# Is Defined Benefit always better than Defined Contribution?



## motl (Mar 3, 2014)

Not something I've ever had to consider before but it seems my new employer offers both a DBP and a DCP option. 

DCP option is pretty normal - 7% from company, 4% from me.

DBP at highest level would be 7.5% from me and payout would be 2% of average salary based on years of service. I currently don't have the formula to calculate years of service scenarios but assume it's fairly standard.

So, is DBP always the better option? I'm currently 32 and plan to retire between age 45 and 50. I like my new company but can't guarantee I'll be here until I retire - I may not even be here more than 2-4 years depending on which opportunities arise elsewhere. I'm not intending to leave but I'm not in government so not committed to one employer forever. 

I can basically guarantee I won't work 20 years at this company since I will retire before that time either way. I may work here 10-15 years but I may also leave after just a few. Is DBP still better?

I suppose this is the gist of my question - if I left after say 3 or 5 or 10 years for another company, would the return I get from exiting the plan still be more than if I'd just been contributing to a DCP over the same period? Any way to answer this? Don't know much about it. 

Thanks.


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## kcowan (Jul 1, 2010)

I would guess that you would be better off with the DCP because that was designed for your situation.


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## Daniel A. (Mar 20, 2011)

Agree DB pensions work well for long term employee's but in this case a DC pension will pay the most its like money in the bank 11% if you took the DB option it would pay next to nothing should you quit.


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## My Own Advisor (Sep 24, 2012)

"DBP at highest level would be 7.5% from me and payout would be 2% of average salary based on years of service. I currently don't have the formula to calculate years of service scenarios but assume it's fairly standard."

If you have a gold-plated pension, something along the lines of 2% x average best five years of employment salary x years of service, to put things in perspective, a 20-year career making $80k (average best five) = 0.02*80,000*20 = $32,000 per year, indexed usually, for life. 

For sake of a quick comparison, using a 3% very safe withdrawal rate, that's basically like saving $1,000,000 in 20-years and your portfolio yields about 3.2%.

To save and invest a loose equivalent to that, you would need to save $25,000 per year, earning 6%, for 20-years to equal that $1,000,000 value.

So, can your DC pension earn 6% on average and can you even contribute $25,000 per year for every year going forward? 

DB pensions are in general, especially the "gold-plated" ones, an outstanding deal.


Now, you may or may not stay long term. That's up to you, and them. If you leave, you should find out when you are "vested". This means when you leave, you can either keep the employer contributions in the plan, until age of retirement (usually at least age 55), or....transfer the value (“commuted value”) of your pension to another pension plan, if you’re joining another one that allows such a transfer; OR transfer your commuted value to a registered retirement savings plan or other plan, which may be locked in (meaning you can’t withdraw the money until retirement) (e.g. LIRA)....OR take the cash value (if it’s not locked in).

Your employer will have those details and options.


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## Eclectic12 (Oct 20, 2010)

motl said:


> ... DCP option is pretty normal ...


Without some sort of survey of all of them, this strikes me like talking about a "normal" mortgage. There are parts that are pretty standard like being able to choose between investments, employer plus employee contributions, taxes being deferred etc. There are also areas of differences such as contribution rates, how wide a choice of investments, build in costs for the investments etc.




motl said:


> ... 7% from company, 4% from me.


A broader survey might change my perception but the ones I have had access to the details for or that others have talked about have had the employers % equal to the employee % for contributions. Some with an optional component have capped the employers portion at a set $ amount. For example, the salary based part might be 3% each where if the employee opts to put more in, the employer will match up to $5K.

The worst contribution rate DC pension I was mistakenly booked into the info sessions for switching from the DB pension I was in to the new DC pension was 1% each for employer/employee contributions. The DC pension had four MFs to choose from where three of the four MFs charged a 2.78% MER. That's when my personal RRSP had the choice of a similar MF at a 1% MER or ETFs were under 1%.

I say "mistakenly" as after shifting through the details to decide to say in the DB pension, I discovered that only managers and above could participate in the DC pension. Those starting work at my level one month after me had no DB or DC pension, just Group RRSP matching at something like 1% employee and 0.5% employer capped at $5K.




motl said:


> ... DBP at highest level would be 7.5% from me and payout would be 2% of average salary based on years of service. I currently don't have the formula to calculate years of service scenarios but assume it's fairly standard.


Again ... lots of variation. I've had "best five of the last seven years" x years of service (YOS) x 1.56% for one plan, "average of the last five years" x YOS x 1.3% and [(average of three years Year's Maximum Pension Earnings x YOS x 1.5%) + (average of three years of YMPE x YOX x 2%)].

This is all before considering stuff like bridge benefits (some plans include this while others like mine provide an optional plan to buy this while other plans don't allow it), optional buyback of early retirement penalty etc.




motl said:


> ... So, is DBP always the better option?


Lots of moving parts where IMO the range of investments in the DC plan with it's associated costs, your experience as an investor, what you think the markets will do and what the DB plan contribution rates are will be important.

The DC versus the DB payout formula is important when comparing the choices where one plans to keep the DB pension as a pension, whether you stay with the company or move to another company. One of the other choices is to take the commuted value (CV) that you invest yourself.

I have taken the CV twice, relatively early in my career. This has always be at least my contribution % x number of years in the pension plan x 2 (mine plus employers) + plus a growth amount. In this option, the more fair comparison with the DC pension is 15% versus DB pension at 15% (7.5% x 2).

As I have left the pension early with decades to go to retirement, the actuarial formula that looks at mortality tables, time to retirement etc. to come up with the lump sum amount have kept this within what I could put into a LIRA and into my RRSP without using RRSP contribution room. Others who were in more generous DB pensions that took the CV closer to retirement ended up with LIRA + RRSP contribution without using RRSP contribution room + RRSP contributions that used up RRSP contribution room + taxable income driving their tax rate to the maximum.


Cheers


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## Eclectic12 (Oct 20, 2010)

My Own Advisor said:


> ... If you leave, you should find out when you are "vested".


Many provinces have moved to immediate vesting. A few are still on the "two years to vest" and I think it is NFLD that is much longer (five years?). 


Cheers


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## My Own Advisor (Sep 24, 2012)

Eclectic12 said:


> Many provinces have moved to immediate vesting. A few are still on the "two years to vest" and I think it is NFLD that is much longer (five years?).
> 
> 
> Cheers


Geez, that's great....the earlier you are vested the better...


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## peterk (May 16, 2010)

^^ Eclectic is right, this is definitely complicated, and I don't think you can come up with the "correct" answer via discussion. You gotta sit down and do ALL the math and a sensitivity analysis for likely employment outcomes and see what comes out in the wash. 

Does the employer have a pension calculator tool at least? Would you have access to it now to play with without locking into the DB? If not you'll have to do it all manually. 

And if you do sit down to do all the math, make sure you are looking at after tax dollars. And take into account that the 4% vs 7.5% contribution by you during employment years also materially affects the taxes (towards the favour of the DB plan), which is an additional complication that must be considered.

This won't be an easy spread sheet. Good luck!


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## peterk (May 16, 2010)

My Own Advisor said:


> Geez, that's great....the earlier you are vested the better...


Great? For who, short term job hoppers that bring questionable value and no stability to the workforce or community? Not great for long term employees, not great for companies, not great for encouraging companies to offer DB plans, and not great for hiring practices to get more people working (higher upfront cost for employers).


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## ian (Jun 18, 2016)

There is no right answer. I have seen DC plans where the employers match was anything from one percent to ten percent. I have seen DB plans where the employee paid nothing and the payout was 1 percent (I was in one of these). Add to that the variance that age and length of service at time of resignation and you have even more variables. Some DB's only pay out with CV if you leave prior to age 55. My DB had a significantly higher CV at age 59 than it did at age 48 by a factor of 4.


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## Eclectic12 (Oct 20, 2010)

My Own Advisor said:


> Eclectic12 said:
> 
> 
> > Many provinces have moved to immediate vesting. A few are still on the "two years to vest" and I think it is NFLD that is much longer (five years?).
> ...


According to a Manulife PDF 2016 update - immediate vesting includes the Feds, BC, Alberta (since 2014), Manitoba (since 1976), Ontario (2012), Quebec and Nova Scotia.

New Brunswick since 1991 requires five years of continuous service or two years of plan membership.
Saskatchewan from 1993 is two years of continuous service.
Newfoundland from 1991 is two years of continuous plan membership.

PEI is the weirdest with something called *Pre-Operative Date* which then goes with the plan provisions or *Post-Operative Date* which requires three years of plan membership *and* five years of continuous service.

http://events.snwebcastcenter.com/manulife/GBRS/Prod/Media/PDFs/SL/ge10129.pdf


Cheers


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## Eclectic12 (Oct 20, 2010)

ian said:


> There is no right answer. I have seen ...


Or to put it another way ... YMMV where "pretty normal" takes a back seat to the particular details. :rolleyes2:
Kind of like a mortgage, LoC etc.


Cheers


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## motl (Mar 3, 2014)

OK trying to make my decision and want to make sure I'm thinking about this right. More details...

DB pension vests immediately. I can contribute 7.5% salary to receive 2% of my highest average salary over 5 consecutive years. I'm going to use $80,000 for this example although I should definitely be making much more if I'm still here in 5-10 years. 

Assuming I stay 5 years - (80,000 x 0.02) x 5 = $8000 pension @ 65
Assuming I stay 10 years - (80,000 x 0.02) 10 = $16,000 pension @ 65

Now if I did the DC option I'd receive 11% of my salary each year (ignore my contributions for now). 

Assuming I stay for 5 years - (80,000 x 0.11) x 5 = $44,000 contributed
Assuming I stay for 10 years - (80,000 x0.11) x 10 = $88,000 contributed

Using 5% compound interest, $44,000 would grow to $80,000 by 65 and $88,000 would grow to $148,000 by 65.

Let's assume I'll live to be 75 (very conservative but gives an edge to DC). That would be $8800 or $14,800 withdrawn each year. Obviously I'm ignoring the fact that those investments could continue to grow as I'm withdrawing. If I live to 85 then those numbers get cut in half, at which point it seems DB becomes more attractive. 

The other point to consider is that choosing DB over DC means I contribute 7.5% instead of 4% of my salary. If I assume the same salary as above, that's $14,000 lost extra income over 5 years or $28,000 over 10 years. I would invest this money on my own. At 5% interest I would receive an extra $26,000 at 65 for the 5 year or $47,000 for the 10 year. 

If I add those to the scenario above, I would actually end up with $106,000 at 65 (5 year version - $26,000 + $80,000) or $195,000 (10 year version - $47,000 + $148,000). In a 20 year scenario, that would be $5300/year or $9750/year. Again these calculations ignore DC growing during withdrawals. 

So as far as I can tell my math confirms what I suspected - the longer I live, the more attractive DB becomes. If I knew I'd only live to 75 then I'd choose DC, but the challenge is at 65 I won't know how long I need the money to last. I mean I'll have considerable other retirement accounts so I'm not going to rely on my pension in either scenario but I still wanted to work this out. 

Have I missed anything in my math? 

I'm still not 100% certain but it seems to me even if I only stay 5-10 years the DB option is better. I work for a very large company that I can't see going out of business but that's always a concern.


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## sags (May 15, 2010)

I retired at 55. If I had taken the commuted value I would be running out of money just about now at age 67.

I know people who took the commuted value and regretted it. I don't know anyone who took the monthly benefit and regretted it.


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## motl (Mar 3, 2014)

sags said:


> I retired at 55. If I had taken the commuted value I would be running out of money just about now at age 67.
> 
> I know people who took the commuted value and regretted it. I don't know anyone who took the monthly benefit and regretted it.


Ya, to be clear, in none of my DB scenarios would I do anything but take the pension at 65. 

This is more an exercise in understanding if the pension value at 65 for working only 5-10 years is still better than the DC option.


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## ian (Jun 18, 2016)

I did not take the commuted value. 

There are lots of good reasons to take it. If your health is failing or if you do not have longevity in your family history. Or, if your wife is considerably younger than you (the joint numbers will significantly reduce the monthly amounts because of her age).


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## GreatLaker (Mar 23, 2014)

ian said:


> I did not take the commuted value.
> 
> There are lots of good reasons to take it. If your health is failing or if you do not have longevity in your family history. Or, if your wife is considerably younger than you (the joint numbers will significantly reduce the monthly amounts because of her age).


Yes, and also if two spouses have great (typically indexed government) pensions, one can take the commuted while one takes the pension.


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## GreatLaker (Mar 23, 2014)

sags said:


> I retired at 55. If I had taken the commuted value I would be running out of money just about now at age 67.
> 
> I know people who took the commuted value and regretted it. I don't know anyone who took the monthly benefit and regretted it.


Sags do you know anyone that took a pension from Nortel or Sears?

But yeah, I hear you. I think more people would have been hurt by taking a commuted value and having it badly managed, than those that took a pension that failed and ended with a reduced pension payment.

I took the commuted value twice and don't regret either. Once in the early 90s from an industrial / smokestack industry company. That pension probably would have done OK. More recently I retired from a [email protected] Canadian tech company that was bought out by an even [email protected] US company that does not even seem to know what a DB pension is.

Several people from the second company asked me if I thought they should take the commuted value. I don't give recommendations on that. I do ask a series of questions that most people would not know where to start answering. How will you manage the money? Do you have a trusted FA that will manage it? Are you sure they are putting your interest first, or is it possible they just want to build their assets managed? Do you know that most advisors only have an obligation to sell investments that are suitable for the client based on the KYC form, not to sell what is in the client's best interest? Do you know the impact of fees on a portfolio? If you want to manage it yourself do you already manage that much money? If not why would you start now? What's your investing strategy?What's your investing plan? Do you have a written investment policy statement and plan? What would you do if markets crashed 40 or 50% like in 2008? Most people considering those questions decided not to take the commuted.


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## peterk (May 16, 2010)

motl said:


> Have I missed anything in my math?
> 
> I'm still not 100% certain but it seems to me even if I only stay 5-10 years the DB option is better. I work for a very large company that I can't see going out of business but that's always a concern.


Yes quite a lot, but it's a good start at a rough estimate .

For one, just withdrawing the funds at 65 to 75-85 is too simplified. You should at least do an annuity payment calculation with some growth rate considered (lots of calculators online).

Two, your larger DB contribution now also means lower taxes now. Lower taxes now is a huge consideration for when you're projecting the benefit coming 50 years down the road. By ignoring this you favor the DC plan inadvertently.

Three, you don't seem to be considering the difference in RRSP room between the options. If you leave after 5ish years like you think, you'll likely have a PAR adjustment for your DB plan, which will give you significantly more RRSP room back that you thought you didn't have. By ignoring this you again will favor the DC plan inadvertently and improperly.


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## kcowan (Jul 1, 2010)

A friend took the CV when he left to work for a competitor. He used it to buy a cottage, Four years later, I took a golden handshake and took an immediate pension. The immediate pension in one year was 60% of his CV. His cottage has gone up in value. I have been drawing my pension for 26 years.


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## peterk (May 16, 2010)

sags said:


> I retired at 55. If I had taken the commuted value I would be running out of money just about now at age 67.
> 
> I know people who took the commuted value and regretted it. I don't know anyone who took the monthly benefit and regretted it.





motl said:


> Ya, to be clear, in none of my DB scenarios would I do anything but take the pension at 65.
> 
> This is more an exercise in understanding if the pension value at 65 for working only 5-10 years is still better than the DC option.


Yes but the point is that while different situations, both are essentially the "same" decision that must be made.

One could also look at your projected career and think "how much guaranteed income is coming my way without this DB pension?". If the answer _feels_ low to you, then lean towards the DB.

You must also ask yourself how much you trust yourself, and how much you'll trust yourself as an old man. If you have access to 100% of your monies is it possible you might do something stupid or reckless with it? Maybe you're only a little reckless and it would be good to have 25% of your retirement income hidden away in a pension? 50%? 75%?

DB vs DC (or Pension vs. CV) is an existential question as much as it is a math question.


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## motl (Mar 3, 2014)

peterk said:


> Yes but the point is that while different situations, both are essentially the "same" decision that must be made.
> 
> One could also look at your projected career and think "how much guaranteed income is coming my way without this DB pension?". If the answer _feels_ low to you, then lean towards the DB.
> 
> ...


Ya I see what you're saying. I'm not at all concerned about having access to all of my accounts. That won't be an issue.

In fact, not having access to DB is one reason I'm apprehensive. I plan to retire between 42 or 45 so at that point I'll just have to hope that 20 years later the pension is still around. Perhaps more importantly, if something happens to me and I know I'll die young, I can't access that money to do as I wish when I wish. 

I checked out the calculators you mentioned and the edge still seems to go to DB, especially with the incorrect assumptions you pointed out in your earlier reply. The difference doesn't seem huge but it's definitely decent enough. 

Perhaps it's partly mental - having less take home pay and not really controlling that part of my retirement. 

My company also offers stock options up to 10% of income with a 50% match. Seems like a no-brainer/free money, especially given the overall health and performance of the company. But if I take part in both at max levels I'll be deducting an additional 17% off my income. Obviously the deducted money is making money so to speak, but mentally it's hard to adjust. At the end I could be saving the same (or less) of my take home compared to my old job, even if overall I'm gaining financially.


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## motl (Mar 3, 2014)

Sorry one last question. 

For the DB, I have the option of 1% contribution for 1% payout (of average salary multiplied by years of service) or 7.5% for a 2% payout.

Is there a reason not to choose the first option? The second should be better but the contribution is 7.5x more for only a 2x payout. That also frees up 6.5% salary to invest myself.


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## Daniel A. (Mar 20, 2011)

Wish I could find the books I have that have done direct comparisons between DB & DC a DC will not match a DB long term.

I notice in your calculations of DC that you have not factored anything for management fee's which should be somewhere between 2-3 % .

Everyone is different with very individual considerations my DB pension is fairly good partially indexed, fully funded, survivor gets 100% if I die first, never have to worry about what the markets are doing.


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## Eclectic12 (Oct 20, 2010)

GreatLaker said:


> sags said:
> 
> 
> > ... I know people who took the commuted value and regretted it. I don't know anyone who took the monthly benefit and regretted it.
> ...


They are being quoted in the papers, are they not?

Closest that I know of is the neighbour who took the CV of his Nortel pension. When the pension was reduced, he was glad he did.




GreatLaker said:


> ... I think more people would have been hurt by taking a commuted value and having it badly managed, than those that took a pension that failed and ended with a reduced pension payment.


With the way people have trouble understanding what to compare ... if the same misunderstandings are in their investing expectations and plans (never mind the number of people whose eyes glaze over when the conversation is the basics of finance) - it is a recipe for really bad results.




GreatLaker said:


> ... Several people from the second company asked me if I thought they should take the commuted value. I don't give recommendations on that. I do ask a series of questions that most people would not know where to start answering. How will you manage the money? Do you have a trusted FA that will manage it? ...


Questions and/or asking a minimum effort to learn have been helpful to me or reveal interesting things about those asking.

For better or worse ... there are lots of variations and lots of factors to consider.


Cheers


*PS*
Several at work who took the CV from a fully indexed DB pension regretted it, after seeing how their investing went (including mistakes like selling in Dec 2008 then skipping re-buying until around Mar 2012). Others like the neighbour who took the CV for his Nortel pension and a co-worker who also took the CV for the insurance company pension did better.


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## motl (Mar 3, 2014)

Daniel A. said:


> Wish I could find the books I have that have done direct comparisons between DB & DC a DC will not match a DB long term.
> 
> I notice in your calculations of DC that you have not factored anything for management fee's which should be somewhere between 2-3 % .
> 
> Everyone is different with very individual considerations my DB pension is fairly good partially indexed, fully funded, survivor gets 100% if I die first, never have to worry about what the markets are doing.


Good call. Completely forgot to account for the insane fee compared to my own investments. My old DC plan got ravaged by those fees. I think that pretty much seals my decision. 

Still trying to understand my last post about 1%/1% vs 7.5%/2% though.


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## ian (Jun 18, 2016)

You also need to look to see if you can roll the entire DB over into a tax sheltered LIRA. I had two components. A DB plan and a supplementary plan. I had no unused RSP room.

My supplementary pension could not be rolled over. It had to be paid out as a CV as per company policy. It was taxed in each of the three tax years that I spread it over.

A portion of the CV of my DB pension would have been immediately taxable as income if I had selected the CV route. The balance could have been transferred into a Lira. As I recall, about 25 percent of the DB CV payout would have been taxable.


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## Eclectic12 (Oct 20, 2010)

motl said:


> ... Have I missed anything in my math?


Lots ... for starters, joining the DB pension means that when you retire early - you will have the choice of either keeping the capped DB pension credits earned (this seems to be the scenario you have covered with issues) or take the CV (which you don't seem to have covered).

The "quit then take the CV" scenario should be something like:

Assuming I stay 5 years - my DB contributions x 2 (employer has to pay half) + growth as a minimum (the point in time calculation likely with have low interest rates pumping up the CV and a shorter time to retirement increasing it as well). This looks like something like [($80K x 0.075) x 2 + growth ] x five years.

Repeat for 10 years.




motl said:


> ... Now if I did the DC option I'd *receive 11% of my salary each year (ignore my contributions for now*).


From what you have said, the company will contribution 7% and you will contribute 4% to end up with 11% contributed. Unless you mean "ignore optional additional contributions for now", this makes no sense to me.

Secondly - unless you plan on leaving the $ in cash, the FMV is going to vary, with one's ability to invest it limited by the choices available in your plan ... at whatever costs are build into those funds. For one DC pension I looked at the details for, it was choice of four MFs with three of the four having MERs of 2.3%. Others have posted on CMF that they could choose index funds with 1% MERs.




motl said:


> ... The other point to consider is that choosing DB over DC means I contribute 7.5% instead of 4% of my salary. If I assume the same salary as above, that's $14,000 *lost extra income* ...


How so?

The income going in the DB pension is the same as $14K going into an RRSP ... from the POV of that particular tax year's income tax return.
Since you get your contributions back - the "loss" is being unable to control what it is invested in as the pension manager will do it, usually at lower rates that most retail investors are charged. 




motl said:


> ... I would invest this money on my own ...


Question is - are you the type to stick to the plan of investing this in an RRSP or TFSA?
Or like a lot of other people, would you decide to spend it on an needed repair, vacation or larger vehicle because "retirement is a long way off - the kick *** sound system is more important now"?


At the end of the day - unless I missed it, a key factor that has been ignored is what experience do you have investing?
How do you know that should another crash like late 2008 happen again that you would avoid the mistakes that cost people big money?
People manage to lose money is bull market so that is also another question, beyond the investing limitations as well as costs of the DC pension.


Cheers


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## motl (Mar 3, 2014)

Thanks, more good information to consider. I feel like I'm siding with DB now, but just trying to understand the value of the two options I presented a few posts back.

Also, I have zero concerns about my ability to invest and stay the course. I already have a decent investment portfolio growing (almost entirely index funds) and am very frugal/strict to hit my goals. I have a hard target of 45 to retire which is only 12.5 years away so I'm not messing around with blowing retirement savings on random things. 

But this DC is with SunLife and I've had plans with them before. Their MERs in my experience are terrible, although I'm not sure if it varies by plan/employer.


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## peterk (May 16, 2010)

With a freedom 45 plan, all the more reason to tuck that money away in the DB. Who knows what life will throw at you between age 45 and 65, after you become unemployable. That ~$500/month payment starting at 65 may be a life saver.

You sound like a real optimist, motl, and a logical guy who likes to keep things under his control. Optimists would be smart to give up a bit of control, and have a sneaky backup plan in case things go south all of a sudden because the optimism has blindsided you. As general food for thought, how do you know you can "stay the course" with your investing, when you had nothing to invest during the last big market crash? Being down $5000 when you're 25 (or whatever) isn't the same as being down $500,000 when you're 55 with no DB pension. 

Tangentially related - You're like 33 with no wife and kids yet, were thinking about buying a house with GF, weren't you? How is it that you have a "hard" 45 retirement plan? Surely it is merely a wispy loose figment of a plan at this point??


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## motl (Mar 3, 2014)

peterk said:


> With a freedom 45 plan, all the more reason to tuck that money away in the DB. Who knows what life will throw at you between age 45 and 65, after you become unemployable. That ~$500/month payment starting at 65 may be a life saver.
> 
> You sound like a real optimist, motl, and a logical guy who likes to keep things under his control. Optimists would be smart to give up a bit of control, and have a sneaky backup plan in case things go south all of a sudden because the optimism has blindsided you. As general food for thought, how do you know you can "stay the course" with your investing, when you had nothing to invest during the last big market crash? Being down $5000 when you're 25 (or whatever) isn't the same as being down $500,000 when you're 55 with no DB pension.
> 
> Tangentially related - You're like 33 with no wife and kids yet, were thinking about buying a house with GF, weren't you? How is it that you have a "hard" 45 retirement plan? Surely it is merely a wispy loose figment of a plan at this point??


I suppose I just know the kind of person I am generally when it comes to these things. Nothing is guaranteed obviously but I've developed pretty good personal finance habits and self-discipline in general. You're right though - keeping a bit out of my control can't hurt.

33 this fall, yes, but no plans for kids. GF and I aren't planning to get married and are happy renting. We may move in 10-15 years and buy in a LCOL area, but that wouldn't impact our plans too significantly because my current retirement plans/calculations account for rent anyway. 

Anyone have any thoughts on the DB plan options?

1% salary for 1% payout vs 7.5% salary for 2% payout. My brain has been busy all day today but in that scenario aren't I contributing 7.5x more income so the company will contribute 2x more (in a CV scenario) or payout 2x more (as pension)? Does that actually make sense?


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## Eclectic12 (Oct 20, 2010)

ian said:


> You also need to look to see if you can roll the entire DB over into a tax sheltered LIRA. I had two components. A DB plan and a supplementary plan ...
> A portion of the CV of my DB pension would have been immediately taxable as income if I had selected the CV route. The balance could have been transferred into a Lira. As I recall, about 25 percent of the DB CV payout would have been taxable.


A good point.

The OP should be able to confirm if a supplemental plan is in the mix.


However, others have posted that their DB pension, which had only a DB pension without a supplemental DB pension - were in the same situation as they were close to retirement.

The two DB pensions I have taken the CV for, were also only a DB pension, where many years to go for retirement meant the estimated investment growth reduce the total paid out.


For the first CV, something like 95% was covered by a LIRA and a transfer to my personal RRSP without using RRSP contribution room. I would have to dig up the details but the essence was that for the remaining 5%, if I did not have RRSP contribution room to absorb it, the payment would have been taxable income. I chose to use up some of my RRSP contribution room.


For the second DB pension, 100% of the CV went into a LIRA. As both pensions were covered by the same jurisdiction, the same LIRA was used to receive the CV (keeping the number of LIRA low :biggrin: ).


Cheers


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## Eclectic12 (Oct 20, 2010)

motl said:


> .... Also, I have zero concerns about my ability to invest and stay the course. I already have a decent investment portfolio growing (almost entirely index funds) and am very frugal/strict to hit my goals. I have a hard target of 45 to retire which is only 12.5 years away so I'm not messing around with blowing retirement savings on random things.


You are ahead of a lot of people!




motl said:


> .... But this DC is with SunLife and I've had plans with them before. Their MERs in my experience are terrible, although I'm not sure if it varies by plan/employer.


It does vary ... the more the employer is willing to kick in to Sun Life, the more likely the lower MER funds will be made available.

If the employer is looking for bottom dollar then likely the high cost MER funds with less choice is what will happen.


Cheers


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## peterk (May 16, 2010)

That 7% 1% issue sounds odd Motl. You sure you have the numbers figured out right?

I believe that a supplemental plan, like an indexing fund, is fully transferrable to LIRA like the DB CV is. Perhaps the issue is if you hit the maximum transfer value sooner because of the supplemental contributions then they will become excess and taxable.


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## motl (Mar 3, 2014)

peterk said:


> That 7% 1% issue sounds odd Motl. You sure you have the numbers figured out right?
> 
> I believe that a supplemental plan, like an indexing fund, is fully transferrable to LIRA like the DB CV is. Perhaps the issue is if you hit the maximum transfer value sooner because of the supplemental contributions then they will become excess and taxable.


Ya, 1% for 1% or 7.5% for 2% but that doesn't make sense to me.

Had trouble getting a hold of anyone from the pension management company today but will give them a call tomorrow. Maybe there are hidden elements that make the 7.5% more attractive that aren't listed on the benefits website. Otherwise I can't wrap my head around how the higher option would be better. 

As far as I understand it, in a lump sum situation the employer gives you what you contributed plus their contributions (100% match) as a starting point. So in that sense the 7.5% is fantastic, but if taken as a pension at 65 the payout is only 2%. I'll post again tomorrow after running that by the plan admin because it's strange to me.


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## motl (Mar 3, 2014)

OK so here's an update. I've confirmed full amount of pension can be retained in fund as deferred pension if I leave the company. Vests immediately. 

DB plan options

1) 1% of earnings for 1% of final average earnings multiplied by years of service
2) 3% of earnings up to YMPE ($56,000) and 7.5% beyond that for 1.3% of final average earnings up to final average YMPE plus 2% of final average beyond that multiplied by years of service
3) 7.5% of earnings for 2% of final average earnings multiplied by years of service

So I'm definitely confused about option 3. Does it make any sense to contribute 7x more income to receive only 2x more pension versus option 1? I'm left wondering if my value for money is actually better than DB1. 

Under DB3 I would be deducted $5700 per year to receive $16,000 per year at 65 for 10 years of service. 

Under DB1 I would be deducted $760 per year to receive $8000 per year at 65 for 10 years of service.

Under DB1 I would retain an extra 6.5% of my salary. Roughly this would be about $3500 per year after tax. Over 10 years using 5% growth I'd have $50,000. If I leave at 10 years and stop contributing, that sum grows to $170,000 by age 65 without any contributions. Without factoring in growth during retirement that $170,000 represents about $8500 per year over 20 years. Using a payment annuity calculator, a 20 year timeline from age 65 allows for withdrawals around $12,000 annually. Even if we split the difference and say $10,000, when added to the $8000 above I would come out ahead of choosing option 3 ($16,000). 

Really appreciate the help so far and would love someone to let me know what I've missed. I've oversimplified some things but to me I can't see DB3 being better than DB1 unless my goal was to take a CV (since they pay out 100% match AFAIK). If my goal is to take it as a pension at 65, DB1 seems to make the most sense. It would present a modest pension at 65 but also allow me to potentially come out ahead even using conservative investments/growth rates for that remaining 6.5%. Only thing I'm not considering between DB1 and 3 is how RRSP room would be impacted, but I'm not sure that would offset what I've found above?

On the plus side, because of unused flex benefit dollars I could select DB1 and actually not contribute anything from my salary. DB3 contribution would likewise be reduced by about $1000 annually. Hoping people with more experience can confirm my findings. Thanks!


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## peterk (May 16, 2010)

^ Ah, so is the "employer contribution" the same amount in those 3 scenarios?

The numbers looks reasonable if you're considering that the employer is contribution some percentage as well. The 1% pension is the "base" pension, essential provided by them (you only pay 1% which isn't nearly enough to fund a 1% pension) and the other 2 options are options for you to enhance your pension payout, at your own cost.

* Edit: You probably can't answer that question easily of the employer contribution in the 3 option. It's probably hidden deep in the math and can only be known by the PA generated for your T4.*


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## motl (Mar 3, 2014)

Ya I'm not sure. I'd heard somewhere that employers have to match 100% for DB contributions but I'm not sure that's right?

So if I ever took a CV from DB1 I'd get my contributions at 1% plus their 100% match and from D3 it'd be 7.5% plus match. In that scenario DB3 is vastly superior because of a much higher match. But if I simply defer and take pension starting at 65, the payout is 1% versus 2%. 

It honestly seems to me like the 7.5% option is meant to seem more attractive (because of the 2% payout) so more people will select it, and that it helps subsidize people who choose the 1% option (because like you said, it's probably too low to fund the pension). Does that make sense? 

Am I right to assume that if my goal is to take the pension deferred @ 65, the match is irrelevant because in either case it's a lifetime pension paid out as 1% or 2% based on years of service? If that's the case then I'm still unsure why I'd choose 7.5% when my previous match seems to indicate I could make up the difference by investing that 6.5% difference?


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## peterk (May 16, 2010)

motl said:


> Ya I'm not sure. I'd heard somewhere that employers have to match 100% for DB contributions but I'm not sure that's right?
> 
> So if I ever took a CV from DB1 I'd get my contributions at 1% plus their 100% match and from D3 it'd be 7.5% plus match. In that scenario DB3 is vastly superior because of a much higher match. But if I simply defer and take pension starting at 65, the payout is 1% versus 2%.


That doesn't sound right.



> Am I right to assume that if my goal is to take the pension deferred @ 65, the match is irrelevant because in either case it's a lifetime pension paid out as 1% or 2% based on years of service? If that's the case then I'm still unsure why I'd choose 7.5% when my previous match seems to indicate I could make up the difference by investing that 6.5% difference?


Yes, but if the employer contribution is different between the two (though I suspect it's not) then your Pension Adjustment (PA) will be different, which affects your RRSP room.


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## Eclectic12 (Oct 20, 2010)

motl said:


> OK so here's an update. I've confirmed full amount of pension can be retained in fund as deferred pension if I leave the company. Vests immediately.
> 
> DB plan options
> 
> ...


I am confused about having options at all ... I can see why your head was huring!

For me, my first DB pension was being in it with a set percent up to YMPE and a set percentage after YMPE. I never made YMPE before leaving so it was the lower percentage.

My second DB was similar where I was started above YMPE so it was a blend.

My third and current DB has the blend of contribution. It also has an optional supplemental plan but that can only buy upgrades. 
For example, I can buy:
1) full indexing instead of partial indexing.
2) a bridge benefit to top up from age 55 or whatever age after 55 to age 65 
3) the early retirement reduction 
4) any combination there is enough money to buy


Being able to choose what contribution level to go with has not been offered. These options will take some thinking.




motl said:


> ... Only thing I'm not considering between DB1 and 3 is how RRSP room would be impacted, but I'm not sure that would offset what I've found above?


If you think your conservative investments are going to grow better then DB1 is the choice that will give you more RRSP contribution room.

By contributing to the DB pension, a pension adjustment (PA) is calculated based on the future benefit being earned. When the RRSP contribution room is calculated for the following year, the PA is subtracted to reduce it. (This levels the playing field with those who only have an RRSP to fund their retirement).
http://blog.taxresource.ca/calculating-the-pension-adjustment/

Assuming the summary above benefit numbers are correct plus that I am reading them correctly :
DB2's the 2018 PA should be something like [ 9 x [(1.3% x 2018 YMPE) + (2% x excess of YMPE)] - $1,000
For $80K of earned income then [ 9 x [(1.3% x $55,900) + (2% x ($80,000 - $55,900)] - $1,000 = [ 9 x (726.70 + 482) ] - $1,000 = $10,878.30 - $1,000 = $9,878.30

2018 RRSP contribution room earned would be something like $80,000 x 18% - PA to a max of $26,230 = $14,400 - $9,878.30 = $4,521.70.


DB3's formula looks weird as I am used to the split rates for up to YMPE then after YMPE. If the flat formula is corrrect then
2018 PA = [ 9 x ($80,000 x 2%) ] - $1,000 = $14,400 - $1,000 = $13,400

The 2018 RRSP contribution room earned becomes $14,400 - $13,400 = $1,000.


Increased benefits means a lot less RRSP contribution room is being earned each year. Where one takes the pension instead of the CV, that's the way it goes. 
Where one takes the CV, then a pension adjustment reversal (PAR) may grant back some RRSP contribution room. I believe early retirement is the situation where one likely gets back RRSP contribution room while others who left just before retirement reported that their PAR was close to zero.

https://www.milliondollarjourney.com/what-is-the-pension-adjustment-pa.htm



Cheers


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## motl (Mar 3, 2014)

Thanks everyone for your input.

I've done some more calculations and it seems if I leave quite early (say after 2 years) then DC is almost definitely better. My plan allows changing DC/DB type every 5 years and coincidentally the next eligible enrollment period is January 2019 so I can actually change my decision next year either way. I think I may go with a DC and evaluate again in January. I'm still new here but if by then I can see myself committing ~10 years to this company then I will definitely switch to DB. If I'm feeling more likely to move on in a normal 2-3 cycle then I'd stay as DC.

That's my current thinking anyway. Have another week before I have to finalize my choice.


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## Spudd (Oct 11, 2011)

Just make sure you are definitely able to switch from DC to DB. At my old company you could switch from DB to DC but not vice versa.


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## ian (Jun 18, 2016)

Many companies are forcing new hires and some of their younger DB employees into a DC plan.

For today's employees, many of whom can expect to have four or five employers during their working lives, DC may be the best way to go. The work environment has changed so much. Just read an article in NPR. In 1980 it took 10 man hours to produce a ton of steel in the US. Today, it takes 2 hours because of automation. Long term jobs in many sectors may become a thing of the past.


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## motl (Mar 3, 2014)

Ya, that's what I'm struggling with.

I've advanced my career nicely over the past few years and feel like I'm in a great spot with this company to move up internally, BUT the number of opportunities at my branch may be limited. And I may not want to relocate (ie. to Toronto). So if I want to get the most value out of DB I should decide to stay here 5-10 years and potentially give up some earning potential and/or roles of interest externally. Otherwise, if I'm committed to advancement and growth, it's probably better to go with DC because I can't guarantee I'll find those at my company in 5-10 years.

It's a tough call trying to project my future career path.


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## james4beach (Nov 15, 2012)

motl said:


> So if I want to get the most value out of DB I should decide to stay here 5-10 years and potentially give up some earning potential and/or roles of interest externally.


Be careful when doing that calculation. The DB = compensation = extra income.

Editing and trimming my post because I see you've already been doing a lot of calculations, so this isn't news to you


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## motl (Mar 3, 2014)

Ya for sure. I just changed jobs and had to do a similar exercise to understand the total compensation packages of my old versus new employers. 

Also, a DB pension would be a no brainer (even at a lower salary) if I were expecting a 20-30 year career with the same company. But I'm not, so that's why (IMO) the gray area emerges. My dad has a comfy military pension so I'm aware of how good a DB pension can be, but I didn't have access to one in my early 20s and don't plan to work beyond another 10-13 years. And though my company is giant and I'm pretty confident it will be fine, there's always a concern that a non-federal government DB pension won't pay out as expected if the company goes under. I'm still 33 years from collecting a pension and a lot can happen in that time.

The more appealing side of the DB pension is keeping a portion of my retirement investments protected from the markets.


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## james4beach (Nov 15, 2012)

motl you might also want to consider the counterparty risk, the creditworthiness of the party giving you the DB. There's a huge difference between say a federal govt pension and a private co like Bombardier. Don't forget what happened to the Nortel pension.


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## peterk (May 16, 2010)

Thinking about pension solvency and counter party risk seems to be on the scale of trivial when motl isn't even doing a detailed assessment of the differences between the plans, just a generic holistic comparison. For example, using market returns to calculate the final value of the DC instead of the appropriate bond rates is comparing vastly different risks and is not a very fair assessment. So is not determining the detailed tax effects of both options. Pension funding risks is a couple orders of magnitude less important than nailing down the other factors properly, I would think.


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