# DB vs. DC Pensions



## Sampson

The series of articles in the Globe and Mail about the growing problem of underfunded public and private pensions has got me thinking.

Are DB really that good? I know from some of MDJ's posts that Federal Government Employees can get 70% of their average salary from their last few years of service, but I think that's rare. In my public pension plan, it appears that % of salary paid out are about 55%, 47%, 39% for 35yrs, 30yrs, and 25yrs of service respectively.

Given that my contribution rates keep going up (20% next year - half from employer), I was wondering whether I'd be better off with my employer simply giving me that money.

I made some preliminary models, and I'm actually finding it difficult to see an obvious benefit to the DB model. My rates of returns over the years of service were very modest (4-5%) - and considering many DB pension plans have severe penalties for early retirement, I'm starting to think I wish I had a DC plan (with similar rates of employer matching funds).

Taxes obviously play a major role, but lets assume all the money goes into an RRSP so is not taxed in either the pension, or in my own hands.

I'm I way off base here? Thoughts?


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## MoneyGal

You are focussing on one aspect of retirement income streams -- expected return. 

In my view, this is not the appropriate way to evaluate whether you'd be "better off" with a DB or DC pension. 

DB pensions protect against two three major risks to the sustainability of income in retirement -- longevity and Sequence of Returns. If they are inflation-adjusted, they protect against inflation risk as well.


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## yyzvoyageur

You're starting to sound like me:

http://www.canadianmoneyforum.com/showthread.php?t=1060

If I had the choice, I would take all of the money going toward my pension and CPP and invest it myself within an RRSP. I'm convinced I would be better off.

What pension plan is that? The percentages sound really odd.


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## Sampson

MoneyGal said:


> DB pensions protect against two three major risks to the sustainability of income in retirement -- longevity and Sequence of Returns. If they are inflation-adjusted, they protect against inflation risk as well.


Hadn't given these factors too much thought. I suppose the age/longevity assumptions have to be made, but it wouldn't be very nice I'm 95 and end up without pension money. Perhaps protection against the risk of sequence of returns is their biggest advantage. I know my pension is not fully indexed to inflation so only limited protection there.

Pension plan is Alberta Public Service Pension Plan. Only started to look into payout %'s, so those are rough estimates.

I think it may not work well for me because I plan to retire early, and not actually participate in the pension contributions that much 

Oh well, I guess I'll have to keep planning as if I won't be getting a pension


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## ghostryder

yyzvoyageur said:


> You're starting to sound like me:
> 
> http://www.canadianmoneyforum.com/showthread.php?t=1060
> 
> If I had the choice, I would take all of the money going toward my pension and CPP and invest it myself within an RRSP. I'm convinced I would be better off.
> 
> What pension plan is that? The percentages sound really odd.



There is an interesting perspective in the book "Filthy Lucre" on this topic.


"when we purchase life annuities as a group through an employer they are no longer called annuities. Instead, they are called "defined benefit pension schemes". This change in nomenclature creates all sorts of confusion; there is an inclination to regard pension schemes as savings arrangements, rather than insurance products. Nevertheless, an annuity is essentially what is being purchased: in return for an upfront payment (the "pension contribution"), the employer guarantees a fixed periodic payment from the time of retirement until death.

.... In the debates over "privatization" of social security in the United States, for instance, people routinely compared the rate of return of money that was saved and invested in the stock market with the rate of return of money paid into Social Security. *Yet analyzing the latter in terms of rate of return involved a category error. It amounted to comparing an investment to an insurance policy....*


<paraphrasing here> what proponents of "privatization" of Social Security in the US were reccomending was not really privatization of the system. That would be people purchasing their own annutities individually. What they are actually reccomending is that people stop purchasing insurance and simply save for their own retirement.....their goal was simply to undo a mutually beneficial risk-pooling arrangement for no other reason than an ideological hostility to government."


Maybe you could do better on your own, but are you comparing apples to apples? A DB pension, especially a public sector one has a "guarantee" like no other.


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## AndrayDomise

I find that the DB vs. DC debate often misses the point. There's no reason the two can't be reconciled. Many employers still using DB plans offer some form of DCPP or group RRSP as well, to which you can make automatic contributions.

If not, open your own and make contributions. Even with the pension adjustment, there ought to be ample room available to build a complementary retirement nest egg.

DBPP and DCPPs are meant to cover two different forms of risk, and there isn't any reason you can't do both.


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## andrewf

Can't you solve the longevity risk with annuities, and both longevity and inflation risk with indexed annuities? Sequence of returns remains a risk for individual investors, just as sponsor insolvency largely remains a risk for private sector DB recipients. I won't say anything about public sector DB plans, except that it is part of the general problem where public sector workers are paid far more than their private sector counterparts, even without benefits, and once benefits are factored in, it becomes a bit embarrassing.


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## MoneyGal

AndrewF: yes. It is more expensive to purchase annuities privately than to get the same kind of longevity insurance through a DB pension plan, though.


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## CanadianCapitalist

It's interesting that those in DB plans think DC is better and those in DC plans think DB is better. Isn't the grass always greener on the other side?

I work in the private sector and would not be very comfortable being in a DB plan because we are seeing what's happening to pensioners at Nortel, GM and other troubled companies. I'd rather be in a DC plan and assume the risk of a shortfall.

Even before we get to the risks that MoneyGal is talking about, there are 2 risks with DC plans: (1) Saving risk and (2) Investment risk. Employees in DC plans may not be saving enough for their retirement and typically they are on their own when it comes to managing their portfolios. 

Despite these risks, I don't see how the private sector will go back to DB plans. So many have been burned as these plans turned out to be far more expensive than initial estimates.


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## Four Pillars

I don't think there is anything magical about DB plans. The main "benefit" of DB is that for some people, the employer makes some of the contributions.

I guess it boils down to - do you consider the employer contribution to be a "bonus" or just part of your compensation that you have no control over?


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## HaroldCrump

Four Pillars said:


> I don't think there is anything magical about DB plans.


The magic is the longevity insurance, and in many cases, inflation insurance that it provides.
To replicate the kind of retirement income stream, longevity insurance and inflation indexing that gold-plated DB plans provides, a corresponding private sector worker with a SD RRSP in similar job would have to work much harder, longer, make much more gross income and have a higher % of savings put away each month.
For someone who begins working for the federal govt. in their mid-to-late 20s, is easily able to retire at 55 (or earlier, depending on when they started) with the full force of the govt. pension behind him/her.
The RRSPers are faced with very stiff risks (esp. equity market turmoil) that most RRSPers will not be able to overcome.
The best case scenario for them is hoping they have enough to buy an annuity.
I don't know the going rates of annuities, but I'd imagine that getting an annuity that has the inflation indexing and longevity insurance features of a DB pension at age 55 will be extremely expensive, esp. these days with low interest rates.


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## MoneyGal

The magical thing about DB pensions is that they are cheaper for employees to participate in and employers to buy. 

Why? Forced participation. 

People who buy annuities privately tend to be healthier than the population as a whole, which drives the price of annuities up relative to the longevity insurance provided by DB pension plans. 

In a DB pension plan, *everyone* participates, whether they are long-lived or not, and whether they personally have no longevity risk aversion (and thus would opt out of the company pension plan if they could). And then those who die earlier (and stop receiving pensions) subsidize those who live longer than average. 

No privately-purchased personal pension can ever match that. This is the same reason why CPP is a "good deal" for recipients, and pays more than a similar lump sum (the discounted value of CPP entitlements at retirement) would buy in the open market. 

I think the "grass is greener" arguments arise because people compare two different things. If you look at longevity risk, DB pensions are a no-brainer winner. But if you are looking at retirement savings through an investing lens (not a longevity risk lens), all of a sudden DB pensions look "riskier" because the payout depends on an uncertain and random date of death (plus loss of liquidity, credit risk of the issuer, etc). 

In addition, I think a couple of issues are being collapsed in this discussion: one is - which is the best way to save for retirement? And the other is, which is the best way to provide for a guaranteed lifetime stream of income once you are IN retirement? 

I think these two questions need to be considered separately, and suggesting that somehow DB and DC pensions are "the same" or "there's no winner" is evidence of these two aspects being collapsed. 

JMO.


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## MoneyGal

X-post with HC, who makes excellent points. An inflation-indexed annuity purchased at age 55 (especially for a woman) is staggeringly expensive and the true value of public sector pension plans is enormous.


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## MoneyGal

An indexed pension of $50,000 for a 55-year-old woman costs about $1M today.


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## Sampson

CanadianCapitalist said:


> It's interesting that those in DB plans think DC is better and those in DC plans think DB is better. Isn't the grass always greener on the other side?


Not necessarily a 'grass is greener' situation for me necessarily, I'm just a control freak and would like plan the remainder of my savings/investments accordingly.

What got me first going on this issue was looking into the 'milestone' years of employment that are required to have bumps in the DB payout.

Because I have plans to semi-retire very early, having worked between 15-20 years, the payouts (although protected against inflation and longevity risk) will not be nearly as good as those working 30+ years (i.e. the payout is not linear to time worked).

If I had a DC plan instead, at least I could plan my asset allocations properly. Who knows how these public pensions will fair, and what the rate of contribution increases will be over my years of employment.

I agree with both MoneyGal and Harold, re: annuities and also forced participation. These are likely overwhelming benefits to most in this pension plan, just not necessarily beneficial to me


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## OhGreatGuru

Sampson said:


> The series of articles in the Globe and Mail about the growing problem of underfunded public and private pensions has got me thinking.
> 
> Are DB really that good? I know from some of MDJ's posts that Federal Government Employees can get 70% of their average salary from their last few years of service, but I think that's rare. In my public pension plan, it appears that % of salary paid out are about 55%, 47%, 39% for 35yrs, 30yrs, and 25yrs of service respectively.


I've taken a quick look at the Alta Pension Plan booklet, because the numbers you quote are at variance with other typical public pensions, such as the federal public service. The difference seems to be in how they handle coordination of benefits with CPP. The federal plan is nominally 2%/year of service to a maximum of 35 years, or 70%. But that pension is reduced at age 65 by a formula that approximates your CPP entitlement. The Alberta formula, on the other hand, seems to incorporate the CPP integration right off the bat - the pension is 1.4%/ year of service for the average salary up to the YMPE, and 2% for the portion of salary over the YMPE. But then there is no reduction at age 65.

The Alberta method might present cash flow problems for people who are retiring before age 60, but in the long term it probably amounts to a similar payout.


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## MoneyGal

Sampson: the forced participation is a benefit to *everybody* in a DB plan during the accumulation stage. You only lose out if you die before 50% of your cohort. 

And I don't know why you'd say "I don't know how these public pensions will fare" - they are backed by the strongest counterparty going, the one that can actually print money to back up the promise. 

But yes, public sector pensions are not linear. They are among the only pensions that pay based on best five (or whatever) years of salary. So what that means is a clerk (for example) who started with a salary of $32,000 but finishes with a salary of (for example) $62,000 will receive a pension as if she had made contributions on a $62,000 salary for her entire career. 

It's really a staggering benefit. The last actuarial valuation of the federal public service plan showed that at the then-current yield of 1.73% (on a RRB), the plan was worth more than 33% of pay. Discounting at today's rates (I usually use 2% to estimate a long-term inflation-adjusted rate) would produce a contribution rate of exactly 30%. That's the cost of the public sector guarantee.


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## andrewf

MoneyGal said:


> An indexed pension of $50,000 for a 55-year-old woman costs about $1M today.


Isn't that about the liability faced by the fed gov't due to public sector pensions? Considering that the federal DB plan requires contributions of ~30% of salary, this seems not far off the mark. My rough calculation tells me than 30 years at 30% contribution on a $50k real salary requires 5% real ROR to yield $1 million. Doesn't sound far off the mark to me.


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## MoneyGal

Yes, but: 

1. public sector workers do not contribute 15% of the totals required to fund their pensions (because of the last-best earnings issue I described earlier) and

2. what 55-year-old female private sector worker earning $60-$65K do you know who has been able to build up a lump sum of $1M by making maximum RRSP and TFSA contributions?


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## fraser

I believe that the debate over whether DB's or DC's are better very much depends on the individuals age, their propensity to manage a DC plan, their ability to save, etc. I am in a DB plan, which ends this year. Ten years ago my employer offered us an option to move to DC while at the same time closing DB to new membership. I was 48 and had 15 years of service. I declined the offer because I thought that that the offer was too little. Many people accepted...it was the time of the internet bubble and 15 point returns were common. A year later, things went south. For me, the DB was really one leg in the three leg stool of personal savings, CPP/OAP, and DB. The DB that I will be getting will form the backbone of my retirement planning even though is is not indexed. Fortunately, the plan is well funded, secure, and not large. I think that we need some immediate changes in provincial and federal regulations governing DB plans to make them better and more secure for both employers and employees.


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## CanadianCapitalist

MoneyGal said:


> Yes, but:
> 
> 1. public sector workers do not contribute 15% of the totals required to fund their pensions (because of the last-best earnings issue I described earlier) and
> 
> 2. what 55-year-old female private sector worker earning $60-$65K do you know who has been able to build up a lump sum of $1M by making maximum RRSP and TFSA contributions?


A worker retiring at 55, with a $50K full pension from the Federal Govt.,would have worked for 35 years since age 20. How many such workers do you know?

Regardless, let's compare apples-to-apples. Federal Govt. employees do not collect CPP. Private sector employees do. Another worker who worked the same length of time in the private sector will probably collect full CPP, which will pay benefits of $10K per year from age 65. So, a private sector worker retiring at 55, should have a lump sum that is less than $1 million, say $850K or so.

I ran a quick calculation. A worker starting off at $30K and ending with $65K over 35 years, contributing 18% of her salary to a RRSP and earning 3% on her investments (all real dollars), will be left with $460K in her account. So, yes, even if you make adjustments, public sector pensions come out as quite generous for those retiring very early.

MoneyGal, where do you find returns for inflation-adjusted annuities. I'd like to play around with different retirement ages.


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## MoneyGal

CC: I have access to tools through work. I'm not aware of any free tools for these calculations.


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## MoneyGal

Also: someone retiring at 55 cannot collect full CPP, because they will have too many "drop-out" years before the normal retirement age of 65. But yes, the comparison should be of total pension entitlements, not just public service pension. I was just throwing up one quick example though. 

However, if you want to make an apples to apples comparison, you should only allow the private sector worker to invest in GICs or RRBs - something with no market risk.


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## Sampson

MoneyGal said:


> Sampson: the forced participation is a benefit to *everybody* in a DB plan during the accumulation stage. You only lose out if you die before 50% of your cohort.


I suppose the benefit is that if the pension plan is underfunded, then the future contributors will continue to pay for my pension.



MoneyGal said:


> And I don't know why you'd say "I don't know how these public pensions will fare" - they are backed by the strongest counterparty going, the one that can actually print money to back up the promise.


I'm not so worried that they will fail, I'm just more concerned that if the pension pool of money performs poorly, then to receive the same benefit, my personal contribution will continue to rise to fund those already retired.


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## MoneyGal

Sampson said:


> I'm not so worried that they will fail, I'm just more concerned that if the pension pool of money performs poorly, then to receive the same benefit, my personal contribution will continue to rise to fund those already retired.


Indeed; a concern you share with every taxpayer out there (civil servants included).


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## andrewf

Private sector DB plans have market risk: the plan sponsor doesn't have bottomless pockets to guarantee market performance shortfalls.

Public sector DBs are not risk free. Even though the government of Canada can print currency, it cannot guarantee a real stream of payments, only a nominal one. If the government needed to default on its debts, it wouldn't do so by refusing to make payments, it would do so by printing currency and devaluing the loonie. Any real-value (ie, inflation adjustment or non-CAD denominated) liabilities would require a hard default, because the government can't inflate these away.

All of this is to say, if indexed pension liabilities got large enough and the government got into debt trouble, those pensions would be far from safe.


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## MoneyGal

Andrew: you have no disagreement from me. But I am speaking (writing) in relative terms, not absolutes. All other factors held constant, I'd choose a public sector DB pension. (It's a moot point anyways; I have no pension plan.)


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## OhGreatGuru

_Regardless, let's compare apples-to-apples. Federal Govt. employees do not collect CPP. Private sector employees do. Another worker who worked the same length of time in the private sector will probably collect full CPP, which will pay benefits of $10K per year from age 65. So, a private sector worker retiring at 55, should have a lump sum that is less than $1 million, say $850K or so._

Actually, they do collect CPP. They pay into it the same as any other salaried employee, whether public or private sector. But like most large pension plans, whether public or private, the Public Service Superannuation Plan has integration of benefits with CPP. As I explained, in the federal plan the effect is that your Superannuation pension is reduced at age 65 by a formula that is roughly equal to what your CPP entitlement at age 65 is (or would have been if you take it early) For rough forecasting purposes you can pretend you won't collect CPP and your pension will continue unreduced, but that isn't actually what happens.

(The reduction only balances out with your CPP if you spent most of your working career with the government. If you did not, then it's more complicated. The reduction in CPP at age 65 is actually proportional to the number of years of pensionable service you have.)

During your working years, you pay CPP premiums as well as contributions to Superannuation. But below the YMPE you pay a lower amount into the Superannuation plan. The rates have been going up in recent years, but in 2010 the contribution rate to Superannuation is 5.5% up to the YMPE and 8.4% for earnings above the YMPE.


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## m3s

Thanks OhGreatGuru

I was going to say, if public sector don't collect CPP then wth do I pay CPP?


When I was in high school I worked weekends and summers for the military, then joined full time at 18 and went to university. By the time I graduated university, I had over 4 years pensionable service. Under the old plan I could have started collecting a DB pension at 37.5 yrs old and began a new career

The new plan seems to take a lot more things into acct such as age, but I certainly don't feel like the grass is greener on the other side.


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## houska

andrewf said:


> I won't say anything about public sector DB plans, except that it is part of the general problem where public sector workers are paid far more than their private sector counterparts, even without benefits, and once benefits are factored in, it becomes a bit embarrassing.


Don't want to take this too far off topic, but this doesn't ring true to me. My wife and I are both professionals, in different fields. In both of our fields, public sector salaries are far less than private sector ones. The generous DB pension benefits in the public sector (in particular the pension peg point to highest paid years at time of retirement) can even it out if you are a lifer. However, at least in our fields to claim public sector compensation is higher requires committing to the public sector career path for the long term and penalizing the private sector compensation trajectory for the increased risk of involuntary job loss.


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## locke

As for DC vs private DB, wouldn't they have similar market risk given that rather you choosing your own investments, the pension manager does?

Where I work I had a choice when I first joined though I had to research it, all my colleagues got forced participation on after 2 years (I harped on them for missing free money via company match).

Now they don't give a formula on DB but it seems to me via the DB vs DC calculator they provided that unless I stayed with the same company at least 10 years due to penalty for early termination it's not worthwhile.

My plan vested after 2 years, so now I keep all company match going forward.

Another considering I would chime in on, is what DC investment options are available. A family member's DC via an auto parts company has completely different investment options than mine. Nearly all hers are actively managed funds with no index options. My has super cheap index options (.07% MER avg) with some active fund options with the MER's are are 25% of the retail equivalent (ex. .81% vs 2.83% for a global fund).

Also, DC seems to encourage what many retail investors do. Chase performance and switch/sell at/or near the bottom.


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## MoneyGal

Both DB and DC pensions have market risk. The question is who bears the risk. In DB plans, the employer bears the risk - the employee does not.


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## OhGreatGuru

houska said:


> Don't want to take this too far off topic, but this doesn't ring true to me. My wife and I are both professionals, in different fields. In both of our fields, public sector salaries are far less than private sector ones. The generous DB pension benefits in the public sector (in particular the pension peg point to highest paid years at time of retirement) can even it out if you are a lifer. However, at least in our fields to claim public sector compensation is higher requires committing to the public sector career path for the long term and penalizing the private sector compensation trajectory for the increased risk of involuntary job loss.


Thanks Houska. In the federal public service, clerical workers are better paid than industry averages, but not the managerial, technical, or professional workers. Private industry periodically complains about having to compete with the government's "overpaid" secretaries and clerks. But the Public Service believes in paying these people a living wage, and giving them benefits, unlike the private sector. 

Having said that, I admit there are some regions in the country where the difference between public service pay and private sector is more pronounced than others, due to lower regional salary rates. That's a function of being a national employer. Proposals to vary salary rates with regions run into all kinds of problems with pay equity legislation.


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## houska

MoneyGal said:


> Both DB and DC pensions have market risk. The question is who bears the risk. In DB plans, the employer bears the risk - the employee does not.


Perhaps I'm being oversimplistic, but here's how I think about it: If you have a DC pension, you face a) market risk, b) longevity risk. and c) investment management stupidity risk. (By c) I mean e.g. return leakage through performance chasing). If you have a DB pension, you exchange all of these for counterparty risk. (MoneyGal is right, your employer has market risk and extremely bad market performance may increase the risk that your employer will not live up to his promises to you). And especially if the DB entitlement is based on terminal earnings, you have higher exposure to job loss risk (voluntary or involuntary) since a disproportionate amount of your pension value accrues in later years.


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## bean438

OhGreatGuru said:


> _Regardless, let's compare apples-to-apples. Federal Govt. employees do not collect CPP. Private sector employees do. Another worker who worked the same length of time in the private sector will probably collect full CPP, which will pay benefits of $10K per year from age 65. So, a private sector worker retiring at 55, should have a lump sum that is less than $1 million, say $850K or so._
> 
> Actually, they do collect CPP. They pay into it the same as any other salaried employee, whether public or private sector. But like most large pension plans, whether public or private, the Public Service Superannuation Plan has integration of benefits with CPP. As I explained, in the federal plan the effect is that your Superannuation pension is reduced at age 65 by a formula that is roughly equal to what your CPP entitlement at age 65 is (or would have been if you take it early) For rough forecasting purposes you can pretend you won't collect CPP and your pension will continue unreduced, but that isn't actually what happens.
> 
> (The reduction only balances out with your CPP if you spent most of your working career with the government. If you did not, then it's more complicated. The reduction in CPP at age 65 is actually proportional to the number of years of pensionable service you have.)
> 
> During your working years, you pay CPP premiums as well as contributions to Superannuation. But below the YMPE you pay a lower amount into the Superannuation plan. The rates have been going up in recent years, but in 2010 the contribution rate to Superannuation is 5.5% up to the YMPE and 8.4% for earnings above the YMPE.



Sure they collect CPP but since the pension is reduced by the same amount, then it is the same as not getting CPP.

We all pay into it, but not everyone benefits from it.
Kinda chips away at some of the gold plating of the DB.


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## MoneyGal

bean438 said:


> Kinda chips away at some of the gold plating of the DB.


No, the actuarial calculations take integration of the federal pension plan with the CPP into account. The gold-plating is still pretty solid.


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## George

CanadianCapitalist said:


> Federal Govt. employees do not collect CPP. Private sector employees do.


Federal Government employees pay into the CPP plan and they are eligible to collect CPP, just as any other worker. The difference is that the federal public service pension plan is coordinated with CPP and has an actuarial adjustment at age 65 that approximates the CPP benefit.

Because of this coordination system, contributions to the pension plan are done at a higher rate for earnings above the CPP YMPE.


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## George

bean438 said:


> Sure they collect CPP but since the pension is reduced by the same amount, then it is the same as not getting CPP.


The CPP reduction isn't necessarily the same amount as the actual CPP benefit. They are usually similar, but they are done as separate calculations and won't always be equal.

For the federal public service plan, the reduction in the superannuation plan always occurs at age 65, but there's nothing preventing a public sector worker from applying for CPP earlier or later as their circumstances dictate.

Personally, I'd rather apply for CPP as early as possible (age 60) and take the reduction. The extra money from age 60-65 can go toward travel and enjoying retirement - money that won't necessarily be needed for later in life (70+).


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## George

MoneyGal said:


> No, the actuarial calculations take integration of the federal pension plan with the CPP into account. The gold-plating is still pretty solid.


Agreed. The main gold-plated feature of public sector pension plans is the fact that they're indexed to inflation. Eliminating inflation risk for a 30+ year retirement is a huge benefit, and one that isn't truly appreciated in these times of relatively low inflation.


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## fraser

I am not familiar with other DB pensions. I belong to a DB Plan is entirely funded by my employer, ie I do not pay any percentage of my salary towards the DB plan. It pays out at modest 1 percent per year of service based on best 5 in the last ten years. Members who remain with the company after age 55 are entititled to a full pension at age 62. The plan is NOT indexed. Based on recent reports, this DB plan is well funded and the company appears to have a secure future.

How would this plan compare to other employer plans? There has been talk of offering a commuted value at time of retirement vs pension but at present I would be predisposed to take the pension vs. the commuted value.


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## MoneyGal

What points of comparison do you want? Yours sounds like a very standard, non-public sector DB pension plan. 

If you want to read more about other plans, you could take a look at this report from Mercer Canada - "How Does Your Retirement Plan Stack Up?"


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## fraser

That is what I wanted to know..was it standard, sub standard etc. Thanks very much for the pointer to the Mercer report.


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## OhGreatGuru

George said:


> Agreed. The main gold-plated feature of public sector pension plans is the fact that they're indexed to inflation. Eliminating inflation risk for a 30+ year retirement is a huge benefit, and one that isn't truly appreciated in these times of relatively low inflation.


Agree it's a huge benefit. But it is also paid for by an additional 1% contribution rate from both employees & employer. (Indexing has a long & complicated history, discussed at some length in an article in Spring, 2009 edition of FSNA newsletter - On Guard)


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## OhGreatGuru

bean438 said:


> Sure they collect CPP but since the pension is reduced by the same amount, then it is the same as not getting CPP.
> 
> We all pay into it, but not everyone benefits from it.
> Kinda chips away at some of the gold plating of the DB.


You do benefit from it. This is the misunderstanding that many public servants have who think they are being cheated out of their CPP. If you wanted to get CPP on top of an unreduced pension you would have to pay more into the pension plan throughout your working career.


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## bean438

I dont see how you benifit from CPP with DB.

You pay into CPP, as does a non DB guy who contributes into an RSP.

RSP guy gets CPP with no reduction in RSP while DB guy gets pension reduced by CPP amount.


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## sags

The payment of a "bridge benefit, transition benefit, special allowance" or whatever terminology the DB plan uses to replace the CPP and OAS in earlier than "normal" retirement age, is a huge benefit to DB pension holders.

These "top ups" represent the equivalent of the CPP benefit and the OAS benefit. When a person reaches the age of 65, they collect from the CPP and OAS, so the top up benefits cease. In the case of the CPP, they may collect earlier than age 65 or later.

This is a development from a few years ago when companies were doing well, but wanted to cut employee costs by offloading older, more expensive employees off the active rolls and onto the pension plan. At the time, pension plans were fully funded and many held a surplus, thus benefits were enhanced to suit the purposes of both the employer and employees.

The DB plan holder doesn't lose anything. They collect the CPP from the CPP instead of the pension plan, until the normal retirement age of 65.

I retired at age 55, with an unreduced pension. I collect the basic lifetime pension plus the top up for the CPP. At age 65, the top up is discontinued and I receive the same amount from the CPP instead, but I collected the equivalent of the CPP for 10 years, plus I will collect the CPP at age 60 this year and will "double dip" which is collecting both the CPP and the CPP equivalent.

Labour unions have bargained for these "top ups" which illustrates they are for the benefit of their members, the DB plan holders.


----------



## Karen

It isn't necessarily true that retired public serants lose the full amount of their CPP from their work pension when they turn 65. I'm a retired federal public servant who took early retirement at age 63. When I reached 65, my monthly pension of $1537.50 was reduced to $1,151.95, and my CPP of $795.92 remained the same, so I still retained about $385.00 of the CPP amount - nearly half.

If I had had the choice of paying fully into both plans, I would have done so, but I didn't have that option.

Edited to add: When I posted this comment, I had only read this page of the thread. On reading the whole thread, I realize that others have already covered the point that I made - sorry about that!


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## sags

There was an article yesterday outlining the problems the Ontario Teachers Pension Plan has to face.

Although they have done very well with their investments, and increased contributions from both teachers and the Province, they are still facing a significant and growing shortfall.

The main problem they have is teachers start work later in life, contribute only for 30 years, and then often collect retirement benefits for a longer period than they worked.

They are required to correct the problem by 2012, but are considering the options this year.

Some of the options being considered are increasing contributions, scaling back benefits, or adjusting qualifying requirements.

They are a good example of how a DB pension is supposed to work.

Constantly monitoring and adjusting to the actuarial soundness of the plan, is a pro-active approach. 

When DB pension plans fail, it is always because the fund managers have failed to implement the solutions needed in a timely manner.

In my opinion, a DB pension plan is the best solution for a guaranteed flow of income, but it doesn't come cheap. Benefits have to be properly funded.


----------



## kcowan

sags said:


> When DB pension plans fail, it is always because the fund managers have failed to implement the solutions needed in a timely manner.


I would think that the failure is more tied to the lack of adequate funding by the plan sponsor. Executive had a free ride or too long on DB pensions. Now they are bailing unless they have access to unlimited funds like the public sector...


----------



## sags

Thanks for the correction........that is what I meant to say.

As the teachers run their own fund, they are in a unique position to alter the plan as required.

Interesting that the HOOPP plan is similar in that the employees have representation on the pension board. They are 100% funded these days.

The plans that fail or get in serious trouble, seem to be the ones that lack any board representation from the beneficiaries.

Maybe a lesson there.......


----------



## HaroldCrump

sags said:


> As the teachers run their own fund, they are in a unique position to alter the plan as required.
> 
> Interesting that the HOOPP plan is similar in that the employees have representation on the pension board. They are 100% funded these days.


That is not a reflection of any superior management on the part of HOOPP vs. the OTPP.
It is simply a factor of the increasing size of the health care sector vs. the education sector.
Hiring of teachers has slowed down, class sizes are bigger, under grade 1 classes are consolidated in many schools now, teachers are starting late, retiring early, and so on.
OTOH, health care is receving more funding.


----------



## sags

I agree with your synopsis.

My main point was that DB pension plans seem to fair better when the employees have representation on the pension plan board, than when the company makes all the decisions regarding funding, benefits etc.

In other DB pension news................

The Ontario Court of Appeal has ruled that DB pensions rank ahead of secured creditors in a bankruptcy. This is a significant development that helps reinforce DB pensions.

http://www.ontariocourts.on.ca/decisions/2011/2011ONCA0265.pdf


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## Rob79

My wife is a teacher in Sask, and there pension plan is a good indexed DB plan. But like many DB plans, it is starting to show cracks, even though it is backed by the government. One example is that currently they are average of best 5 years career earnings, but they are looking at changing that formula to a average career earnings, which is a big difference in the end calculation. They are talking about changing the contribution rate which is at 9% now and matched by government. I am on a DC plan at work and it is a matched 7% for a total of 14%, I then put a voluntary 4% to max out the 18%, the one nice thing about the DC plan, yes there is more investment risk, but at least they can not threaten to change my payout half way through unless I pay more into the plan, once they give me the money they can not take it away, yes I could loose it in the market but at least that is the market which effects everyone. It is hard to say which is better, if the DB plans could keep there original criteria till the end then for sure DB>DC but if not like it is looking like then it may me a coin toss


----------



## MoneyGal

Rob79 said:


> I am on a DC plan at work and...the one nice thing about the DC plan...at least they can not threaten to change my payout half way through


They can't threaten to change your payout because they make no promise of any kind about the payout.


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## Rob79

MoneyGal said:


> They can't threaten to change your payout because they make no promise of any kind about the payout.


Yes, very much correct, but at least they can not change the game half way or 3/4 through and if they do it is only to future contributions.


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## Eclectic12

Rob79 said:


> [ ... ]
> 
> It is hard to say which is better, if the DB plans could keep there original criteria till the end then for sure DB>DC but if not like it is looking like then it may me a coin toss


Another factor is how long one has to accumulate assets in a DC plan. 

A co-worker was convinced he would be better off leaving the DB plan for an offered DC plan, based on having more RRSP compared to the DB plan.

I pointed out to him that:
a) when he was younger, he was not in a pension plan (i.e. zero retirement assets).
b) he only started accumulating RRSP assets after joining a pension plan
c) he did not have a long time for assets to grow (RRSP or DC).

Based on these factors I suspected he was better with the DB benefit than with a DC/more funded RRSP but to run his own scenarios before making a decision.

He was surprised to find that based on his calculations, with an assumed annual growth rate of 8% for the DC plan with increased RRSP contributions, his best case scenario was to run out of money five years before the minimum DB benefits would. (His plan also did not include the 2009 market meltdown.)


Bottom line is that like most of life, one size does not fit all.


Cheers


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## Eclectic12

MoneyGal said:


> What points of comparison do you want?
> Yours sounds like a very standard, non-public sector DB pension plan.
> 
> If you want to read more about other plans, you could take a look at this report from Mercer Canada - "How Does Your Retirement Plan Stack Up?"


Good question about what comparison points to use.


I find it strange to consider this a "standard" DB pension plan as fraser stated that:


> I belong to a DB Plan is entirely funded by my employer, ie I do not pay any percentage of my salary towards the DB plan.


The five non-public sector DB pension plans I've had access to the details (or the option to join), all have included employee contributions.

Come to think of it, all of the DC plans included an employee contribution as well.

So an employer only DB pension plan is new to me.


Thanks for the Mercer link, I'll check it out.


Cheers


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## lmcfaden

Eclectic12 said:


> I find it strange to consider this a "standard" DB pension plan as fraser stated that:
> 
> So an employer only DB pension plan is new to me.


New and/or very unique, however may not be appreciated until retirement. My DB pension was all company contributed, with options for employee contribution to an enhancement account. My RRSP room was less then what it would have been with a DC plan, however there is less need to contribute to a RRSP when you have a funded DB plan in my opinion, (and experience)

At one time, my former employer had a DB, DC and a COMBO plan that was half DB half DC. My opinion is the better options are related to employee retention, keep those old folks around by offering a stable reliable long term retirement payout, the DC with opportunity for risk and growth appeals more to the younger employee.


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## Daniel A.

Eclectic12 said:


> Good question about what comparison points to use.
> 
> 
> I find it strange to consider this a "standard" DB pension plan as fraser stated that:
> 
> 
> The five non-public sector DB pension plans I've had access to the details (or the option to join), all have included employee contributions.
> 
> Come to think of it, all of the DC plans included an employee contribution as well.
> 
> So an employer only DB pension plan is new to me.
> 
> 
> Thanks for the Mercer link, I'll check it out.
> 
> 
> Cheers



My plan was company paid no employee contribution, there are not many like it today. That plan is 100% fully funded and now they are on the DC only system for new hires.


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## MoneyGal

Pretty much only banks and railways have retained DB plans in the private sector. Everyone else is DC, if they offer any pension plan at all. I've never worked for a private sector employer who does.


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## fraser

Our DB plan was/is funded 100 percent by the employer (private sector-not in Federal jusidiction). It was best consecutive 5 out the the last ten. Full pension entitlement at age 62 after reaching age 55 (and still employed by the company-this plus an optional limited DC w/match was a 1997 enhancement). 

There was an optional DC component-the ee could contribute up to 3% of wage (to max of approx $3300 year) and the er would match 50 percent of the amount, ie up to 1 1/2 percent. DC component was used to buy enhancements such as form of pension, early retirement bridges, etc. It always surprised me that some members did not take advantage of this.

The company greatly limited the DB plan in 2000 (with a statement that there was a target close date of 2007). They provided a buy out option to move to the new DC (standard match up to 5 percent) for those who were grandfathered. Many selected the buyout. Future ee's and ee's who did not reach the specified age/service combos did not have an option-they moved to the DC program.

I did not and do not regret that decision. Pensionize Your Nestegg put into words and math the reasons why I remained in the program. It was gut feel and the fact that I thought, for me, the buyout was too little. Others who selected the DC route seem satisfied with their decision. I guess it is down to your personal circumstances, risk tolerance, and your subsequent DC performance. 

The DB plan was closed at the end of last year. I believe that two things will greatly impact the finanicial well being of many future retirees. The first is the disappearing DB plans, the second is HELOCs that are causing some people who cannot budget to incur ever increasing debt loads. They can service this debt at their current income levels but cannot reduce the ever increasing principal.


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## sags

There is a lot of incorrect information and assumptions surrounding DB pension plans, that needs to be corrected.

First, there is no such thing as an "employer only" sponsored DB pension plan. Most DB pension plans require significant contributions by both employer and employees. The contributions are deducted from paycheques on a weekly, bi-weekly or monthly basis.

In those DB pension plans that are referred to as "employer only", the employee contributions are negotiated as part of overall wage settlements.

For example:

If an employer says to you.......I will give you a 1.00 per hour raise. You can have the 1.00 paid to you via your paycheque, or you can have 30 cents paid to you directly, 30 cents applied to your health benefits and the other 40 cents directed towards your pension plan..............is the employee not contributing? Are they only contributing if they receive 1.00 from the employer and then give back 40 cents for their pension contribution?

Although an employer may appear to contribute 100% of the requried amount to the pension plan, the employee has their RRSP contribution allowance reduced accordingly, because the contributions are made as a part of their income.

Another myth is that DB benefits can be changed on a whim of the employer. There are laws governing pensions, including the frequency of audits, allowable limits, and the windup of a plan. Pension funds rightfully belong to the members, not the employers. Employers cannot arbitrarily change future benefit rates, without the approval of the other parties. An employee may wind up the plan, but they are responsible for any shortfalls when the capital is distributed to the members.

Another myth....DB pension plans are dangerous and unsustainable.

If employers honour their committments over long periods of time, DB pension plans are sustainable and preferable. In most of the defunct pension plans that are used as examples, the employer was deemed "too big to fail" (remember that term from the banking crisis), and were allowed to withhold contributions, access surpluses, or use arbitrarily high returns on investment in order to reduce the level of contributions needed. Nortel and GM pension plans fit into this category. GM used a 9% annual return on investment and decided that given the "future" returns, they didn't need to contribute, and instead awarded bonuses to executives and dividend cheques to investors, based in part on the "theoretical" savings.

The "danger" of a DB pension plan failing to meet it's benchmark assumptions, and DC pension plan holders would be in a safer position, is contradictory, unless the pension plan assumptions for return on capital are too high, or the DC pension holder's expectations are low.

If the experts investing pension capital fail to meet their benchmarks, providing they are appropriate benchmarks, the average investor will suffer the same or worse fate. Stock market declines affect both DB and DC pension plans.

There is a concerted right wing agenda afoot, determined to try to undermine Canadian's faith in DB pension plans solely because employers don't want any financial responsibility to their employees at all.

The proposed PPPA, or whatever they will call it, is a prime example.

Business is in favour of the plan, providing it doesn't require them to make mandatory contributions. They claim many businesses will be interested in forming a pension plan for the good of their employees. As pointed out by one pension expert, there has been nothing to prevent a business from forming a pension plan in the past, and business has shown no inclination to do so. It is extremely unlikely their attitude will change in the future. The new plan is following a path that has been demonstrated to fail.

Further, unless it is profitable to them, banks or insurance companies aren't going to waste the time and resources to manage hundreds of small employer pension plans. 

The fact is that without employer's contributing, any pension plan would fall well short of meeting the needs of future retirees.

Thus, it brings us to the big picture. If people aren't saving for their own retirement, with the able assistance of employers, Canada's social programs such as OAS and GIS will be overburdened and unsustainable by future taxpayers.

A large scale expansion of the CPP, with mandatory contributions by both employers and employees is the only guarantee against a future burden on social programs. All the other plans are a big gamble, Canada can't afford to lose.


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## MoneyGal

Here's a recent, decent article from Malcolm Hamilton on DB pensions:

http://www.benefitscanada.com/news/db-not-affordable-anymore-hamilton-16463

Excerpt: 

Between 1960 and 1979, the median Canadian pension fund earned a 1.5% real rate of return, and between 1980 and 1999, the median fund earned an 8% real rate of return. “These are profound changes.”

In the last decade (2000 to 2009), the median pension fund earned a 3% real rate of return. But while it’s not the 1.5% return of the ’60s and ’70s, Hamilton said that there’s a sense that things are still bad now. “We’re looking at 50-year low interest rates,” he said. “The DB plan is no longer affordable and never again will be.”


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## fraser

Our DB plan was employer funded. Absolutely no employee duductions. But, it only paid 1% per year of service. Yes, it did reduce my RRSP room however I believe that the value of the DB pension exceeded my yearly allowable RRSP room-especially since I was also in a supplementary, restoration DB plan because my salary exceeded CRA limits for pension plans (I think this was the reason for it). There was a good interview, actually a set of two interviews, with Thomas Walker on Jonathon Chevreau's page on this issue. And yes, my RRSP limit was reduced but you could hardly refer to this as an out of pocket 'cost' of the DB pension.

No union, no negtiated settements. It was part of the benefit package just like dental. We compared our salary in the industry to that paid by our competitors.

At a later date, the voluntary enhancement DC component that was added was purely that.....those that took it got a match.


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## olivaw

MoneyGal said:


> “n the last decade (2000 to 2009), the median pension fund earned a 3% real rate of return. But while it’s not the 1.5% return of the ’60s and ’70s, Hamilton said that there’s a sense that things are still bad now. “We’re looking at 50-year low interest rates,” he said. “The DB plan is no longer affordable and never again will be.””


Perhaps Malcolm Hamilton doesn't know that you should never say never. He's an actuary. Most actuaries are too smart to say "never again will be". 

(Otherwise, he made some good points.)

Interesting that the Air Canada and Postal Worker disagreement is over pension benefits.


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## DanFo

I doubt the union cares about the pensions as much as the wage increases as the union makes more money over the higher wages and nothing from better pensions..its just a better arguement to the public to state the pension side of the arguement.....A/C will hinder to the DC pension plan for new hires and then the union can say well we tried.... but they got their raise and increased their profits which is all the union bosses cared about.


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## MoneyGal

olivaw said:


> Perhaps Malcolm Hamilton doesn't know that you should never say never. He's an actuary. Most actuaries are too smart to say "never again will be".


Hamilton is not the only person using "never" in this context. My own takeaway from this is that if a conservative (I don't mean politically), high-profile consulting actuary is using absolutes, I better sit up and pay attention. 

I only quoted the interest rate part of that argument. The other part is life expectancy. Depending on who you read, you will see the arguments that DB pensions were never really sustainable from the get-go, and now a "perfect storm" of increased life expectancy and historic low interest rates mean the optical illusion of DB pension sustainability has been exposed for what it is.


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## Daniel A.

Sags 
If the employee were really paying as you suggest via wage deferral,many of the plans that have not been funded properly should have been first in line.
Everything is a cost I agree and yes my RRSP room was reduced but at the end of the day I have something fully funded and taken care of by a third party.

DB plans as MoneyGal said are done for private companies DC is the only way forward. No company today is going to take the risk on its all about putting in a fixed amount of cash and knowing at the end of the year what it cost.

The state of things with government workers in the USA should give folks something to think about. Massive under funding and the clock is ticking.
Three trillion dollars worth I believe, the money just is not there.

Anyone who has looked at history can see life expectancy was thinking 10 years out for most when these plans were built in the 50s and 60s.
Having now to plan 25-30 years as much time as most worked for a company, sure sounds costly.


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## HaroldCrump

Daniel A. said:


> DB plans as MoneyGal said are done for private companies DC is the only way forward. No company today is going to take the risk


So what makes the public sector DBPs (in Canada) more sustainable?
Or are they not?
It must be the same set of factors and parameters that they are up against.
What makes them different?


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## fraser

There are some DB plans of private companies that are, and have been well managed for a number of years. Canadian National Railways is just one of them. There are others. We only tend to hear about the basket cases. 

It would be interesting to see an analysis of their management, investment strategy compared to those that are not doing as well. We only tend to hear about the Air Canadas, the Nortels of the world.


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## MoneyGal

HaroldCrump said:


> So what makes the public sector DBPs (in Canada) more sustainable?
> Or are they not?
> It must be the same set of factors and parameters that they are up against.
> What makes them different?


Because there is virtually no counterparty risk. The Government of Canada isn't going to declare bankruptcy (and if they do, you will have much bigger problems than a default on your government pension plan).


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## Daniel A.

In the case of municipal workers they have there own union pension trust.
The money paid in by both members and employer is handled by the pension trust much the same way as Teachers.
Its up to the trust managers to determine the payout ratio and changes.

Provincial & Federal are fully paid by the taxpayer, having said that one move both levels of government made many years ago was to privatize as much as they could. Canada Post is a good example, by contracting out to private companies government sidesteps the issue.

In the USA things are moving towards the same issues as many EU countries.
Look at what the markets think of that.


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## sags

If DB pension plans were to be wound up, what happens to the capital?

Is it distributed to the individual members?

Are stock shares, real estate and other assets all sold off?

Would all these people with no pension income, but a big pile of cash, now be eligible for GIS benefits?

I am thinking..........unintended consequences.


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## fraser

I expect members would be entitled to the commuted value-maybe in the form of an anuity? Don't really know. 

I do know that there are several ongoing cases with regard to a DB pension surplus on windup (from several years ago) and the entitlement to those funds. When it is not spelled out in the plan who owns the surplus-the company, the current employees, the current employees and the retirees??? 
Some of the surpluses are significant and there are a number of legal decisions on the books.


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## Daniel A.

sags said:


> If DB pension plans were to be wound up, what happens to the capital?
> 
> Is it distributed to the individual members?
> 
> Are stock shares, real estate and other assets all sold off?
> 
> Would all these people with no pension income, but a big pile of cash, now be eligible for GIS benefits?
> 
> I am thinking..........unintended consequences.



If you recall in the case of Air Canada in there first time.
The pension fund was taken over by trustee and actuaries assessed how much of a reduction was needed in the monthly payout to those already on pension and those due to make what they had viable.
I believe at the time those already on pension were reduced as much as 25% 

In the 90s when the US steel companies were in trouble long time employees were faced with a reduction of as much as 50%. In other words a guy who thought he was going to receive 2000.00 a month suddenly found himself with entitlement on retirement of 1000.00.

It really comes down to commuted value with no future contributions. 
Nortel is much the same, no one is safe.


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## carverman

I can speak from a DB pension plan based on working for Nortel for 25
years and their bankruptcy in 2009 due mostly to bad management.

About 15 years or so, I was given an option of either staying in the old
pension plan (DB) where Nortel was contributing 100% of the contributions
on my behalf or go to a new DC plan.

At that time, and the decision, once made was final, I thought that
Nortel with it's success story in DMS from the late 70s to the mid 90s
was so well established that it was "too big to fail"..like the movie of
the same title.

Nortel overexpanded (bought too many companies on the high tech market)
that they had no business of buying as those .com companies were in a 
dubious area as far as Nortels middle management was concerned..the
guys with the real brains (being promoted from research (BNR.,.Bell-Northern
Research), who didn't hire flunkys. 

The mistake started in the late 90s when Nortel bought Bay Networks and
decided to compete on the router business with CISCO, who had the market
in their pocket as far as routers. Nortel stock was flying high and on paper
everyone (investors and employers) could have been very wealthy HAD THEY
CASHED IN AT THAT TIME..as the retiring CEO (John Roth) did..cashing
in millions in stock options in the process in 1999/2000.

Then things changed..the US economy that Nortel was dependent on 75%
of their business started to taper off. This was before the wall street and
banking failures in 2008/2009.

Nortel's business prospects started to dry up as a lot of the future orders
that Nortel provided to the stock market as guidance, didn't materialize with
the customers either cancelling directly or rescheduling the orders or even
reducing. This started the ball rolling downhill.

Nortel was forced to dump employees by the thousands, paying out severance and other compensation. This came out of general revenue,
so that made the bottom line even worse in each business quarter.

The CFO that replaced John Roth decided to juggle the books by moving
financial numbers around to make it appear that Nortels quarterly earnings
were better than they actually were.

On top of that, at some point, Nortel approached the Ontario govt
to defer contributions to the DB pension plan, so in essence the underfunding
that was already in place just got worse.

By 2007 or 2008 the DB plan was underfunded by 25% and the contributions
which were stopped (due to poor business management and sales) grew
to 30%. The warning signs were already in place by 2007 and 2008 that
the DB pension plan was indeed introuble.

I took retirement in Nov 2003 and Nortel was paying my severance monthly
which I opted to take rather than a lump sum to invest in an RRSP because
of going back to court and fighting the ex over support payments.
Any large lump sum at that time would be viewed as cash on hand to
continue a larger monthly support payment.

On Jan 1st 2009, after Nortel announced bankruptcy...those payments to
me stopped. Projected loss of income..over $30K .

There were warning signs that the DB pension plan (underfunded by more
than 30% at the time) was no longer sustainable. The pension plan
was handed over to a financial trustee to decide on when and how to
wind up the plan. This is where the plan sits now..in the process of being
wound up, expected by the end of this year.

Now here is the kicker..as pensioners, we have no preferred status in
Nortels remaining assets as the federal bankruptcy laws are not
currently seeing pensioners as creditors higher up than the junk bond holders.

My Views on DB pension plans.

I view them as two edged swords.

In good times when the company is growing and financial markets are
doing well, a DB plan is a carrot that companies can offer to their employees.

However, in case of underfunding and (possible or eventual) employer bankruptcy, the pensioner stands to lose a BIG portion of the pension that he or she was counting on in their retirement..
as in my case, the Nortel pension is being reduced by as much as 30%, until the plan is wound up..and we then have a choice
of either a actuarized lump sum to roll over into a LIF...

or worse..an annuity from a insurance company.


----------



## carverman

The Ont Govt has a Guaranteed Pension Fund..that is supposed to
help situations such as these, is practically bankrupt. McGuinty mentioned
this a couple years ago when the Nortel issue was discussed with him.

So you cant even count on the Governments to help you in your retirement
years. Here is the article on the state of the Ontario Guaranteed Pension Fund.

http://www.thestar.com/business/article/580737


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## carverman

Daniel A. said:


> It really comes down to commuted value with no future contributions.
> Nortel is much the same, no one is safe.


This is the fundamental problem of relying on others to manage pension funds.
There are no guarantees..except maybe the Ontario Teachers pension fund.

Had I known what was going to happen 15 years ago, I would have never
stayed in the DB plan at Nortel. But nobody has a crystal ball to see what
will happen in the financial sector 10 or 20 years from now. 

I will survive somehow with the 15-20 years remaining of my life, but now
I have to be very frugal and dip into my remaining assets (reverse mortgage maybe) as the cost of living keeps rising and the pension income shrinks.


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## Daniel A.

It's great to read a complete summary carverman, just fact no BS.
I've followed the Nortel story along with others and as bad as they are at the end of the day we never seem to find out much on how the pensioners made out other than a quick blub.

Its one thing to work under a DC plan for a full career and another to be faced with a choice of switching from DB to DC mid way through.
The cash value of a DB in the first 15-20 years just is not there, the big cash is the last 7-8 years as the employer contribution ramps up. Its not hard to understand why you stayed with the DB.

Pensions should be right up there first in line should a company go under.
Its the investors who should be doing due diligence demanding that companies look after their financial obligations.

The Ontario pension fund I believe only guarantees to a maximum of 1000.00 so if someone were still getting a thousand from a pension, Ontario pays nothing. If one were to get 500.00 then Ontario pays 500.00 .
Great deal for the companies, not very good for the Ontario taxpayer.


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## George

Daniel A. said:


> Provincial & Federal are fully paid by the taxpayer, having said that one move both levels of government made many years ago was to privatize as much as they could.


This is patently false. Federal and Provincial public service pension plans across the country are jointly funded by the employer and the employees via payroll deductions. For the federal superannuation plan, the current employee contribution rates are 5.8% (below YMPE) and 8.4% (above YMPE). The 5.8% amount has been steadily rising over the past few years, and will increase to 6.4% in 2013.

Source: http://www.tbs-sct.gc.ca/pubs_pol/hrpubs/pensions/ypp2-eng.asp#Toc497204676


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## carverman

Daniel A. said:


> Its one thing to work under a DC plan for a full career and another to be faced with a choice of switching from DB to DC mid way through.
> The cash value of a DB in the first 15-20 years just is not there, the big cash is the last 7-8 years as the employer contribution ramps up. Its not hard to understand why you stayed with the DB.


It is a sad case. Nortel, once the darling and favoured blue chip stock of
the TSE went from boom to bust in about 12 years. I'm referring here
to the "new Nortel", who was free of Mother Bell to do as they pleased.
While under Bell's wing, (51% ownership) the board of directors at Bell
governed the company fairly well. Once the decision was made by Bell
to divest themselves of Nortel, paving the way for "self rule", things went
from normal to boom to bust in a few short years. It was not just Nortel
that fell by the wayside, a lot of Ottawa based high tech companies experienced the same feast to famine transistion, as the US markets dried
up gradually. JDS-Uniphase was another..very little of it is left today.

Today Nortel only exists on some paper(a shell company)..the creditors and
courts are still fighting over the assets and how they should be split up. 
The thousands of patents Nortel holds, filed by innovatative employees on
behalf of the company are up for grabs as well. Google it is rumoured had
a "rocking horse bid"on them, but who knows why, 
this may be a ploy to get the bidding "frenzy" started on the patent rights, but nobody is biting right now..most of these patents are telephony related, some are fiber and cell technology..but at this point, technology is rapidly passing by these 
patents, and their usefulness to anyone else who may still be interested.

After all a patent (and it's rights) is useful only if the individual or entity that the patent is granted too is still around for licensing or litigation.

As long time pensioners who built the company and made it successful,
we got a kick in the *** for our efforts with the DB pension.

The Ontario gov't is responsible IMO, for allowing companies like Nortel to
defer top-up contributions in slow or hard financial times, rather than 
borrow to ensure that the pension fund is topped up yearly. Because the
Ontario pension commission consented, the DB pension fund started to become underfunded from around 2001 and every year as less and less
topup was done, in order for Nortel to juggle it's bottom line...the damage
to the pension fund continued, coupled with slow markets. 

Now the biggest drawback with the Nortel DB plan was that most of the
companies topup and contributions were invested in Nortel stock, and 
not diversified, although in the last couple of years, some attempt was
done to do this, but by this time it was too little too late.

Nortel stock value that ranged from $20 to $100 a share (and more!) 
with 2 for 1 splits twice and even a 3 for 1 split...started on a decline
down to $20 in by 2004-2005. By 2006, most investors had either
quickly cashed in the remaining share value or lost their investments as
the stock started to tumble especially after the new CEO (Frank D.)
formerly the CFO decided in his wisdom to cook the books, undermining
the investor confidence once that was discovered. After that, no matter
what kind of announcement, the stock just didn't seem to go up anymore
and started on it's death slide towards "penny stock" after which it was
delisted by the TSE in 2006-2007. 

This final event was the writing on the wall and the death toll for Nortel.
With investor confidence gone, in order to raise funds, borrowing for anything
became extremely expensive, and it was "rob peter to pay paul" situation, and of course...dumping more longterm employees onto a dubious hightech market.
The nasty side effects of high tech. 

In 2008, as future orders dried up even more, it was clear that Nortel could
not continue and at some point the decision was made to throw in the towel.

Summary:

Nortel was the golden goose, but greed and lack of foresight, over expansion
and fudging the books to appease investors..killed it!

At one time (late 1999 or so) Nortel and CISCO were contemplating merging.
Had that happened, Nortel might still be alive today...but obviously the
two CEOs couldn't agree on market strategy, direction and management
and that idea was abandoned.

Nortel then tried to go into competition with CISCO and paid a high price
for that bad decision, amongst some of the other bad decisions made.


----------



## Square Root

@Carverman. really sorry to read your story. I hope things have worked out for you otherwise. my loss on Nortel shares pale in comparison to your pension losses. i have a very generous exec pension which will start next year. It is not funded but the sponsor(big bank) is as good a backer as I could think of. No guarantees though. Thanks for sharing your story.


----------



## carverman

sags said:


> If DB pension plans were to be wound up, what happens to the capital?
> 
> Is it distributed to the individual members?


Yes, it is, but obvviously there is managment fees by the trustees of the
pension fund..and the lawyers involved also get their cut.



> Are stock shares, real estate and other assets all sold off?


Stock shares, provided it isn't a bankruptcy are considered assets.
Real estate, provided it is not leased (as in Nortel's case) can be
sold as well.
All other assets, including process machinery, lines of business etc,
are generally sold to the successful bidder, as in Nortel's case.
The sucessful bidder can retain some or all of the employees in
that line of business depending on the agreement to buy that
line of business. 

The successful bidder doesn't have any obligation to the former companies
pension plan or pensioners, as in Nortel's case. 



> Would all these people with no pension income, but a big pile of cash, now be eligible for GIS benefits?
> 
> I am thinking..........unintended consequences.


Well this is an interesting question. I was thinking along the same lines.
Unfortunately, GIS benefits start to decline drastically once you are about
$12K in taxable income, (OAS not included) so you would have to be
in severe poverty to collect it. By $15K, you only get about a dollar under
the current GIS rules!


----------



## carverman

Square Root said:


> @Carverman. really sorry to read your story. I hope things have worked out for you otherwise. my loss on Nortel shares pale in comparison to your pension losses. i have a very generous exec pension which will start next year. It is not funded but the sponsor(big bank) is as good a backer as I could think of. No guarantees though. Thanks for sharing your story.


Well compared to the divorce proceedings/legal bills (twice) and once
at the time of my retirement ($30K in legal bills) + $30K lost in the TRB
(transition retirement benefit), I guess I'm still lucky to have enough to
eat, pay my property taxes and buy the occasional case of beer.

I was lucky though in some respects. I "saw" the writing on the wall in the
late 90s, and with the indefinite support to my remarried ex ongoing, I
decided to cash in all my Nortel employee investments (mostly Nortel stock)
and pay off my mortgage on the house I bought after divorce.
In some ways the "big guy above" has been kind to me, because with the
DB pension plan being wound up.,..I would have to go into subsidized housing
along with the rest of the Ottawa poor people on welfare. 

I never expected this after 25 years of service to Nortel! So far, I'm
managing, but obviously when the time comes, more lifestyle decisions
will have to be made. 

I can use the equity in my house to invest in an LIF or even an RRSP,
but any RRSP for about 6 years now as I believe you are not allowed
to contribute beyond age 71 and a rollover has to be done by ??


----------



## carverman

MoneyGal said:


> The question is who bears the risk. In DB plans, the employer bears the risk - the employee does not.


In an ideal and utopian world, the above statement could be considered
true, but unfortunately in todays financial world and investment climate
that is not always the case.

If you read my sad story. The employees also bear some indirect risk
on the DB.


----------



## andrewf

Yeah. Some people think of DB pension funds as a blanket but I would be terrified to have to rely on one.


----------



## carverman

andrewf said:


> Yeah. Some people think of DB pension funds as a blanket but I would be terrified to have to rely on one.


Yes. With what I know now, I should have exercised the option to go from
DB to a DC plan when it was offered in the mid 90s by Nortel. With that
plan, I would have had to contribute some of my own money and Nortel
would have matched it in stock contributions, and the actuarized (correct term?) entitlement rollover to the DC, would have meant that whatever I was still entitled to as a long term employee, would still be under my control now...
not being depleted by all retirees.

There was some discussion initially about the Ontario Guaranteed Pension
Fund, where at least the first $1000 of a retirees pension (a worker who
worked and retired in Ontario) would be available..but seeing too many
big companies have gone bust (Massey-Ferguson/Stelco/JDS Uniphase
to name a few), the prospect of getting that is very dubious now as
the pension fund is in DEFICIT.

If McGuinty gets back in..there may be further discussions. With the other
two parties, it probably isn't going to happen. At one count there was
18,000 Nortel pensioners collecting from the pension fund, but I'm not
sure how many of these are Ontario pensioners (Ottawa/Brampton).

Other divisions throughout the world have similar situations. The British
Division is suing, so are the disabled pensioners, and so are some investors
who got creamed! 

At least for the US Nortel pensioners, the US Gov't stepped in to guarantee
their pensions..but I doubt that Harper is interested..as he has his own
agenda..jets, superjails and corporate tax cuts..and with his majority
of 40% of the vote, he couldn't care less about a few thousand pensioners.

My feeling is that one has to take active interest in their retirement income
and manage it carefully. You cannot count on investment professionals,
companies or even governments to be there for you during the retirement years anymore.


----------



## spirit

*Caverman, your story is quite inspirational*

Thank you for a detailed and informative (note...not biased) report on Nortel. I never did really understand how a well thought of company could implode so quickly like Nortel did. 
30 or so years ago I was a school rep for our larger employee group. We were complaining that our pension funds were locked into 30 year bonds which were paying a measly 2-3 % interest when we could earn 10-12 % in the booming market of the 70's. The older members cautioned us that the world spins quickly and the sure and steady way was best in the long run for something so important as pensions. They remembered the days when workers did not have pensions and suffered greatly when their working days were over. They councelled us to stay the course with our pension money and to invest extra personal funds in the stock market using the new and wonderful (higher payments) mutual funds.
30 years later I think the major difference between you and me was that my profession (teaching) has remained very conservative and yours tied itself to the free market. Your company had a lot of proud and honorable employees who were vulnerable to manipulation by management. Some of the manipulation was for the good of the company but a lot of it was good for only a select few playing by rules that were changing daily.
I have a DP plan but I can see that the future of that plan crumble away due to today's market forces. I am not counting on any government or economy to honor promises made 30 years ago. 
I wish you luck in the future. You have a well trained mind. Look around you to find a fit for your talents where you can have pride and self respect based upon the most important values you have. 
I myself will remain in teaching. I think the young teachers will be facing huge issues and pressures. I would like to think I can pay tribute to those older teachers who councelled us so wisely by staying on and helping where I can. No golf course for this old grey mare


----------



## MoneyGal

Well, for what it's worth, I have also written that the pension tango takes two - and there's no real guarantee if one of the partners can waltz off the dance floor. In fact, we even discuss Nortel by name. 

http://www.irpp.org/po/archive/mar10/milevsky.pdf

Arguably Nortel's demise was severely hastened by their looming pension obligations. That is, had they remained solvent, they would have (continued to) bear the longevity risk for retired employees. We did get e-mail after writing that article that we were "too harsh" in our characterization of companies that "waltz off the dance floor."


----------



## sags

The biggest danger for DB pension plans is allowing the companies to administer the plans of their employees. 

They have a conflict of interest. If they pay the required contributions, it comes off the bottom line. If they can weasel out of the contributions, they can raise the bottom line and reward themselves with bonuses.

If members controlled the administration of their plans, they wouldn't allow contribution holidays, return on investment assumptions that were ridiculously high, or the lack of diversification by investing too much in their employer.

As they are directly affected by the plan's stability, members would also be more amenable to raising contribution rates upwards or benefit levels downward, if that was needed to sustain the pension.


----------



## Daniel A.

sags it is very difficult for the employee to have much say, at the moment if the fund is held at arms length and the company continues funding that is as good as it gets.


----------



## Daniel A.

George said:


> This is patently false. Federal and Provincial public service pension plans across the country are jointly funded by the employer and the employees via payroll deductions. For the federal superannuation plan, the current employee contribution rates are 5.8% (below YMPE) and 8.4% (above YMPE). The 5.8% amount has been steadily rising over the past few years, and will increase to 6.4% in 2013.
> 
> Source: http://www.tbs-sct.gc.ca/pubs_pol/hrpubs/pensions/ypp2-eng.asp#Toc497204676


George the issue is not what you contribute. Patently false no your pension is fully backed by the taxpayers, Canada would have to declare bankruptcy to end it.
Many private DB plans have employee contributions this is not a factor when the company declares bankruptcy.


----------



## carverman

MoneyGal said:


> Well, for what it's worth, I have also written that the pension tango takes two - and there's no real guarantee if one of the partners can waltz off the dance floor. In fact, we even discuss Nortel by name.
> 
> *Arguably Nortel's demise was severely hastened by their looming pension obligations.* That is, had they remained solvent, they would have (continued to) bear the longevity risk for retired employees. *We did get e-mail after writing that article that we were "too harsh" in our characterization of companies that "waltz off the dance floor*."


That's a good article to summarize what is changing today in regards to
pensions. The world has changed since pensions were first conceptionalized. 

Yes, you are right, in that pensions were part of the Nortel obligations that
speeded up their demise, amongst other things. Nortel, Massey-Ferguson,
Stelco and others went through boom cycles and later on..the bust cycle.

If you sell goods and commodities to others, you are never immune to
changes in the marketplace and investment market. A lot different than
with say teachers, that like other professionals, there is always a demand
for their services and generally hired by school boards that are subsidized
by two levels of government and the taxpayers of course..the ultimate
cash cow.

Now with Nortel, it wasn't just that changes in the marketplace or investment
market that helped to seal their fate. They expanded too much in lines
of business that would have take years to develop, and that meant taking
on a too big an employee burden with any companies that they bought.

Any fool. (and there were some headstrong managers that shouldn't
have been promoted to their position in the company), knows that if you
go out and use your "corporate equity" to buy companies, you are going
to dilute the value of the corporate equity if the purchase does not pay
off within a short time. Hi tech is very volatile that way. You need to be
first with some fantastic product or the competition will beat you to
the customers door and undermine you with sweetheart deals..where
there are "dollar bills" wrapped up around the product sale. 

If the technology (company) purchase is deemed to be a liability, then
it's similar to losing sales, since the numbers associated with that purchase
have to go under a different column (LOSSES) in the annual fiscal report.

Now when you are trading high tech goods, you need two things to be
successful to sustain a modest company growth...continuing sales
and manageable risks/assets (which includes the employees and brain trust-
and intellectual property) and of course..a return on investment to pay
stock dividends, to keep the stock investors from dumping your stock at
first opportunity!

Nortel had a lot of that, but failed to realize how important important all of those aspects are in dealing with overexpansion in the 90s, and declining US markets. In the early days, (late 70s) they were the first to digitize telephony and in a marketplace where TIMING TO MARKET is EVERYTHING, they came ahead of the competition and the marketplace was eager to embrace that new technology, especially in the US, where TELCOS borrowed very cheap federal loans to modernize the old analog technolgy that they had from
Western Electric for many years.

The Baby Bells had the cash in hand and were eager to buy. 

Now as they modernized ( mostly with Nortel equipment) that big boom
finally settled down to sales based on CAPACITY DEMAND. Along
comes John Roth, a engineer who worked his way up through Nortel and
got promoted through lines of management to finally get to the CEO
captain's helm of the "star ship" Nortel, who has just been divested by
Mother Bell (Bell Canada). John Roth's book comes out.."NORTEL's
CEO of the YEAR"..in a way a bit like the Chinese after their revolution
and the teachings of Chairman Mao.

John Roth was quoted to say...in one of his managerial seminars..
"the train is leaving... with or without you"...in other words..this is 
the new style of management. 

<Tongue-in-Cheek humour here>
"Now time to set the vision for the company, like a CEO is expected."

" Steer a course for...$30 Billion US..(annual revenue)..Mr. "Sulu"...

(a moniker that I will affix to an individual hired within the captain's
"starship command" to go boldly out there and acquire new technology
to achieve that vision or dream as it turned out to be)

Fueled by teachings fresh from seminars, by a US "management-intellectual
guru..(a PHD who gave expensive seminars to management, on what
a modern company should be doing), the Nortel upper management
armed with rather over achieving high level ideas, went out and bought..
and bought..and bought..after all the Nortel stock was trading high and the hi-tech bubble had not burst...yet!

Middle management/employees reading all these anouncements by company
email..wondered in amazement..what are we going to do with all of these
companies?..perhaps the upper management "really know" what they are doing.
Oh well..I've just been handed x amount of company stock options..(the
first in Nortel history)..I'll just try to achieve my job related goals and try
to stay employed avoiding any layoffs and "deadwood pruning". 

Comes the October stock market "adjustment" and the critical 3rd quarter
results..oh..oh!... we're starting to see losses...some sales have been
deferred by US Telcos, (lack of money or no requirement for capacity
enhancement, and no need for further technological equipment purchases)
as well some other contracts bid on ...didn't materialize as expected earlier
in investor guidance. 

Comes ther 4th quarter..trimming the bottom line..3.000 employees first
to be given pink slips..firesale on some of the companies purchased a
year or two ago...and no dividends payable on the stock!

Stock starts to drop...sales going down..high tech projects/developments
put on back burner, employees on those projects either re-assigned or
dumped. Cycle continues...more firesales. 

"When you are up to your *** in alligators..it's hard to remember that your
first objective.. was to drain the swamp!"

With all of this spinning around them..they just didn't have any spare cash to put some money into the DB pension fund.


----------



## George

Daniel A. said:


> George the issue is not what you contribute. Patently false no your pension is fully backed by the taxpayers, Canada would have to declare bankruptcy to end it.
> Many private DB plans have employee contributions this is not a factor when the company declares bankruptcy.


The plans are fully "backed" by the government in the same way that Canada Savings Bonds are fully "backed" by the government. The original quote that I took issue with was "Provincial & Federal are fully paid by the taxpayer" which is completely false - the plans are paid for by the employee and employer, similar to many private-sector DB plans.

What often gets forgotten is that public servants are taxpayers, citizens, and voters just like everybody else.


----------



## HaroldCrump

George said:


> the plans are paid for by the employee and employer, similar to many private-sector DB plans.


Ah, but the employer _is_ the tax-payer.
There is no difference.
The tax payer is paying the employer portion of the DBP contribution.
In addition, the tax payer is guaranteeing the solvency of the fund as well.

It is _not_ similar to private sector DBPs, at least the ones that don't come to the tax payers every 5 years with hat in hand to bail them out.
A true, sustainable, solvent private sector DBP is funded by the company's earnings, not tax payer subsidies like the auto and airline ones.
How many of such are still out there (if any at all), I do not know.


----------



## carverman

HaroldCrump said:


> A true, sustainable, solvent private sector DBP is funded by the company's earnings, not tax payer subsidies like the auto and airline ones.
> How many of such are still out there (if any at all), I do not know.


Like General Motors/Chrysler?..and we all know who bailed them out and
we will be paying McGuinty's HST for many years to come for that.

As far as Crown Corps... Canada Post/Air Canada, AECL...come to mind. 
http://www.theglobeandmail.com/news...e-fighting-a-rearguard-action/article2059147/

So who pays for the top up?..the tax payer.

I think the era of DB plans are pretty much over. What they didn't count
on was the number of retirees drawing from it and the length of time
each retiree lives.


----------



## HaroldCrump

carverman said:


> Like General Motors/Chrysler?..and we all know who bailed them out and we will be paying McGuinty's HST for many years to come for that.


Exactly...that was my point when I said above : _at least the ones that don't come to the tax payers every 5 years with hat in hand to bail them out_.
This is not the first time the govt. has rescued the auto makers, the airlines, etc.
This appears to be a 5 year ritual.



> I think the era of DB plans are pretty much over. What they didn't count on was the number of retirees drawing from it and the length of time
> each retiree lives.


It may be over, I agree, but someone forgot to tell the govt. this "news".
Apparently, we (the tax payers) are still paying for it, and probably will continue to do so for decades to comes.


----------



## I'm Howard

The Ticking Time Bond is the DB Pensions of ALL Municipal employees which means in a few years , for every municipal employee, the actual Payroll could be three times the actual as you factor in the indexed Cost of the people collecting pensions and the people who will collect pensions.

Property Taxes can only go up dramatically , the Teachers Pensions plus the City Hall pensions are overly generous,a nd you dear property owner are the ATM where the money must come from.

The whole world is facing up to it, Nurses have already lost indexing, but still the pigs slop at the trough as if Greece is some how a worse case than We will be.???

Cost of Health Care for an ageing population, cost of benefits for Retirees, OAS, etc, mobile money is the only way to survive the future tax grabs.


----------



## carverman

HaroldCrump said:


> Exactly...that was my point when I said above : _at least the ones that don't come to the tax payers every 5 years with hat in hand to bail them out_.
> This is not the first time the govt. has rescued the auto makers, the airlines, etc. This appears to be a 5 year ritual.


Based on the economic cycle..unless you have Wall street banker greed
as in the 2008/2009 downturn. GM got bailed out, because of two things,
the local economy (Oshawa) would be devasted if they were allowed to
go bankrupt and the fact that the US gov't stepped in to bail them out.
McGuinty/Harper had no choice then, because if they refused to bail out
the Cdn GM operations, Oshawa could very well be a ghost town by now
not to mention all the tax revenue that the Fiberals would lose.

But since GM is breathing on their own and returning to some kind of profitability, they have no excuses but to top up their DB plan.

The others, well...the cycle will continue and for those that chose to remain
in the DB plan, the tax payers will be supporting them for a generation,at
least until they all die out, and replaced by younger employees who have 
no choice but the DC.

Now, consider the OAS, paid to every Cdn that qualifies at age 65...they
hope that not too many will be around after 65 to collect, but the taxpayers
are on the hook for that one as well,as that one comes out of general gov't revenue.

And lets not even discuss those in for life in penitentiary..do they qualify
for a pension at 65...I know that the infamous kernal Williams does..at
least his military service pension.

We are heading down the road to a rude awakening, I think. 

[/quote]
It may be over, I agree, but someone forgot to tell the govt. this "news".
Apparently, we (the tax payers) are still paying for it, and probably will continue to do so for decades to comes.[/QUOTE]

Well that is because of "entitlement". I have some objection to that too.

Why should John Roth and others that helped to ruin my company be able
to collect pensions based on the last 5 year earnings (over a 1million in salary
and compensation) and I be penalized for just being an employee pensioner
forced to live on a small annuity in lieu of my pension that I worked for 25years to be entitled to.

Oh yes..just as I learned to play the game of life..they changed the rules! 

We are heading down a slippery slope to a rude awakening, I think.


----------



## Karen

> And lets not even discuss those in for life in penitentiary..do they qualify
> for a pension at 65...I know that the infamous kernal Williams does..at
> least his military service pension


.
Carverman, didn't the federal government bring in legislation to stop federal prisoners from receiving OAS and GIS (and CPP - I'm not sure of that?) last year? I know they tabled the legislation, and I think I remember correctly that it passed unanimously. That happened because of the outrage that arose from the public when the media reported that Clifford Olsen was collecting about $1100/month from the government. I also remember that Olsen said that if the legislation passed, he was going to sue the government, but I don't know what became of that.


----------



## Karen

Although it won't affect my federal govenment pension because I'm already retired, it makes me furious to find out that the government has increased the contribution required from their employees to their pension plan. The reason it upsets me is that in 1999, the government helped themselves to $30 billion from their employees' pension plan, claiming that it was a surplus that would never be needed, and they used it to pay down the national debt. Then, less than a dozen years later, they had the gall to raise employees' contributions?

As I recall, the Liberal government of the day had a field day patting themselves on the back for getting rid of the federal deficit - they didn't mention that they stole $30 billion of it from their employees' pension plan - at the very least half of it should have stayed in the plan, since employees make half of the pension contributions.
I agree that public servants are very fortunate to have the defined benefit pensions that they do, but simply stealing money from the fund and justifying it by dishonestly stating that it wouldn't be needed is surely not an ethical way for the government to deal with that. I simply don't believe that their actuaries could not foresee ten or eleven years into the future to know that it would be needed.


----------



## Square Root

The banks have great DB plans that are well funded. A dying breed in the private sector for sure.


----------



## MoneyGal

Banks and railroads are pretty much the only remaining private sector employers that continue to offer DB pensions to new hires.


----------



## OhGreatGuru

Karen said:


> .
> Carverman, didn't the federal government bring in legislation to stop federal prisoners from receiving OAS and GIS (and CPP - I'm not sure of that?) last year? ...


Just OAS and GIS, which are funded out of general revenues. CPP entitlement is based on contributions they (and employers) made, so you can't rob them of it.


----------



## OhGreatGuru

HaroldCrump said:


> Ah, but the employer _is_ the tax-payer.
> There is no difference.
> The tax payer is paying the employer portion of the DBP contribution.
> In addition, the tax payer is guaranteeing the solvency of the fund as well.


Precisely, the taxpayer is the employer, and has all the obligations of an employer for a DB pension of its employees. Fortunately for the employees the government cannot go out of business. (And before we continue casting stones at public servants for not contributing enough to their pensions, what about all those autoworkers who weren't contributing anything into theirs? And what about all those obscenely generous retirement packages that corporate executives get at shareholders' expense?)

The federal public service plan is at least actuarially sound, unlike those in countries like Greece.


----------



## fraser

I am not certain what paying a portion of your DB has anything to do with entitlement. DB pensions are part of an overall compensation package. They are not a gift or an entitlement. They are earned salary in the same manner as other benefits. Some companies require the ee to contribute, others do not. 

Until recently, I worked for a large US international company. I was not required to pay into the the DB plan. There was an optional component for 'extras' such as form of payment, inflation protection, etc. but this was not a basic requirement for vested members. The pension plan is well funded (and has been 'topped up on a regular base to meet stat. requirements) and the company continues to meet it's funding requirements. It is not trying to 'weasel' out of its obligations under that plan. It has frozen the plan and new ees can only go into a DC plan, but this can hardly be described as 'weasel like' behaviour'. I suspect that we only hear about the grossly unfunded plans-not the majority.


----------



## carverman

Karen said:


> .
> Carverman, didn't the federal government bring in legislation to stop federal prisoners from receiving OAS and GIS (and CPP - I'm not sure of that?) last year? I know they tabled the legislation, and I think I remember correctly that it passed unanimously. That happened because of the outrage that arose from the public when the media reported that Clifford Olsen was collecting about $1100/month from the government. I also remember that Olsen said that if the legislation passed, he was going to sue the government, but I don't know what became of that.


Well it looks like the law was passed as far as OAS and GIS..
http://www.ctv.ca/CTVNews/TopStories/20100601/jailed-seniors-legislation-100601/

However, there is no mention of CPP being cut off. This is another can of
worms. If Olsen and olther incarcerated "lifers" paid into it..before being
convicted, they may still be able to collect benefits..even if they can't
spend them. I know he tried to write a book and wasn't able to collect
anything from that. He may still be able to collect a gov't pension if he
paid into it..like our "kernal" Williams.


----------



## carverman

fraser said:


> I am not certain what paying a portion of your DB has anything to do with entitlement. * DB pensions are part of an overall compensation package. They are not a gift or an entitlement*. They are earned salary in the same manner as other benefits. Some companies require the ee to contribute, others do not.


That's not how the civil (divorce) courts see it when it comes to splitting
DB pensions. I had to have mine actuarized by a pension specialist to
arrive at a lump sum that can be split up. The judge mentioned something
about "entitlement" but that was 14 years ago..and my mind is fuzzy on
what she said about my DB pension. In any case, I had to pay off the
ex with about half of my actuarized DB pension at the time. 

If I wasn't entitled to it..why would the courts force me to split it?


----------



## carverman

Karen said:


> The reason it upsets me is that in 1999, the government helped themselves to $30 billion from their employees' pension plan, claiming that it was a surplus that would never be needed, and they used it to pay down the national debt.


That would be Chretien..the PM who also during an election vowed he would
"Kill the GST". I'm sure it was a case of "rob peter (employees) to pay paul"
(the banks)..and a surplus is very tempting, since the gov't must contribute some of the money into the pension pot. 



> As I recall, the Liberal government of the day had a field day patting themselves on the back for getting rid of the federal deficit - they didn't mention that they stole $30 billion of it from their employees' pension plan - at the very least half of it should have stayed in the plan, since employees make half of the pension contributions.


How would one know that they didn't leave half, who is privy to that information besides the courts?...after all , if they took all of it, that would be considered stealing... can the Federal gov't be sued for that? Besides enquiries and the normal white-washing that they do to cover up?



> I agree that public servants are very fortunate to have the defined benefit pensions that they do, but simply stealing money from the fund and justifying it by dishonestly stating that it wouldn't be needed is surely not an ethical way for the government to deal with that. I simply don't believe that their actuaries could not foresee ten or eleven years into the future to know that it would be needed.


No I'm sure they didn't think about it that far into the future. It was a large
lump sum and they were more interested in dealing with the immediate
deficit.


----------



## Karen

Actually the union did take the case as far as the Supereme Court of Canada, where they lost because the enabling legislation did not specify what would happen to surplus funds in the plan. I didn't feel particularly upset about it until recently when the government decided they had to increase the amount employees paid into their pension.


----------



## HaroldCrump

Karen said:


> I didn't feel particularly upset about it until recently when the government decided they had to increase the amount employees paid into their pension.


It was probably done to ensure solvency of the plan, given reducing real returns and increasing longevity, etc.

Not to pick on anyone in particular - don't get me wrong - but what, may I ask, is wrong with increasing the employee contribution?
The rest of the workers do that (i.e. majority of private sector employed folks without pension plans).
They make a RRSP contribution and get a corresponding tax deduction.
Contributions to a pension plan have a similar effect.

I see no reason for the employer (i.e. tax-payer) to keep paying an ever increasing share of the pension burden for a sub-section of the working population.

When CPP had started running into issues, both the employee and employer contributions were increased.

Regarding the argument around pension being a part of the total compensation, salaries and benefits in the public sector are in line with private sector salaries and benefits these days for similar types of job functions -in fact, if anything, they are quite a bit more generous than what typical small or medium scale organizations can afford for their employees.

Barring a very, very small top pyramid of salaries and benefits (such as bank executives, technology firm partners, etc.) I'd say the public sector is at no particular disadvantage.

Therefore, once you factor in employer DBP contributions and future pension entitlements, that total compensation package becomes behemothly out of whack compared to private sector compensation.

Just think about what it would take for a given 65-yr. old retiree (esp. female) to puchase a guaranteed, inflation indexed income stream (annuity) equal to 70% of the average of the previous 5 best years' salary.


----------



## Karen

Harold, it may surprise you to know that I completely agree with almost everthing you've said; there's no doubt in my mind that when I retired from the federal public service, I was earning probably $10,000 a year more than I would have earned in the private sector. I have never complained about public servants' salaries or benefits. In fact, I got in severe trouble with the PSAC union at the time of the last strike before I retired. I worked through the strike because, as I explained to the union officials who threatened to fine me the same amount I had earned during the strike, I had to choose between the union and my conscience, and I felt I had no option but to go with my conscience. I told them that if they decided to fine me, that was okay with me - I did not work through the strike for the money but because I felt the union's demands were unjustified, so I couldn't support them. The strange thing was that I never heard another word from them, so I must have made my point.

With respect to the pension issue, if it was short of money for reasons related to the plan itself - larger than expected payouts or smaller than predicted return on investments - of course the employees' contributions should have been increased. My point was that the only reason it was short was because a few years earlier the government had removed $30 billion from it, assuring their employees that there was far more money in the fund than would ever be needed. It didn't affect me in any way, but it was the principle that I had a problem with.

One other small point: Most public servants do not receive 70% of their best five years' salary; one would have to have worked a full 35 years for the government to be eligible for that. In my case, I worked for them for just over 16 years, so my pension is about 32%. I'm certainly not complaining - I'm delighted to have it - but I wanted to correct your impression.


----------



## fraser

My understanding is that in many public jurisdictions, the amount that the ee contributes is increasing. 

I could be mistaken, but for the Federal civil service, the amount is increasing this year or next year and will represent a contribution of 40 percent of the cost (up from 30 or 32%) of the pension. I am not certain what percentage of salary is deducted for this. 

In BC, I think teacher's pension contributions just increased to about 10.2 percent of salary.


----------



## HaroldCrump

Thanks for your perspective, Karen.
I agree the govt. dipping into a protected pension plan and using it as an ATM machine is totally wrong.
We are seeing this scenario play out in Europe these days.
All of the following governments - Spain, Italy, Greece (of course), Portugal - are dipping into the public sector pension plans to withdraw money because of huge deficits.

The difference of course is that those plans in Europe were never in surplus to begin with.

And yes, the 70% is only for a full 35 year term of service.
But it's a flat 2% for each year anyway, so it's proportional.


----------



## carverman

Karen said:


> Actually the union did take the case as far as the Supereme Court of Canada, where they lost because the enabling legislation did not specify what would happen to surplus funds in the plan. I didn't feel particularly upset about it until recently when the government decided they had to increase the amount employees paid into their pension.


But this is the way the Federal gov't works, Karen. The current gov't
(PC) can change the rules and blame the former gov't (Lib) for the boondoogles and dipping into the cookie jar. If the SCC decided that
there was nothing to prevent the Libs from doing it AND it was accessible
to the Federal gov't...it was a lump sum at their disposal. At least they
didn't use it for jets, superjails and other things..but to pay down the
deficit which in reality affects all taxpayers. We carry the deficit load.


----------



## carverman

Just got the word today...*interim *Nortel pension cutbacks start next month and the cut will be 30%, but at least the PBGF (Pension Benefits Guaranteed Fund) will help with a small top up, but only the first $1000 of pension benefit. 

Example,if a pensioner is receiving $2000 the pension plan is in deficit, and the pension benefits get cut 30% when it is wound up, the PBGF will only top up 30% of the first $1000, (reduced to $700), restoring it to $1000.
The pensioner will have to accept the cuts on the rest. 

The PBGF is an insurance type of compensation, but it only provides limited protection to Ontario pensioners in underfunded pension plans. 

Once the court cases get settled (could take a couple of years), there possibly could be some kind of top up from the court settlement of the assets, but there
are no guarantees. 
In the meantime it's starting to look more like an annuity
next year. 

Not great news, but better than nothing, I suppose.


----------



## HaroldCrump

I thought of bringing up this thread when I read the following news:

*Royal Bank joins wave by abandoning defined benefit pensions for new hires*

http://www.canadianbusiness.com/art...doning-defined-benefit-pensions-for-new-hires

They are just the latest in a series of large, mega-cap corporations switching from DBP to DCP (Manulife and some utilities being the other recent ones I can think of).

Of course, they don't have any choice but to.

DBPs are becoming more and more unsustainable because of a variety of factors.

The only "organization" that is able to "afford" it are the governments and the quasi-govt. public sector - purely due to the full might and unlimited taxing capacity of the govt.

While corporations, that are answerable to shareholders and need to preserve fiscal sanity, are complelled to make this change, the public sector is going about its merry way - borrowing from the future and bankrupting the present.


----------



## Financial Cents

Anyone with a DB Plan better love it while they can. 

Other than gov't, this plan will be a dinosaur in a another decade or so; all other for-profit companies will follow suit.


----------



## sags

Corporations don't have debt problems...........governments do.

The elimination of DB pension plans is the transfer of employee obligations from corporations to the government of the future, and therefore future taxpayers.

Corporations are sitting on mountains of cash.

If they were deploying the cash creating new jobs, investing to increase productivity, or investing in research and development, I might agree with the premise...........but they aren't. 

Our tax dollars already support people who didn't have a DB pension plan.

We are heading in the wrong direction on pension issues.


----------



## HaroldCrump

sags said:


> Corporations don't have debt problems...........governments do.
> 
> Corporations are sitting on mountains of cash.
> If they were deploying the cash creating new jobs, investing to increase productivity, or investing in research and development, I might agree with the premise...........but they aren't.


Corporations are answerable to shareholders for profitability.
Governments aren't, as is evident all across the world.

The reason why corporations are "sitting on mountains of cash", as you say, is simple - we are facing the prospects of a huge and debilitating global recession.
It is only natural for companies to not invest during such times.
Governments cannot force private businesses to increase production and capacity during recessions, that's the way it has always worked and has nothing whatsoever to do with pensions.



> The elimination of DB pension plans is the transfer of employee obligations from corporations to the government of the future, and therefore future taxpayers.


Agreed, yes.
However, here is how I think this will play out : with increasing longevity, fiscal austerity, etc. governments are simply going to claw back social programs.
We are already seeing this with CPP.
The spread between the penalty for taking CPP before 65, and the "reward" for taking it later is widening.
This will keep increasing in the future.
Several countries are now surreptitiously increasing the "retirement" age to 66 or 67.
This will keep going up and within a couple of decades might be rounded off to 70 across the entire developed world.

OAS clawbacks etc. will be increased.

In short, the present generations are paying into a black hole.
They will get much less return on their contributions than the previous generations are getting.



> Our tax dollars already support people who didn't have a DB pension plan.


Private sector tax dollars are supporting those that have public sector pensions.



> We are heading in the wrong direction on pension issues


If by this you mean we need more DBP plans, then I'm with you.
We need stable, sustainable DBP plans across the board - for private sector and public sector.
Right now there is a huge imbalance and it's getting worse every day.


----------



## MoneyGal

HaroldCrump said:


> However, here is how I think this will play out : with increasing longevity, fiscal austerity, etc. governments are simply going to claw back social programs.
> We are already seeing this with CPP.
> The spread between the penalty for taking CPP before 65, and the "reward" for taking it later is widening.
> This will keep increasing in the future.
> Several countries are now surreptitiously increasing the "retirement" age to 66 or 67.
> This will keep going up and within a couple of decades might be rounded off to 70 across the entire developed world.


The adjustments are actuarially sound. If people are living longer (which they are), then short of an increase in contributions the payouts must decrease. Over the average lifetime, the payout levels are the same - 25% of an average salary, with a cap, based on 40 years of payments in.


----------



## sags

My point is that either DB or DC pension plans have to be properly funded to be successful.

There is no need to eliminate the certainty of DB pension plans.

Contribution levels can be fixed and static for employers to provide financial stability in their forecasts, while being flexible for employees as the need arises. An actuarial assessment every 2 years would aid in keeping DB plans on track. 

If employers are not interested in these types of plans, the government should move forward plans to greatly enhance the CPP plan and let the CPPIB administer the plan. Employers and employees would have to pay higher contribution rates, but the end result would be worth it.

I think we owe it to future generations to consider the future, as past generations have done for us.


----------



## HaroldCrump

MoneyGal said:


> The adjustments are actuarially sound. If people are living longer (which they are), then short of an increase in contributions the payouts must decrease. Over the average lifetime, the payout levels are the same - 25% of an average salary, with a cap, based on 40 years of payments in.


I am sure the changes are actuarially sound, and were even necessary.
My point, however, is that there is a reason that large, stable financial institutions like RBC and Manulife are moving away from DBP to DCP, and it is not that they don't care about the welfare of their employees.
It is the various levels of government that have adamantly stuck their necks in the sand - refusing to raise employee contributions rates, reduce payouts, increase minimum eligibility age, reduce indexation, etc.

They only reason they are able to do so is because they can, while private businesses like RBC and MFC can't.
I see no reason whatsoever that public sector employers are matching employee contributions $-for-$, in some cases up to nearly 20% of gross annual pay.
Where is that slush fund hidden, I'd like to know too.

A related issue is creating a society of pension haves and have-nots.

If anyone thinks that right now tax payers are carrying those that didn't have DB pensions during their working years (as sags said above), the coming decades are going to be much worse, given the state of market returns.



sags said:


> If employers are not interested in these types of plans, the government should move forward plans to greatly enhance the CPP plan and let the CPPIB administer the plan.


I agree completely 101%
Unfortunately, the current administration is moving in a different direction with these private sector RPPPs.
A most unfortunate turn of events for those without pensions.


----------



## MoneyGal

I'm pretty sure I'm not understanding you. The federal and provincial governments should be setting contribution rates, etc. on private pension plans - that isn't what you are saying, is it?


----------



## sags

Benefits that are too high, or employee contributions that are too low, are the result of poor negotiations by the employer (government), rather than a DB plan design fault.

Private companies have not shown any inability to fund DB plans, but rather have shown it isn't a priority for them. They don't seem to have the same reluctance when it comes to upper management salaries, bonuses, and pension plans.


----------



## carverman

sags said:


> Private companies have not shown any inability to fund DB plans, but rather have shown it isn't a priority for them. They don't seem to have the same reluctance when it comes to upper management salaries, bonuses, and pension plans.


DB plans were a fringe benefit that most companies in the 50s to 80s
offered as a perk of employment. 

Things were different back then, the cost of living and the number
of employees that would entitled to those benefits, after putting in 10 years
of employment in order for the DB plan to be vested. The employer sponsored
health plans were another perk.

Private companies even with those with public stock offerings are profit driven. Employees are rewarded in accordance to how much contribution towards
profitability and company growth, they make on an individual basis in annual reviews.

If a non-negotiated contract employee or management fails to meet
expectations after 2 reviews..they are history. 
(Unionized employees have a little bit more protection because any dismissal
has to be brought to the attention of the union first). However, this is 
not the case with massive layoffs due to loss of business or other reasons.

The employers contribution to the DB is based on profit and loss, since
as mentioned, it is a lower priority than making a profit or keeping the company afloat.

Such was the case with Nortel, which grew from a "few hundred" employees
in the 60s to 90,000 (worldwide) in the mid to late 90s. As economics
and recessions in the US wreaked havoc on Nortel's plans to be a $30 billion
(US) company by year 2000, orders got deferred or cancelled and lines
of business had to be trimmed in order to stay viable....this reflected on
the yearly financial report of profits in losses. This resulted in lines of
business being trimmed and employee layoffs due to downsizing. 

In good years, the company willingly topped up the DB plan, in bad years
(2000 on), due to underlying losses, they didn't have the profit margins
anymore to top up contributions which were the sole responsibility
of the employer, so they were allowed to defer PP topup
contributions to "next year" , with permission from the Ont gov't.

That resulted in the DB plan contribution deficit increasing from year to year
based on the number of retirees drawing from the plan already and the
number of vested DB PP employees that are entitled to future DB benefits.


----------



## HaroldCrump

MoneyGal said:


> The federal and provincial governments should be setting contribution rates, etc. on private pension plans - that isn't what you are saying, is it?


Apologies for my ramblings lol 
No, what I was trying to say is that (IMHO, of course) the various levels of governments are creating a society of haves and have-nots by refusing to moderate the generousity of the govt. sponsored DB plans.

That is what has created (and will create to a much larger extent in the future), a large section of welfare dependent retired folks (by welfare I mean OAS + GIS).

There are various parameters in the govt sponsored DB plans that are outrageously generous, and the matching of up to 22% (I believe is the max rate) is just one of them.

If a private corporation (answerable to shareholders w.r.t profitability) decides to match 22% of gross salary as employer contribution into DB plans - that's fine as long as they don't come cap in hand to the tax payers for bailout like the auto companies did.

However, for various govt. agencies, corporations and pure administrative departments to do so is outrageous.
At the end of the day, it is one set of workers funding the retirement of another (smaller) set of workers.
The irony arises because majority of workers in the first set don't have access to the very same benefits that they are funding for the rest.



sags said:


> Benefits that are too high, or employee contributions that are too low, are the result of poor negotiations by the employer (government), rather than a DB plan design fault.


I agree with you, sags.
I think you and I are saying the same thing from different angles.
Benefits are too high and employee contributions are too low for sure.
And yes absolutely, this is because of poor "negotiations" by the employer (the *tax-payer* and not the govt.)

This is simply because the fox is in charge of the hen house.


----------



## MoneyGal

Well, I'm not sure I would argue that the various levels of government should moderate the existing pension plans. Those are legal contracts and the employees and employers entered into them in good faith. 

I would suggest, though, that public service compensation be described in more transparent terms. The value of DB pensions is pretty enormous and I don't think this value is necessarily portrayed fully or accurately in discussions of public sector compensation (or understood by public sector workers themselves). 

The flat markets in the last decade, together with close-to-zero interest rates and new funding requirements for pensions are a triple-whammy for pension administrators and employers. It's no surprise that employers continue to dump DB pensions.


----------



## HaroldCrump

MoneyGal said:


> Well, I'm not sure I would argue that the various levels of government should moderate the existing pension plans. Those are legal contracts and the employees and employers entered into them in good faith.


Oh no, I would never suggest/desire that either.
The last thing we need is more tax payer $$ be wasted on lawsuits between workers and govt.
But I think (all else being equal), the various levels of govt. ought to be doing what we are seeing in the private sector i.e. reducing DB benefits or switching to DC for new employees.
There may be existing union contracts that prevent the employer from switching to DB for new employees, and if so, such contracts need to be modified during the next cycle of negotiations.



> I would suggest, though, that public service compensation be described in more transparent terms. The value of DB pensions is pretty enormous and I don't think this value is necessarily portrayed fully or accurately in discussions of public sector compensation (or understood by public sector workers themselves).
> 
> The flat markets in the last decade, together with close-to-zero interest rates and new funding requirements for pensions are a triple-whammy for pension administrators and employers. It's no surprise that employers continue to dump DB pensions.


+ 101%
It is also a triple-whammy for those that are not part of the public sector DB pension system, primarily private sector and self-employed workers.
Because their tax $$ are left footing the bill for these increased costs.


----------



## MoneyGal

Nice discussion. Thanks!


----------



## andrewf

It would be interesting to see how things might change if governments had to account for pension liabilities the same way as the private sector, and fully fund those pension liabilities in the year they are incurred. I feel that governments are likely buying labour peace by entering into unrecognized liabilities (off-balance sheet borrowing) far into the future. It's essentially a case of a large, vocal and powerful minority extracting undue rents from future taxpayers in an opaque manner with the complicity of politicians.


----------



## MoneyGal

From a presentation by the Chief Actuary of Canada that I just got in my e-mail inbox: 

"No matter if it is a fully funded or a PayGo plan, no matter if it is a DB or a DC 
solution, no matter if it is a national public scheme or a private pension plan, the fact is that increased longevity will continue to put pressure on the financing of pension plans"

"If the DB plans are to survive, modified designs are necessary
• Example: recommendations of Lord Hutton report (UK, March 
2011) for public service schemes

– Replace final average design with career average revalued 
earnings (CARE) design

– Increase the member’s Normal Pension Age in the new 
schemes so that it is in line with UK State Pension Age 

– Fixed cost ceiling for sponsors contributions along with the 
default mechanism of cost sharing with employees, if 
needed."

Link: http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/oca/presentations/jcm20110926_pres_d4_e.pdf


----------



## Eclectic12

andrewf said:


> It would be interesting to see how things might change if governments had to account for pension liabilities the same way as the private sector, and fully fund those pension liabilities in the year they are incurred. I feel that governments are likely buying labour peace by entering into unrecognized liabilities (off-balance sheet borrowing) far into the future. It's essentially a case of a large, vocal and powerful minority extracting undue rents from future taxpayers in an opaque manner with the complicity of politicians.


Hmmm ... I must be missing something. 

Since when does the private sector have to fully fund pension liabilities in the year they are incurred? 

Any db plan presentations I've been at say that the numbers are required to be run about every three years. In many cases, if the liabilities don't match the assets, it's typically two or more years before additional money is added to address the imbalance. 

So even if a company has the will and the cash, they are running years behind the situation. Then there's companies like Nortel and Air Canada who decide to defer "until times are better" - until the gap is so big that they admit they can't fix it.


Cheers


----------



## MoneyGal

C.D. Howe Institute releases new report - from my inbox:

LEGAL FOR LIFE: WHY CANADIANS NEED A LIFETIME RETIREMENT SAVING LIMIT

2011 – James Pierlot

Toronto, Oct. 27 – Federal tax rules are preventing many Canadians – especially in the private sector – from saving enough for retirement, according to a report released today by the C.D. Howe Institute. Workers relying on RRSPs cannot accumulate even half the retirement wealth of career members of defined-benefit (DB) pension plans, says the report, “Legal for Life: Why Canadians Need a Lifetime Retirement Saving Limit,” by James Pierlot with Faisal Siddiqi.

“Solving this ‘have’ and ‘have-not’ divide in the pension outlook for Canadians is becoming urgent,” says Pierlot. More than 12 million Canadian workers do not participate in a DB pension plan. Many of these workers need to save for retirement, and must do so in RRSPs and defined-contribution (DC) pension plans. The authors demonstrate that tax rules prevent these workers from saving enough, even as career members of DB plans accumulate retirement savings worth as much as 60% of their total career incomes.

For the report go to: http://www.cdhowe.org/pdf/commentary_336.pdf


----------



## Four Pillars

The CD Howe is full of a lot of nonsense. They seem to specialize in analysing problems that affect very few (rich) Canadians, but they offer their solution to "all" Canadians.

Yes, people without DB pensions should have enough tax-deferred contribution room to put them on par with someone with a good DB pension - but if this were to happen, how many Canadians would make use of the extra RRSP room?

The reality is that the current RRSP limits are enough to fund a decent retirement, and most Canadians don't come close to maxing out their contribution room as it is.

If the CD Howe inst. really cared about the average Canadian, they would put some of their considerable intellect towards trying to find ways to get the average Canadian to save more and make better use of their retirement plans (TFSA,RRSP) in their current form.


----------



## Eclectic12

HaroldCrump said:


> I am sure the changes are actuarially sound, and were even necessary.
> 
> [ ... ]
> 
> I see no reason whatsoever that public sector employers are matching employee contributions $-for-$, in some cases up to nearly 20% of gross annual pay.
> Where is that slush fund hidden, I'd like to know too.
> 
> [ ... ]


Are you sure you don't mean benefits that are paid out instead of contributions?

If you mean contributions - I am puzzled as *every* private employer who has allowed me to join their DB plan has *exceeded* my contributions.

So when I paid in 3% of salary, typically the company paid in 5%. The combined employee + employer contributions was 8% of salary.


For the case of 20% of gross annual pay - what is the employee to employer ration? 


Cheers


----------



## HaroldCrump

Four Pillars said:


> The reality is that the current RRSP limits are enough to fund a decent retirement, and most Canadians don't come close to maxing out their contribution room as it is.


While that is true, we are comparing two different things.
Regardless of the contribution room (you can make it $1M and it won't change a thing), the real issues are the guarantee, the inflation protection and the longevity protection that a non DBP plan (RRSP or DCP) can never claim to fully achieve.
Esp. in these days of volatile markets and erratic asset returns.

IMHO, the issue does not lie on the RRSP side.
The RRSP rooms are adequate, more or less.
The issue lies on the pension side, esp. the govt. backed public sector pensions.
The only way to fix the imbalance between the Haves and HaveNots is to make DBP pensions more accessible to everyone, not this useless half-hearted attempt with RPPPs that they announced last year.


----------



## MoneyGal

Four Pillars said:


> The CD Howe is full of a lot of nonsense. They seem to specialize in analysing problems that affect very few (rich) Canadians, but they offer their solution to "all" Canadians.
> 
> Yes, people without DB pensions should have enough tax-deferred contribution room to put them on par with someone with a good DB pension - but if this were to happen, how many Canadians would make use of the extra RRSP room?
> 
> The reality is that the current RRSP limits are enough to fund a decent retirement, and most Canadians don't come close to maxing out their contribution room as it is.
> 
> If the CD Howe inst. really cared about the average Canadian, they would put some of their considerable intellect towards trying to find ways to get the average Canadian to save more and make better use of their retirement plans (TFSA,RRSP) in their current form.


With all due respect - and that's a lot - I don't think this is what the report is doing. 

Whether or not people would use the available contribution room is not the point - the point is that right now, there is an imbalance between high earners in DB pension jobs and high earners who have no DB pension. 

I don't think the C.D. Howe Institute is saying that the solution is somehow to level the playing field for all Canadians. But you are saying the proposed solution is of no use because it doesn't level the playing field for all. 

As you've pointed out, for low and moderate income earners, there's no real problem - they will get a larger fraction of their post-retirement income from CPP, OAS and potentially GIS. And if they want more, they can put money in RRSPs. 

But there is an imbalance as soon as you start to tip over the $50K per capita income, a group that is likely over-represented on this forum. 

If hardly anyone will use the increased limits, then why not implement them? It would restore a level of horizontal equity that is not available now. 

In a nutshell [puts irony glasses on]: _who will think of the 1%?_ Our friends at the Institute shall.


----------



## Four Pillars

MoneyGal said:


> In a nutshell [puts irony glasses on]: _who will think of the 1%?_ Our friends at the Institute shall.


Lol - yes, they will.

I agree with you - I guess I get annoyed when certain groups try to sound like they are trying to help more Canadians than they actually are.

CARP is another group - they've been going on about the "forced" minimal RRIF withdrawals for years like it's some kind of big deal for a lot of seniors. In fact, I suspect it's a non-existent problem for most seniors.


----------



## Four Pillars

HaroldCrump said:


> While that is true, we are comparing two different things.
> Regardless of the contribution room (you can make it $1M and it won't change a thing), the real issues are the guarantee, the inflation protection and the longevity protection that a non DBP plan (RRSP or DCP) can never claim to fully achieve.
> Esp. in these days of volatile markets and erratic asset returns.
> 
> IMHO, the issue does not lie on the RRSP side.
> The RRSP rooms are adequate, more or less.
> The issue lies on the pension side, esp. the govt. backed public sector pensions.
> The only way to fix the imbalance between the Haves and HaveNots is to make DBP pensions more accessible to everyone, not this useless half-hearted attempt with RPPPs that they announced last year.


I don't think that is the issue. Anyone with an RRSP, TFSA, open account can convert that money into an indexed annuity at any time which would be equivalent to having a DB plan. Of course, most people couldn't come up with enough money to match their DB counterparts, but that's another issue.

I guess one difference is that someone in a DB plan is enrolled during their working years and making contributions etc, whereas the RRSP person doesn't buy their annuity until they are in their 60's or 70's.

I know MG has mentioned that there are annuities that you can buy when you are younger, but they don't pay out until a certain age ie 65. I would think this is pretty much equivalent to a DB plan. Not sure how common those plans are.


----------



## CanadianCapitalist

With all due respect, I don't think the C. D. Howe is comparing apples to apples. One cannot simply compare a public sector $50K salary + DB with a $50K private sector salary. IMO the comparison should be between what the same job would pay in the public sector and the private sector to figure out whether we have a fairness issue. If the same job paid $60K and one can save 9% of the salary in a RRSP plus receive CPP benefits, the numbers will likely show the difference isn't very much.


----------



## HaroldCrump

^ w.r.t. the above, the Sep/Oct issue of Money Sense had an article titled _A civil servant's sweet payoff_ or something similarly worded.

A quick look at two facts highlights the futility of comparing public sector DBPs vis-a-vis private sector salaries + RRSP:
- the value of their pensions upon retirement
- the % contributions made by the employer (i.e. tax payers) vs. employee contribution

As they say on the Lang O'Leary show : _it is off the charts_


----------



## MoneyGal

CanadianCapitalist said:


> With all due respect, I don't think the C. D. Howe is comparing apples to apples. One cannot simply compare a public sector $50K salary + DB with a $50K private sector salary. IMO the comparison should be between what the same job would pay in the public sector and the private sector to figure out whether we have a fairness issue. If the same job paid $60K and one can save 9% of the salary in a RRSP plus receive CPP benefits, the numbers will likely show the difference isn't very much.


There's respect all around here. I get your point, for sure; but leaving the professions out of it and simply comparing people on the basis of income earned, the person not in the public sector is getting a crummy deal. 

I think the point you are making is that civil servants are not inappropriately compensated when you take into account the presumably-higher rents they could extract from the private sector by way of salary and other compensation. 

But CD Howe is not making that argument, either. They aren't even saying there's anything wrong with public sector total compensation. They *are* saying that two high income earners, one in the private sector, one in the public sector, get very different benefits from the *tax system* and that allowing people to accumulate much more RRSP room would be one way around this (for that small class of people).


----------



## HaroldCrump

MoneyGal said:


> They *are* saying that two high income earners, one in the private sector, one in the public sector, get very different benefits from the *tax system* and that allowing people to accumulate much more RRSP room would be one way around this (for that small class of people).


I disagree with their solution.
You could give everybody $1M RRSP room every year and that wouldn't change the fact that RRSP is not a DB pension.
The only way (for the private sector workers) is to increase accessibility to DB pension plans.
Either by expanding CPP or through a new system.
The RPPPs are useless in that regard as well.

I know MG you are not a fan of CPP expansion but I don't see what else would solve this particular issue.

"Just buy an annuity" is often suggested as a simplistic solution but consider : how many $$$$ would someone need to accumulate in their RRSP to even come close to purchasing an annuity that has the same features and same payout as their public sector DBP cohorts are getting.


----------



## MoneyGal

Also, CC - you can compare workers earning $50K and $75K in the CD Howe report. 

You will see that (according to that report) the public sector worker earning $50K and the private sector worker earning $75K have roughly equivalent outcomes (less than $100K difference in retirement after 35 years) - meaning it takes a $25K per annum salary premium *plus* full RRSP funding in order to catch up to what the $50K DB pension-earner gets. 

Disclaimer: I have not analysed this report in any real detail.


----------



## Four Pillars

HaroldCrump said:


> "Just buy an annuity" is often suggested as a simplistic solution but consider : how many $$$$ would someone need to accumulate in their RRSP to even come close to purchasing an annuity that has the same features and same payout as their public sector DBP cohorts are getting.


Don't forget - The public sector DB worker is making their own contributions and also getting contributions from the government (from tax money). 

If the private sector worker wants an equivalent pension (via annuities), their annual contribution would have to be equivalent to the amount of total contributions being made on behalf of the DB worker.

I'm over-simplifying a lot (ignoring CPP), but my point is that the public sector employee pension is subsidized by the government. In theory, the private sector employee should have a higher wage  which would allow them to save enough to purchase an equivalent pension.


----------



## steve41

What is the parameter they use for the db pension 1.25%, 1.5%, 2%? integrated (or not) with CPP?


----------



## HaroldCrump

Four Pillars said:


> the public sector employee pension is subsidized by the government.


^ *Exactly*
Actually, by the other tax payers.



> In theory, the private sector employee should have a higher wage  which would allow them to save enough to purchase an equivalent pension.


So we agree...I think we were saying the same things from different angles.

Conversely, average public sector compensation should be lower to offset this huge gap, since the govt. can't force the private sector to pay more wages but has full control over its compensation structure.

Another alternative is accessibility to a public DBP for the private sector workers, such as CPP expansion or a DB version of the RPPPs.
I don't know why so many (including the CD Howe institute) are opposed to expansion of the CPP.


----------



## Four Pillars

HaroldCrump said:


> ^ *Exactly*
> Another alternative is accessibility to a public DBP for the private sector workers, such as CPP expansion or a DB version of the RPPPs.
> I don't know why so many (including the CD Howe institute) are opposed to expansion of the CPP.


Because it won't benefit rich people? 

Seriously - one drawback of expanded CPP would be increased employer premiums which might not be great for the economy or jobs.

I'd be more in favour of increasing the CPP, but leaving the employer premiums alone and just increase the employee premiums.


----------



## HaroldCrump

Four Pillars said:


> Seriously - one drawback of expanded CPP would be increased employer premiums which might not be great for the economy or jobs.


But what about the employer premiums that we are all paying for the public sector DBPs - that's a drag for the economy too since it is funded out of tax revenues.
I might understand a successful and profitable private corporation paying generous contributions into its pension plans, but the govt. is neither.



> I'd be more in favour of increasing the CPP, but leaving the employer premiums alone and just increase the employee premiums.


Yeah, I'd totally be ok with that.
Keep the current level of pensionable earnings for CPP and add a second tier of contributions funded entirely by employees themselves, which equates to the current average pension plan contributions in the public sector plans.
I'd sign up for that.


----------



## MoneyGal

Four Pillars said:


> In theory, the private sector employee should have a higher wage  which would allow them to save enough to purchase an equivalent pension.


Well, there's another important wrinkle - and that is that the equivalent DB pension can't be purchased in the open market. Annuities purchased on the open market are *much more expensive* than the cost of DB pension income. 

Unfortunately, the report doesn't address this issue other than in one sentence and one footnote on page 28, which say (in part): 

_Our “base case” for determining DB pension values uses a 4.5 percent discount rate and fixed rate post-retirement indexing of 3 percent. 

These rates are considered to the most reasonable estimate of the value of a fully indexed pension because they reflect experience with actual quotes
for group purchases of pension annuities with full inflation indexing; in other words, the “base case” reflects the real-world market value of pensions. 

It should be noted that these group rates would not be available to individuals, who must pay retail annuity purchase rates. *Retail annuity purchase rates would be expected to be higher due to sales
commissions and adverse-selection risk*._

/quote

So for those who say "but private sector workers can just buy an annuity" - you must realize that the cost of the annuity purchased in the open market is much higher than the cost of a DB pension (and how much higher depends on many factors, including your age and gender).


----------



## steve41

Once more, there is a big difference between a 1.5% integrated db pension and a 2.25% non-integrated pension. And then there is the question as to whether it is indexed or not. These parameters have to be nailed down.


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## MoneyGal

They are assuming full indexation and they give their discount parameters in the report. In fact, I quoted them above. 

And as for integration, they are assuming federal civil service plans, so whatever the integration rules are for that pension plan, that's what they're assuming. 

If you read the report, their assumptions are in it.


----------



## Eclectic12

Four Pillars said:


> Don't forget - The public sector DB worker is making their own contributions and also getting contributions from the government (from tax money).
> 
> If the private sector worker wants an equivalent pension (via annuities), their annual contribution would have to be equivalent to the amount of total contributions being made on behalf of the DB worker.
> 
> [ ... ]


True ... but then again, the same is true for those with private DB plans, as well as those with DC plans or RRSPs where the employers contribute.


Cheers


----------



## Four Pillars

Having read the report in a little more detail - I do think the lifetime accumulation limit is a pretty good idea. 




HaroldCrump said:


> But what about the employer premiums that we are all paying for the public sector DBPs - that's a drag for the economy too since it is funded out of tax revenues.
> I might understand a successful and profitable private corporation paying generous contributions into its pension plans, but the govt. is neither.


Why doesn't the gov't limit their contribution to their employer pension funds to 4.9% which is the basic employer CPP contribution? I'm fine with that!





MoneyGal said:


> Well, there's another important wrinkle - and that is that the equivalent DB pension can't be purchased in the open market. Annuities purchased on the open market are *much more expensive* than the cost of DB pension income.
> ...
> 
> So for those who say "but private sector workers can just buy an annuity" - you must realize that the cost of the annuity purchased in the open market is much higher than the cost of a DB pension (and how much higher depends on many factors, including your age and gender).


Well, like I said - I was simplifying. Plus I don't really know what I'm talking about.




Eclectic12 said:


> True ... but then again, the same is true for those with private DB plans, as well as those with DC plans or RRSPs where the employers contribute.
> 
> 
> Cheers


True - I'm just saying that if you want to compare contributions - you have to include all the contributions.


----------



## HaroldCrump

> Originally Posted by *Eclectic12*
> _True ... but then again, the same is true for those with private DB plans, as well as those with DC plans or RRSPs where the employers contribute._


No, there is a difference - a big difference.
A private corporation can do whatever the heck they want.
As long as they are successful and profitable, they can pay $1M to a bellboy, who cares.
Just don't keep coming back to the tax payers with cap in hand begging for money every 10 years.

The govt. on the other hand is a very different thing.
Right now, govt. contributions and DB plans are the most generous around - by a wide margin.
IMO, that is a huge imbalance - made possible not by virtue of profitability but simply by virtue of a ruthless and unrelenting taxing capacity.


----------



## sags

Eliminating public service pensions is really a dead issue.

MPs aren't about to vote themselves out of a pension.

http://www.thestar.com/news/canada/...43--defeated-mps-turn-to-gold-plated-pensions

Canadians without a DB pension plan, would be better served lobbying for an expansion of the CPP to create a better DB pension plan for everyone.

Strangely, the same groups that rail against DB pension plans, also don't like the expansion of the CPP program.

Their stance, it would appear, is they don't want pensions for anyone.


----------



## the-royal-mail

^What does that link have to do with MPs voting themselves out of a pension? I didn't read it that way at all.


----------



## Eclectic12

HaroldCrump said:


> No, there is a difference - a big difference.
> 
> A private corporation can do whatever the heck they want.
> As long as they are successful and profitable, they can pay $1M to a bellboy, who cares.
> 
> [ ... ]
> 
> The govt. on the other hand is a very different thing.
> 
> [ ... ]


I don't have access to private corporations books but I have heard complaints about how they are spending their money from insiders.

In case it wasn't clear, I meant public corporations. If you think no one cares when the corp is successful, then why are there newspapers articles with complaints? Or people posting on CMF and other boards? Or better yet, why are there shareholder proposals in just about every bank's annual report for years now?


IAC, this is all besides the point. 

My point is that the advantage of employer contributions is not a gov't versus private issue. There are a lot of DC plans or RRSPs where the employer is contributing additional funds for employees, not to mention the DB plans.

Anyone with the employer kicking in funds is going have a much easier time to fund their retirement.


As for the gov't being able to tax to make up any shortfall, having higher contribution rates etc., I understand your points. 

I'm simply making a different point.


Cheers


----------



## sags

the-royal-mail said:


> ^What does that link have to do with MPs voting themselves out of a pension? I didn't read it that way at all.


Sorry......typo........forgot the *n't *above. Corrected now.

My point is.........

MPs would have zero credibility arguing that public service pensions should be axed, while preserving their own, very generous pension plans.


----------



## Daniel A.

The way I read this thread it has gotten way off the topic.

DB v DC


----------



## fraser

What I take out of the report is confirmation that, from a tax perspective, people in DB plans are treated much more favourably than people who do not participate (the majority) in DB plans and rely on RSP's or DC plans. This is in terms of contribution limits, not tax on withdrawals.

I suspect that this tax contribution limit inequality grows exponentially during times when the equity market is challenged to produce even positive gains. I happen to be in a DB plan where my employer has made significant extra contributions over the past number of years to keep the plan funded at the prescribed levels...contributions that never see the light of day from an individual's contributions levels for tax purposes.

I would like to see a signficant increase in allowable annual RRSP contributions. We do have somewhat of a lifetime limit for RSP contributions in the form of RSP carry forward room but this percentage is only up to capped maximum contribution amount rather than a straight percentage of income.


----------



## Eclectic12

Four Pillars said:


> [ ... ]
> 
> Why doesn't the gov't limit their contribution to their employer pension funds to 4.9% which is the basic employer CPP contribution? I'm fine with that!
> 
> [ ... ]


Will an employer contribution of 4.9% be enough without cutting benefits below what private db plans are offering?

I'm wondering as my private DB plan has me (the employee) contributing 5.0%. If the employer is contributing less than the employee, it sounds like something more than just the contributions would have to change.

Or maybe I'm in an exceptional private DB plan. ;-)


----------



## HaroldCrump

Excellent discussion on the Lang O'Leary Exchange this evening called _The Pension Ponzi - How the Public Sector is Bankrupting Canada's Health Care, Education and Your Retirement_ 

http://www.cbc.ca/video/#/News/TV_Shows/Lang_&_O'Leary_Exchange/1308689786/ID=2165811814

I have ordered the book as well.

The authors arguments are compelling and something we have discussed here several times.


----------



## sags

Discussions on this topic invariably contain statements that shade the facts.

One such statement, "each taxpayer is individually responsible for $35,000 to each public service retiree" simply isn't true. Personal income tax revenue is only one revenue source for the Government. There is also revenue from corporate taxes, sales taxes, licence taxes, gas taxes, royalty taxes, land leases and rents, crown land sales, user fees, and a host of other income producing vehicles.

It would be just as fair to say that public pensions are paid from oil royalties, or car licencing fees, or a combination of any of the other forms of revenue, as it is to say the cost is borne by individual taxpayers.

Revenue for the Canadian Treasury has been declining, due to a weakened economy and lower conumers spending. If a high percentage of the population is retired on low income, they won't be paying taxes or contributing to the overall economy. Savings generated by avoiding pensions to everyone will be displaced by an overall increase in social benefits. As public service workers receive their pensions, they will also be paying income tax back to the government, therefore the total amount of compensation would be reduced by the income tax generated. At the lowest marginal tax rates, about 1 in 5 pensions would be paid for by the tax revenue generated from other pensioners.

The main benefactor from people not having pension plans ISN'T the people of Canada. It is the businesses who successfully transfer their employee obligations onto the Government. Many Canadians believe we have already given enough concessions to Corporations and business. Taxpayers pay for the infrastucture that contributes to their ability to earn profits. We subsidize the education of their future employees. We pay for the health care of their employees. We already do lots of things for corporations.

The discussion also ignored the long term outlooks for pension plans, and focuses entirely on the results during a short period of time of record low interest rates and market volatility. It has been universally accepted that interest rates will not remain at today's low rates for the next 40 years. When interest rates were normal, and the returns on investment were normal, these kinds of discussions were mute.......because many pension plans posted surpluses. It was only a few years ago, that employers were accessing the surpluses in pension plans to reduce their workforces, via enhanced voluntary retirements.

A balanced and fair public debate on the issue, considering all of the relevant facts, would be a worthwhile exercise for Canadians.

At present it consists mostly of sketchy facts and fear mongering by one side.


----------



## v_tofu

*Canadian Pension Ponzi scheme?*

Is our pension at risk? Too many going into retirement? Pensions not getting the % growth as expected due to the global economic collapse?

When do the riots start?


----------



## HaroldCrump

You are referring to that new book?
I mentioned it on that DB vs DC thread under Retirement section.
Maybe you can post your comments there.


----------



## daddybigbucks

that is why i have 4 retirement plans in place.


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## fraser

One thing is for sure. Civil service indexed DB plans are too expensive. They either need to be scaled back, or the amount that each employee funds needs to go up significantly. The taxpayer can not afford to fund those benefits to the extent that they have and they are out of step with what is happening in private industry.


----------



## HaroldCrump

sags said:


> It is the businesses who successfully transfer their employee obligations onto the Government. Many Canadians believe we have already given enough concessions to Corporations and business. Taxpayers pay for the infrastucture that contributes to their ability to earn profits. We subsidize the education of their future employees. We pay for the health care of their employees. We already do lots of things for corporations.


I agree with you, sags.
No one can deny the validity of your counter points.

I worry about our business competitiveness though.
If we require corporations to offer and support gold-plated DBPs across the board (to reduce reliance on OAS, GIS, etc.), we might be killing their competitiveness.
Every time I think along those lines, I think of GM, Chrystler, etc.
Their pension obligations are one of the things that run them into the ground, once every 10 years or so.
Then they come, with cap in hand and a long face, to the governments asking for bailout money.
And to save the jobs, every time the govt. pillages the tax payer $$ and bails them out.

We discussed up-thread about large corporations like RBC and MFC abandoning DBPs and switching to DCPs for new hires.
I think all of these facts indicate that DBPs are unsustainable.

In the case of governments, of course, there is no competitiveness to worry about.
Just keep taking the tax $$ and keep contributing towards the DBPs.
Overly generous features like 100% matching contributions, up to 70% of highest drawn salary pension benefit, full indexation, bridge benefit, etc. are just outrageous, IMO.

In terms of solutions, I personally lean towards an expansion of the CPP.
I would prefer that to the RPPPs that the govt. announced earlier this year - those are useless.
The question is whether an expansion of the CPP must be voluntary or mandatory.
Mandatory expansion put the same burden on corporations and businesses.
Optional expansion has the problem of adverse selection, as well as the fact that many people do not save money to begin with (under-utilisation of the RRSP is evidence).



> A balanced and fair public debate on the issue, considering all of the relevant facts, would be a worthwhile exercise for Canadians.


I would absolutely 100% support that.
I was disappointed that the govt. decided to sneak this RPPPs without due consultation with the public.
It was a campaign promise from 2006, I believe, however IMO the govt. has skirted the issue.


----------



## sags

It is a sad day, when "competitiveness" means a country can't expect Corporations to pay a fair share of the cost of doing business in Canada.

My how the world has changed over the years.

When I first joined the workforce in 1967, a company had profit goals and were ecstatic to meet or surpass those goals. When they did so, they rewarded the employees they felt were valuable and who had contributed to the overall success.

By the time I retired, there were no profit goals........only that whatever was earned in profit was never enough, employees were an unfortunate necessary burden to the corporation, and a continual search for more profit pushed away all other concerns, such as quality of product and customer service.

People wonder how big three cars got such a reputation for lousy quality, and the relentless blind search for profit was the key reason.

Toyota recently experienced the same phenomena, when quality took a back seat to seeking higher profits. 

As to pensions........if governments can't afford them, corporations can't afford them, and peope don't earn enough to save for them.........that is going to leave us with a huge hole in social benefits............that we will be left paying for.

I agree with an expansion of the CPP, but it has to be mandatory to a degree.

Perhaps the employee should pay 66% of the increase in contributions, while business pays the other 33%, or some other formula.

The bottom line is it can be done, if the political will is there.

I am sure when the CPP program was first announced, companies said they couldn't afford the premiums then.

The managed all right the past 40 years or so.


----------



## Daniel A.

I would have gladly accepted a higher threshold on CPP in any year of work.
Most years my maximum contribution was reached in May of every year.

What most don't realize is that companies with pension plans get an offset on their CPP contributions by having a pension plan. That's right they are not required to match.


----------



## MoneyGal

TVO's "The Agenda" is running a segment on pensions tonight: 

http://theagenda.tvo.org/episode/141126/pension-envy-and-supporting-the-occupy-protesters

From the link:

There is a great divide in the pension world: those who are on defined contribution plans, and those predominantly public sector workers who are on defined benefit plans. Is one group getting the short end of the pension stick?

Guests:

Craig Alexander, chief economist with the TD Bank Financial Group.

Catherine Swift, president and CEO of the Canadian Federation of Independent Business.

Randy Robinson, political economist with OPSEU, the Ontario Public Service Employees Union.

Jonathan Chevreau, columnist at the Financial Post and blogger at The Wealthy Boomer.

Allan Shapira, senior vice-president and actuary at Aon Hewitt in Toronto.


----------



## HaroldCrump

sags said:


> I agree with an expansion of the CPP, but it has to be mandatory to a degree.
> 
> Perhaps the employee should pay 66% of the increase in contributions, while business pays the other 33%, or some other formula.


I agree with both of those options.
Perhaps a combination of mandatory increases coupled with optional contributions if someone wants to.

The optional portion would replace the RPPPs that they are touting right now.
Except that, instead of being administered and delivered through the private banking/insurance industry, it would be under the umbrella of the CPP.
And of course it would be a DBP, not a DCP.
Count me in as amongst the first to sign up.

This whole drain on the public coffers may not have been so bad had they kept the pension features reasonable and sensible, instead of the outrageous benefits they have become.
Maybe without the 100% matching employer contributions, up to 70% of highest drawn salary, full indexation, bridge benefits, early retirement transition, etc. it may not have been so bad.

Many of the complaints against the public sector pension plans isn't as much about the fact that they exist - it's more about the outrageousness of the features they provide.
At a huge cost to the taxpayers, most of who can only dream of such generosity.


----------



## m3s

sags said:


> It is a sad day, when "competitiveness" means a country can't expect Corporations to pay a fair share of the cost of doing business in Canada.
> 
> My how the world has changed over the years.
> 
> When I first joined the workforce in 1967, a company had profit goals and were ecstatic to meet or surpass those goals. When they did so, they rewarded the employees they felt were valuable and who had contributed to the overall success.
> 
> By the time I retired, there were no profit goals........only that whatever was earned in profit was never enough, employees were an unfortunate necessary burden to the corporation, and a continual search for more profit pushed away all other concerns, such as quality of product and customer service.
> 
> People wonder how big three cars got such a reputation for lousy quality, and the relentless blind search for profit was the key reason.
> 
> Toyota recently experienced the same phenomena, when quality took a back seat to seeking higher profits.


+1



sags said:


> As to pensions........if governments can't afford them, corporations can't afford them, and peope don't earn enough to save for them.........that is going to leave us with a huge hole in social benefits............that we will be left paying for.
> 
> I agree with an expansion of the CPP, but it has to be mandatory to a degree.
> 
> Perhaps the employee should pay 66% of the increase in contributions, while business pays the other 33%, or some other formula.
> 
> The bottom line is it can be done, if the political will is there.
> 
> I am sure when the CPP program was first announced, companies said they couldn't afford the premiums then.
> 
> The managed all right the past 40 years or so.


The thing is, the government and corporations CAN afford them.. our little society can still afford pensions anyways. If corporations are only concerned with profits, then they need to be regulated to provide a pension. Then competitiveness becomes the issue, thus the challenges of globalization

I don't think closing the borders to trade, or occupying other countries to force them to be like us is the answer. We siphon most of the profit back from those "more competitive" countries anyways. *The solution lies where all the profit goes*


----------



## dubmac

*Contributions to pension plan in these volatile times!*

Hi all,

I contribute, along with my employer, into my DC pension plan each month. I can put the $ in fixed income mutual fund (1-5 yr GIC's, bond or mortgage funds), equity (Cdn, International, Global or American), Balanced, or Specialty funds. 

Given these volatile times I'm tempted to go all in on equities & buy 'em when they're cheap. ...or wait til say, the Spring, then buy more equities. 

Is anyone in the forum undertaking a similar decision in the mgmt of their pension plan? If so, how are you managing in these times when the money is being put into the plan despite the circumstances and you need to decide where to put it!

BTW: I am 10-15 yrs from needing to draw down on any of these pension assets

thanks in advance for any replies.


----------



## balk

Harold, 

I find your constant harping on the fact that public sector employees are completely funded by the tax-payer tiring as you use this as a reason for constant attack against their compensation. 

Both my wife and I are both public employees (teacher and nurse). As a teacher in Quebec, my salary and compensation package are very similar to the private sector equivalents (non-subsidized private schools), however unlike the students of private schools, most students of public schools could not afford to attend school if their parents were forced to pay out of pocket for each year of education. How would you prefer to have the system work? Does the fact that my compensation package rivals that of the private sector bother you? Does it make me any less of an employee that I work with troubled youth instead of a private school with more resources?

My wife, as a nurse, makes less in Quebec than a nurse who works privately in the United States. Is she bothered by this? No, because she enjoys her work. Nurses who work privately for pharmaceuticals make higher salaries. 

We both realize that our salaries are paid for by the tax-payer but there is no private solution that would enable all citizens to have access to a basic service. I was speaking with a doctor who made more in 1 day at a private clinic then he did in 3 days in the public system. This money has to come from somewhere so it is either taxes or private insurance. 

Lastly, here in Quebec, our pensions are not fully indexed, we are half indexed.


----------



## Daniel A.

What private sector equivalents are you referring to ?

I've just finished reading Pension Ponzi and am taken back by the richness of public sector deals.
I for one have no issue with obtaining a fair & reasonable contract but there are limits to what the public can afford.
Don't get me wrong I'm retired and have a DB pension, in order for me to have retired I had to take a reduction of 16% this was after putting in 30 years of service and I don't get extended medical on top.

The company I worked for always made a profit and continues that way.


----------



## dubmac

For some good background on the public vs private pension debate, have a look at the following report produced by the CD Howe Institute..it's a bit old (2008), but relevant.

http://www.cdhowe.org/pdf/Commentary_275.pdf

Insofar as the report goes, see and read the chart on pg 23. It is most revealing..someone who earns 80-90K on retirement will obtain a pension value of over 1 million. Pretty sweet if you started at 25-30 yrs old... 

bottom line : If you have a DB public pension plan, count yourself lucky! You have a definite advantage over "the rest of us" with DC plans (or none ).


----------



## Eclectic12

dubmac said:


> For some good background on the public vs private pension debate, have a look at the following report produced by the CD Howe Institute..it's a bit old (2008), but relevant.
> 
> http://www.cdhowe.org/pdf/Commentary_275.pdf
> 
> Insofar as the report goes, see and read the chart on pg 23. It is most revealing..someone who earns 80-90K on retirement will obtain a pension value of over 1 million. Pretty sweet if you started at 25-30 yrs old...
> 
> bottom line : If you have a DB public pension plan, count yourself lucky! You have a definite advantage over "the rest of us" with DC plans (or none ).


True ... but then again, how many meet this profile?

Most private sector people I know who are making this kind of money have changed companies several times from when they were 25 - 30 years old. Unless each new company along the way allows a transfer-in of the DB pension, likely this person has an RRSP, several LIRAs and a much smaller DB pension value. 

... now executives on the other hand are a different story. *grin*


As for public sector, how many start at 25-30 and stay until retirement? I'm sure it is much higher than private but I've also met a lot who started in the private sector and eventually were able to get into the public sector.


Cheers


----------



## dubmac

http://www.horizons.gc.ca/doclib/BN_LC_casestudy_E.pdf

eclectic

you have a few good points above, but scan the report above..most start now at age 40, but if you started at 28...you would do well in your pension


----------



## RedRose

What if...the actuary makes an error to the pension fund?

That is what has stalled my decision to take my husands pension or the lump sum. The actuary in my case would be Mercer and they made some kind of error in calculations to an Alaska company...the mind boggles.


----------



## MoneyGal

Mercer was the consulting actuary to the public service plan in Alaska. 

Mercer had no role in dealing directly with pensioners. 

No Alaska DB pensioner is out even one dollar as a result of this dispute about actuarial valuations.


----------



## Eclectic12

dubmac said:


> http://www.horizons.gc.ca/doclib/BN_LC_casestudy_E.pdf
> 
> eclectic
> 
> you have a few good points above, but scan the report above..most start now at age 40, but if you started at 28...you would do well in your pension


Hmmm ... so over the past decade - the average years of service has gone from 23.5 years to 26.9 at retirement. At the same time, it appears to say that the number of 40 years old or older new employees has jumped from 24% to 37%.

As for doing well if you started at 28 - the same is true of my current DB pension. Though I'm sure even at it's best, it won't come close to a public service db pension.

*grin*


Cheers


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