Gold Plated Pensions – A Blessing Or A Curse?

This guest post was written by Robb Engen, who blogs about Canadian personal finance at Boomer & Echo. Together with his mom, (she’s the Boomer, he’s the Echo) they offer their own unique perspectives on saving, investing and personal finance. Add Boomer & Echo to your RSS reader today!

Did you know that the average person will stay in the same job for less than 5 years? This means that you will likely have at least 6 to 10 different jobs throughout your entire working life.

For the 29% of Canadian workers who currently contribute to a defined benefit pension plan this presents a bit of a challenge, especially for younger employees.

The Golden Retirement Plan

A gold-plated pension has been seen as a blessing for Canadian workers for decades, but these pension plans are now hard to come by outside of the public sector. Employees lucky enough to have such a plan were thought to be set for life in retirement.

The basics of the defined benefit plan look something like this:

– Employee contributes a certain percentage of their salary towards the public or company pension plan

– Employer matches that contribution

– As your salary increases throughout your career, contributions continue to grow

– Employees max out their pensionable service when they reach the magic number of 85 (age + years of service)

The retirement benefits will vary depending on the type of plan offered by the employer, but a typical defined benefit pension formula can look like this:

2.0% x Years of Service x Best 5 Year Average Salary

Using real numbers, if you were hired by your employer at the age of 25 and worked there for 30 years with your best 5 year average salary of $100,000, your annual pension income would be $60,000.

Pension Pictures, Images and Photos

Set For Life, Or Life Sentence?

As a young worker, there is one number that stands out above all the others. 30 years with the same employer? In order to maximize your defined benefit pension retirement benefits, you need to be in it for the long haul.

That seems almost inconceivable for this generation of employees who fall in and out of love with their jobs faster than Apple updates the iPhone.

I’ve witnessed firsthand the complacency that sets in amongst many public sector employees who do the least amount of work possible in order to collect their paycheque every two weeks until they finally reach that magic number where they can retire and receive their gold-plated pension.

Is that any way to live your life? If complacency is setting in after just 5 or 10 years with the same organization, how in the world are you going to make it for 25+ years? Young workers definitely have to consider this when choosing their long term career.

Leaving The Pension Plan Before Retirement

 

If you leave the pension plan before your normal retirement date, your eligibility for benefits depends on the length of your pensionable service and your age.

There are three options for those leaving a company with a vested pension:

1. Leave the funds in the plan and collect the pension benefits at the time of retirement.
2. Transfer the funds to a new pension plan, if the new pension plan allows this.
3. Transfer the amount into a locked-in RRSP, or LIRA.  A LIRA is similar to a regular RRSP except withdrawals are not allowed until the employee reaches retirement age.

Are You Better Off Investing On Your Own?

My defined benefit contributions make up more than 11% of my salary, leaving me with little opportunity to create my own investment portfolio. Directing all of your savings towards retirement when you’re young may help build up a sizeable nest egg, but is it in your best interest?

With an RRSP you can use the Home Buyers Plan to withdraw money for a down payment on a house, or use the Lifelong Learning Plan to upgrade your education. And with the Tax Free Savings Account you can withdraw money at any time, tax free! These investing options give you a lot more flexibility compared with the rigid defined benefit pension plan.  It's also worth noting that today's fintech investing platforms make investing on your own cheaper and easier than ever before.  If you're looking for a TFSA or RRSP solution that you can “set-and-forget” then Canada's robo advisors offer the best path.  See our Wealthsimple review for the quickest possible way to take a piece of your paycheque and convert it over to an investment portfolio (we ranked it a 4.9 out of 5).  On the other hand, if you're looking for the investment strategy that cuts fees to the absolute bone in Canada, then you're going to want to take a look at our Questrade review where we detail exactly how to use their no-fee ETFs to build yourself a couch potato portfolio that will maximize your nest egg over the long haul.  If you're going to use a discount brokerage such as Questrade or Virtual Brokers, then you'll need to do a little more math (and it's a little more paperwork upfront) than going the robo advisor route, but considering that fees are one of the only things that investors can really control, it's certainly worth your time to figure out which options works best for you!

Changing The Way We View Pensions

There was a time where landing a job with a defined benefit pension plan right out of University was considered a ticket to a golden retirement. Employees were loyal to their employers and in turn expected to be taken care of when they retired.

But Generation Y doesn’t envision working for the same employer for their entire careers. They want to take time to find their passion, reach outside their comfort zone, or maybe start their own business. They want the ability to invest their own money and choose their own retirement date.

Readers: What’s your take on the gold-plated pension known as the DBP? Is it a blessing or a curse for the young generation?

42 Comments

  1. Val Baumann on June 8, 2011 at 10:42 am

    I used to think that these defined benefit pensions were a blessing. And in fact they were for a time 40-50 years ago when people and businesses were loyal and entered into “long term relationships” with one another. People showed up for 25-30 years, did their job and their employer rewarded them with a pension.

    The world is different now and so are people. For the most part, people want to direct their own life and their own work now (especially Gen Y/ Gen X) rather than just “take orders” from a mega corporation. Younger people are focused on building a career not merely a job. They understand that a career often includes multiple jobs in many organizations…including some entrepreneurial efforts of their own. They see their growth coming from their own actions and not those of their employers.

    With this new world thinking, though, comes certain responsibilities. One of them includes becoming knowledgeable about savings and investments so they can also “grow financially” from their own actions. I’d like to see Gen Y/Gen Xers do better than their parents and really learn how the economy works and how investing/saving for the long run is done best. It is so important. I provide financial education and advice to young people as well as Boomers. They want to learn and seem generally to get that they need to manage their own future.

    Learn all you can about the financial world around you. Find trusted mentors and advisors. Then, whether you have a pension or not….you’ll be able to grow your way to wealth…..in that ” individual sort of way” that you live already!



  2. Obsessive Compulsive Daniela on June 8, 2011 at 10:44 am

    Wow, 11% of your income. I work at a university and have a DBP, and I contribute just over 5% of my income. Although this is a really contentious issue at my workplace right now, the amount could very well increase after our contract is renegotiated this year.

    I’m almost 27, and 30 years definitely feels like forever right now. But you are right, it’s really hard to turn my back on my pension, especially when I also consider the vacation time/personal days and overall salary I receive. At the moment, I don’t LOVE my job, but I don’t mind it, either, and I could always change departments, so it’s not an issue. I can definitely see how it could become an issue, though.



  3. Financial Uproar on June 8, 2011 at 9:22 am

    I come to Young and Thrifty for Y&T, dammit! Screw off Echo!

    Just kidding. Sort of.

    As for pensions, I know a lot of teachers. And they admit the pension is a big perk of being a teacher. And if they don’t, I accuse them of lying.



  4. Echo on June 8, 2011 at 9:38 am

    Sorry Uproar, I’m everywhere (better lock your doors!).

    I agree that a pension can be a huge perk, I just think that 25+ years is a long time to spend with one organization in order to max out the benefits.

    How many teachers lose their passion after 5-10 years and are now caught in the trap of doing something they don’t really enjoy anymore just because of the allure of the DBP?

    I also believe that DBP’s are misunderstood by people who don’t have them. The pension is not a gift, you are forced to contribute (heavily) to it with your own income.

    Would I save 11% of my salary if I wasn’t forced to by my employer? Probably, but it wouldn’t all be in my retirement account. I would try and split my savings between RRSP, TFSA, mortgage paydown and even RESP’s depending on the year.

    The forced savings plan is good for some people, but others (like me) might enjoy a bit more flexibility and control.



  5. Echo on June 8, 2011 at 10:51 am

    @Val
    Well put! You said it better than me in about 1/4 of the words. Thanks for your comments!



  6. Echo on June 8, 2011 at 10:56 am

    @Obsessive Compulsive Daniela
    All of the Universities in Alberta are on the same plan. Check out these contribution rates – www.uapp.ca/Defau…?tabid=511

    You bring up a really good point about considering your other benefits as well, such as vacation time/personal days. And changing departments is a very real possibility which could open up a whole new career path while staying within the same organization.



  7. Mike Holman on June 8, 2011 at 12:12 pm

    Interesting topic. I guess there are a number of reasons people are “hand-cuffed” to their jobs, but a good pension has to be one of the most common ones.

    A small point – if you leave a DB pension plan, the money has to go into a locked-in RRSP otherwise known as a LIRA. You can’t put it into an RRSP and you can’t cash it out.



  8. Echo on June 8, 2011 at 1:21 pm

    @Mike
    I’m not sure if you can paint all DBP’s with the same brush. Best to check with your plan provider on your options. With my DBP, unless I’m over the age of 55 when I leave the plan, I have choices about what to do with my pension funds. The choices includes a cash payout, an RRSP transfer or a LIRA.



  9. krantcents on June 8, 2011 at 2:47 pm

    As a teacher, I will receive a pension, but I look at it as a base. I will also receive Social Security and I am contributing to a 403B, IRA and Roth IRA too. I look at it as multiple income streams.



  10. young on June 8, 2011 at 9:47 pm

    @krantcents- I’m not sure how the taxation system in retirement work in the US, but do you get heavily taxed when you withdraw from the retirement accounts? That’s one of the reasons those in Canada with DBP’s aren’t recommended to save up too much for an RRSP, because otherwise, you get taxed when you withdraw from your RRSP and when you have a monthly pension.



  11. young on June 8, 2011 at 10:25 pm

    @Financial Uproar- Haha, Echo read my mind- I’ve been meaning to write a post about DBP’s! There are many many perks of being a teacher, 2.5 months of vacation being one of them, pensions, once you’re in- you’re in etc. etc. There are a lot of downsides too, including having to plan your lesson plans etc. (At least that’s what my teacher friend tells me).



  12. young on June 8, 2011 at 10:28 pm

    @Echo- My DBP is only 4.7% of my gross income. It still adds up though (amongst all the other deductions off my gross pay). 25+ years is a long time to spend with one organization, especially if one is of the Generation Y age. I agree- as a Gen Y I can’t see myself working for 25 more years until I hit the golden 30 year number. I guess the boomers, and Gen X’s can call us lazy 🙂 (or as we like to call it, efficient). However, you never know- time really flies when you’re working. I can’t believe I’ve been paying into my DBP for 5 years already myself!



  13. young on June 8, 2011 at 10:31 pm

    @Val Baumann- There are still some people who view DBP’s as a blessing, or that getting a DBP paying job is a career “jackpot”. I unfortunately don’t think that Gen Y will do better than our parents. The inflation rate is just so high, people are graduating with large levels of student loan debt even before they start getting paid, and Generation Y has a short attention span (as evidenced as my BF who is on his 4th job right now.. I think I lost count).

    Thanks for your comment- it is a great message 🙂



  14. My University Money on June 9, 2011 at 11:23 am

    I am one of those teachers that feels “locked in”. I would like the freedom to invest my own money and would vote any day to switch to a defined contribution. Give me the ability to make my own decisions! I feel that I could get better returns on my own money and don’t understand how I’m forced to give up part of the pay for the services I’ve provided. It shouldn’t be allowed, and their should be an easier RRSP switchover (1 time exemption) if you choose to leave before your “magic number”.



  15. Financial Independence on June 9, 2011 at 2:08 pm

    Honestly, I would have such option – I would be a happy bunny. Yes it is a long relationship, always like a marriage.

    But Big Companies are not bad a tall, slightly more strict than small, but there is certainty in them.

    And typically you are on a handsome salary with them any. Otherwise you are getting about the same salary elsewhere without any guarantees.

    Our company stop doing it for young generation, but senior colleagues do have it. You know what? They leaving paycheck to paycheck, hustle free.

    Their future is guaranteed. I made my calculations – I have to save away at least 20% of my salary just to have the same at age of 65 🙂



  16. SJ on June 9, 2011 at 2:09 pm

    I think the issue starting to be seen with DBP plans is the funding shortfalls (i.e. Ontario Teachers’ Pension Plan). The question is who pays for the shortfall? Certainly not those currently receiving pension benefits (legislation tends to protect them). The onus appears to be falling on working members. It begs the question, will working members end up overpaying for a reduced pension going forward? A lot of DBP plans were setup years ago with overly optimistic assumptions (investment return, life expectancy, and an ever increasing number of contributing working members). The baby boomer effect is going to radically change the future DBP retirement landscape.



  17. young on June 10, 2011 at 12:28 am

    @SJ- Excellent point. The baby boomer effect will radically change the future of Canada in general, especially in terms of health care costs and the economy. I guess that’s why the TFSA is a good idea- you rely on your own after tax income. However, with more and more money becoming tax sheltered, where will the money come from to fund for our future?



  18. young on June 10, 2011 at 12:31 am

    @My University Money- What’s the percentage of your gross income that you have to contribute to your DBP? I’m okay with 5% of my income, but I don’t know if I would be okay with 11%- that’s quite steep. I think the defined contribution stems from a very union-like mentality 🙂



  19. Brad Mol on June 10, 2011 at 9:35 am

    The benefit of a DB is that the employer is taking on the risk of funding a defined income stream in the future. Employers have shifted more and more to a DCPP plan so that their costs are defined and the risk of deriving an income from the DCPP falls on the employee. This is not all bad though considering the points raised in this post about wanting more control, and the frequency of job changes. DBP’s usually have a reduced income paid to surviving spouses and in most cases there is no value to your Estate when the second spouse dies. If you don’t live to life expectancy it’s possible you would have paid more into the plan than you received. With DCPPs 100% of the asset rolls to your spouse and 100% of any residual after second death passes to your estate. There is more control over how the funds are invested, flexibility when you change jobs, access to the funds for HBP and LLP, and sometimes you can even do an annual transfer out of the plan to a self-directed RSP so that you have even greater control over the assets. There are many variations of both types of pension plans and if given the choice, options should be carefully considered.



  20. krantcents on June 10, 2011 at 12:04 pm

    In the US, except for the Roth IRA, when you withdraw money in retirement it is taxed as ordinary income. In theory, retirees are i a lower tax bracket in retirement.



  21. FA Guys on June 10, 2011 at 12:53 pm

    I think the biggest reason we view pension plans differently can be summed up in your last sentence; “They want the ability to invest their own money and choose their own retirement date.” I think this is the reason that many people justify leaving certain pension deals because the chances of finding employment with a larger income is not impossible. Its a matter of making carefully informed decisions and budgeting your finances from the start that makes the reliance of pension plans a thing of the past.



  22. South County Girl on June 10, 2011 at 8:41 pm

    My U.S. pension is a little different… I have to wait to take it until 55 or older so if i leave work before that I don’t have to cash it out… i can wait and pull what I’ve earned at 55.

    My formula:
    (2.75%) X (5 years at the company) X (highest year salary)

    My salary is $17.98 an hour x 80 hours a check x26 checks a year =$37,398

    So I’m actually earned a pension worth $5,142 year or $428 a month as of now. If i work till i’m 55 (i’m 25 years old now) and never get a raise, i’ll have 35 years of service total… and that will make my pension almost $36,000.00 a year or 96% of my salary…. Yeah, i’m staying with my job…

    So to fight the stereotype, I keep picking up projects, working in multiple departments and growing as an employee instead of being complacent. I’m just very blessed to have been hired at 20 into a full time job while still going to school…

    and fyi, I started working there at 16 without benefits working minimum wage so i’ve actually been here already for 8 years… which already blows the job changing stats out of the water.



  23. Sustainable PF on June 12, 2011 at 6:49 pm

    Great analysis.
    When I joined the public service as an intern, my mentor told me “after about 10 years of service your pension has you by the balls”.

    In July I hit 9 years and it is increasingly difficult to give up the pension. Mrs. SPF is now a public servant at the same place so we have 2 pensions.

    I personally think I can have multiple careers in the OPS. E.g. I started as a programmer for 3 yrs and have been a business analyst for 6 years. I can move into Business or Information architecture, data modeling, information management, project management or try to get into a business area as i’m on the business side of IT. As this is the case, I don’t feel as handcuffed to my job as I do to the employer. But the money is great for the smaller city we live in and our retirement is more or less taken care of – our investments are gravy.



  24. young on June 12, 2011 at 11:05 pm

    @Brad Mol- Thanks for the clarification, Brad. You’re right- if one doesn’t live to full life expectancy, having a DBP sucks balls. I know of many people who retired, then shortly after, got cancer and didn’t get to enjoy their pension. Life is short 🙁 that’s why I’m an advocate of enjoying your life (to an extent) now, because you never know what will happen in the future.



  25. young on June 12, 2011 at 11:07 pm

    @Sustainable PF- I think being ‘handcuffed’ to the employer doesn’t have to be a bad thing, especially when you have so many different jobs under the same employer umbrella you can move to. You can do 5 years at each place 5 times- if I did that, I doubt I would be bored too. Having your retirement taken care of is great, in my opinion- one less thing to worry about!



  26. young on June 12, 2011 at 11:24 pm

    @South Country Girl- you’re like a rare 20-something species! 🙂 I think as long as you work in multiple departments, it keeps things fresh. Who knows maybe you’ll be a manager a few more years down the road (or CEO?).



  27. young on June 12, 2011 at 11:27 pm

    @krantcents- that sounds very very similar to the Canadian RRSP



  28. young on June 12, 2011 at 11:30 pm

    @FA Guys- That’s true- but sometimes the stability is a nice thing too. It would be interesting to see the difference between female and male perspectives on gold plated pensions. I think that (now I am generalizing) that females may prefer the stability of the gold plated pension. Whereas males may want more growth, challenge, and opportunity with their jobs. Thoughts?



  29. […] I’m not including my defined benefit pension which is >$30,000 […]



  30. Why Having a COLA Is Pretty Sweet on September 29, 2013 at 8:15 pm

    […] Related:



  31. R on February 17, 2014 at 3:09 pm

    My advice for those that start at a DB job for a few years : leave it to follow your passion, find your dream job, but always intend to return eventually for the 5 years of your career once you can land a senior high paying position. This will mean those early years will count for way more $$$. eg 3 years of $45K at start of career will get you $2700/yr. But return late in career gor 5 yrs and avg $100k well now those 3 early years will earn you $6000/yr



  32. jay on August 19, 2016 at 4:40 pm

    DBP doesn’t need to cost much. I believe private company are allow to adjust, so someone’s DBP might just be: 1.0% x Years of Service x Best 9 Year Average Salary…



  33. Carlyle on August 23, 2016 at 9:20 pm

    A few comments,

    In my industry (in Canada) as an Employmemt Counsellor, the vast majority of positions are outsourced to non profit organizations that act as a quasi public service minus the benefits and salary. Most of my colleagues make between 40 – 50k a year with no pension and often no benefits in contract positions. I recently landed a position with the government at age 39 that has DBPP. The position with pension pays over double my last salary. So heck no I have 0 plans of moving and hope to stay here for life. I’ve done the “new contract every 2 years” thing. It sucked. I’m thankful that now I can hopefully have a decent retirement with 23 years in a DBPP … thank god I got in before it was too late.



  34. Tom on August 25, 2016 at 2:29 am

    DB is still amazing, if you go about it right. Look at police pensions, a city cop who works the beat for 25 years and does not get promoted. If they started in their job at 23, they would be 48 years old with a pension of 55k a year (indexed to inflation) if retiring today. At this point they enter a work optional stage of their life, with plenty of time to pursue further ambitions. Not many people without DB can be work optional in their 40s. Most people have to work until government benefits kick in to make sure they have enough. Sure you can’t access the rrsp for a down-payment or education, but that is a bad financial decision anyways, because you’ll get taxed to hell and back since you would be accessing your rrsp during high income years.



  35. Kyle on August 26, 2016 at 12:53 pm

    Congrats on landing a great new gig Carlyle – reap the rewards!



  36. Cindy Gutcher on October 3, 2016 at 11:38 am

    I worked for a bank and didnt contirbute to my pension. The commuted value is $340,000. Im allowed to trasnfer $200,000 to a LIRA and $140,000 to claim as additional income as no room in my RSP as purchased my own every year so I tooked the monthly pension as defined. Was this a wise decision?



  37. Kyle on October 3, 2016 at 3:08 pm

    That was a very wise decision IMO Cindy. Without knowing the rest of your details it’s impossible to tell for sure, but taking that 140K as income would result in a super high tax rate – so you did well to avoid that.



  38. Sheila on January 20, 2017 at 2:06 pm

    I have a question for you and hope you can clarify something for me.

    I have a DBP and started employment at age 17, however, the company didn’t start my DB plan until age 25. I am 37 years service next month yet my pension is only vested 30 years.

    Why did the plan not start when I joined the company or after all probation periods? I’ve had full benefits for healthcare etc after 6 months. Thanks in advance.



  39. Kyle on January 22, 2017 at 10:47 am

    It could simply be that the company only started the DB plan at that point Sheila. I’d ask HR for my pay stubs from that period in order to verify. Congrats on being with the same company for 37 years!



  40. Ken on January 22, 2017 at 8:13 pm

    DBP

    pros: well diversified investments with generally low fees (my plan has the equivalent MER of .006 — on par with the lowest cost ETFs)

    cons: you are giving up your capital for a future cash flow and may not live long enough in retirement to fully capture all of the benefits that you should be entitled.

    Most financial planners would consider those who have membership in a DBP to be fortunate.



  41. R on January 27, 2017 at 2:24 pm

    I’m pretty much the last of the old school defined benefit pension plan lucky ones. The day I finished high school I got a job with the government and I’ve had a defined benefit pension plan that I’ve been contributing to since 1993. I’m guaranteed a full pension that is unreduced the day I turn 55 years old. As a matter of fact I’ve been a contributing member so long that I don’t have to contribute any more the day I turn 52. My advice is if you can get into one of these jobs with a golden pension like I have to keep it. Nevermind you’re stupid dream you know what your dream is going to be? Your dream is going to be to have food in your fridge and a roof over your freaking head.



  42. Keven on February 1, 2017 at 11:54 am

    What usually are the perks of an average high school teacher 10% pension plan (conservative estimate of 46 000$/year)? With time, do you gain capital via interest’s? Do the employer really match the contribution (i.e.: for a 350$ contribution/month, the employer will give you an additional 350$)?

    If the latter is true, it would seem that for 15 years (the person is a Mustachian and don’t want to work more than that 😛 ), you would have invested 63 000$ and the employer would have matched it (+63 000), resulting in 126 000$.

    Let’s say that you invest that 63 000 (4200$/year) in a 0,5% MER ETF portfolio for 15 years with an average of 8% interest gain/year and 2% dividends gain/year. If my calculations are right, it gives me 129 490,43$.

    Indeed, in this situation, the individual would gain a couple of % more with personal investing than the pension, but the loss is far from a catastrophe (saying that the Mustachian is saving 30%+ of its income thus leaving a lot of space for personal investment).

    Am I correct with this one or am I forgetting something? I’m quite new to the world of finance and I appreciate all new knowledge! 🙂



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