalf, although contributions may have been made during the period of membership.
Some Employers claim that these contributions belong to them. The Plan members usually feel that this money belong to the pension fund, and should be used to improve the funding ratio, reduce Employee costs, or enhance the benefit entitlements of current or retired members.
If the investment performance of the fund has been better than that forcast by the actuary, a surplus, real or virtual, can exist, based on the assumption that the current Plan assets + expected investment income + anticipated future employee contributions are more than sufficient to cover both current, (pensions currently being paid), and future, (accrued benefit entitlements of current members and vested former members), fund obligations. In this situation, the Employer may not need to make any further contributions to the pension fund so long as the surplus exists. A 'creative' actuary can cook the books to some extent, and either create a theoretical surplus, or overstate an existing one, usually by raising the future investment return percentage.
Prior to January 1, 1987, plan members who terminated employment prior to attaining both age 45 and ten years of service were not subject to locking-in provisions, meaning that they could withdraw the current value of the employee portion of their pension without restrictions, and often surrenderring the employer portion in the process. If they were vested, but not locked-in, the vesting would often only have applied if they did not elect a cash refund of Employee monies, but chose a deferred pension instead.
It's important to note the difference between vesting and locking in on pre 1987 benefits. Vesting means that the plan member qualifies for benefits based on Employer contributions. Locking in means that the pension benefits must ultimately be received as the retirement annuity. Current legislation, Ontario Provincial and Federal, provided for both vesting and locking in after two years of RPP membership.
Most defined benefit plans do not give any improvements to former members who terminated while vested, but prior to early or normal retirement age.
Take, for instance, the employee born December 31,1965, who contributes 5% of wages to the pension plan from age 25-35, then terminates employment in January, 2001.
His normal retirement date will be in January, 2031, and he can apply for a reduced pension, on or after January, 2021. Typically, the reduction for early retirement of a former member is 6% per year, (as in CPP), so he could apply for 100% of his monthly pension at age 65, or 70% at age 60, or 40% at age 55.
That pension will be based on benefit rates in effect from 1991-2001, rather than those that may be in effect between 2021 and 2031. Although his benefit entitlement is fixed, his Employee contributions continue to accrue investment income, meaning that he pays for more and more of the pension himself, and the Employer funds the difference. If the benefit formula is low, and the employee contribution rate is high, it's very common that the present value of the Employee portion may exceed the total value of the pension.
Changes were made to pension legislation at January 1, 1987 that require Employers to fund at least half of the benefit earned after December 31, 1986.
Take the example of two men, born December 31, 1955, and December 31, 1979, who join a Union defined benefit pension plan on the same day, January 1, 2001. Let's also assume, for illustrative purposes, that one dollar, with compound interest, will double every 6 years. We'll also assume that, at age 65, one dollar of monthly pension for life is equivelent to $100 in an RRSP.
Each man participates in the plan for 8 years. They would have received the same wages and pension benefits under a Union Collective Bargaining Agreement. Let's also assume that the monthly pension entitlement at age 65is $50 for each year of membership.
Both employees will be entitled to a monthly pension of $400 at age 65, or a reduced amount on or after age 55. Using the 6% per year reduction rate, $160 per month if the pension starts at age 55, or $280 per month if it starts at age 60.
The older employee is age 53 at the date of termination of employment. He can apply for his full pension of $400 per month in twelve years, or a reduced amount in two years. In addition, prior to age 55, he can elect to transfer the commuted value, (calculated present day value of the benefit), to a locked-in RRSP, or other locked-in Plan.
The younger employee is age 29 at the date of termination of employment. He can apply for his full pension of $400 per month in 36 years, or a reduced amount in 26 years. He also has the option, prior to attaining age 55, of transferring the commuted value of the benefit to a locked-in RRSP, or other locked-in Plan.
At the termination date, the older employee's commuted value will be $10,000: $400/month @ age 65 X $100 for each dollar of monthly pension at age 65, divided by 4, because one dollar would increase four fold in 12 years.
At the termination date, the younger employee's commuted value would be $625: $400/month @ age 65 X $100 for each dollar of monthly pension at age 65, divided by 64, because one dollar would increase 64 fold in 36 years. And yet, the Employer contributed the same amount on behalf of each during their period of membership in the Plan.
This is an extreme example for illustration only. Rather than using the value at age 65, the calculation would most likely be done based on the 70% entitlement at age 60, and an assumed interest rate much lower, usually based on the average CANSIM bond rate from the previous 12 months for the first five years of the calculation, and 6% thereafter, but the concept is accurate. Each would have a commuted value calculated to be equivelent to the lump sum which, if left to accrue interest until age 65, would be sufficient to purchase a benefit of $400 per month.
For anyone who is considerring a transfer from an RPP to a locked-in RRSP, the crucial information is the interest assumptions used in calculating the commuted value. If you believe that your rate of return in the RRSP will exceed the assumptions used in the CV calculation, you may ultimatley get a better pension when the RRSP is annuitized. If you think the pension plan may no longer exist when you reach retirement age, consider transferring. If you think the interst rates used in the CV calculation are too high, consider the transfer option at a later date; it will be available to you provided that you have not yet attained age 55 at the transfer date.
Note that the option of CV transfer to a locked-in RRSP is not guaranteed under legislation if Plan membership terminated prior to January 1, 1987. If that's the case, you probably have to wait until attaining age 55 to receive any benefits, (Registered plans must allow for early commencement of benefits on or after attained age 55; they can't make you wait until you're 65).
If there is any doubt as to what your decision should be, hire a professional investment advisor, don't base your retirement decisions on what you read on an escort review board! Do, however, bring up some of the points listed above, and if he/she can't explain your entitlements, options, and risks, to your satisfaction, hire someone else!
drlove said:
you can only transfer if you leave or the company has it set up that you contribution goes to a broker
Bito, you're right it was the Pension surplus that I was thinking of. In M & A, Pensioners in DPP fighting to keep surplus in plan. For some, the court case settlement if any, may outlive them. It's been years since I worked with Pension, vesting, PBSA, etc.
