# Defined Benefit - Blessing or Curse?



## BigMonkey (May 31, 2016)

With more companies discontinuing defined benefit plans due to the cost and new employees being on the defined contribution plan. It appears any company undergoing an employee reduction program, employees with a defined benefit plans are at a higher risk over employees with defined contribution plan. This makes sense because the employee on the DB plan is more costly than one on a DC plan. 

1) My question, if you guys have noticed this trend at your company or any other company? 

2) In terms of climbing that corporate ladder, I would think that an individual on a defined benefit plan would have a more difficult time moving up since they are more costly/highly compensated compared to a DC employee.

Any of those that have been in the workforce for a while noticed this trend as well for non-unionized companies? Unionized employees would should be somewhat immune to this since it is based on seniority.


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## fireseeker (Jul 24, 2017)

DB benefit plans do not inherently cost more that DC plans. At times they have even cost less. (Google Dominion Stores and Conrad Black.)
The issue is that DB plans have more risk for plan sponsors (the employer). With interest rates falling for such a long period of time, plan returns lagged projections and companies have generally had to increase their contributions to maintain enough assets to pay future liabilities.
Interest rates appear to be rising now, so this risk may diminish or disappear in future.
Many (most?) companies with both DB and DC plans are unionized (I work for such a corporation). Layoffs are generally determined by seniority, unless we're talking about management.
Even in cases where there is no union, I would think the difference between DB and DC costs and liability would be an extremely small factor when it comes to layoffs.
This also applies to your second question. Making promotion decisions on the basis of what kind of pension plan an employee has would save little and would ultimately be self-defeating -- because you would be promoting for terrible reasons.


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## Daniel A. (Mar 20, 2011)

I'd have to agree with the above, once interest rates start going up the cost of a DB plan to companies drop.

As far as laying people off between a DB & DC plan goes a company could save far more getting rid of everyone over 55 future medical cost time off, vacation time, bonuses and other perc's. 
Companies want solid managers and are willing to pay for the right person to get the job done I was reminded of that this past week after talking with my daughter. She started at a new company last fall and in the few months there is moving into a different job with the same company at the moment in a union something she has never been a member of. Management made it clear to her that they will create a position for her in management to keep her she has an HR background. Her fellow union workers are intimidated by her skill and they would never consider leaving their safe union jobs.


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## sags (May 15, 2010)

When inevitable downturns happen where do companies look first to reduce their costs ?

If you said the ranks of low to middle management.........you get a cookie.


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## Beaver101 (Nov 14, 2011)

^ Partially agree with the " ... to the middle management", it starts with the lowest part of the totem pole. 

Re-read DanielA's post ...


> company could save far more getting rid of everyone over 55 future medical cost time off, vacation time, bonuses and other perc's.


, and 



> Management made it clear to her that they will create a position for her in management to keep her she has an HR background.


.. and of course, HR is the lapdog to execute the layoffs.


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## OptsyEagle (Nov 29, 2009)

I would think the cost of a pension would be a very small factor in the reasons why one employee gets laid off in lieu of another.

As others have said, the reason for the demise of the DB pension plan is because of the risk, not the cost. Most employers are not in the business of managing money and have no interest in the risk. That risk should fall on the individual and not the employer. DB plans should never have been invented in the first place, but they were.


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## Beaver101 (Nov 14, 2011)

OptsyEagle said:


> I would think the cost of a pension would be a very small factor in the reasons why one employee gets laid off in lieu of another.


 ... agree.



> As others have said, the reason for the demise of the DB pension plan is because of the risk, not the cost. Most employers are not in the business of managing money and have no interest in the risk. That risk should fall on the individual and not the employer. *DB plans should never have been invented in the first place, but they were*.


 ... and why were they invented? Who did it benefit?


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## Eclectic12 (Oct 20, 2010)

Cost of a DB pension is more likely to influence whether it is capped where new employees are offered a DC pension, RRSP matching or nothing. It is likely to happen on a much broader scale than one or two employees.

As an example, for one company I worked for, before merger - all employees were offered a DB pension with a combined employee/employer contribution rate of something like 5.9%. After merger, those below manager were offered RRSP matching while managers plus above were offered a DC pension with a combined employee/employer contribution rate of 2% with five MFs to choose from for investments.


If the employee being laid off has the DB pension then from what I have seen, the key factors seemed to be:
a) performance (or lack thereof)
b) salary savings, where typically the thinking was that experience didn't matter so a junior employee would be cheaper
c) politics


Keep in mind that a more senior employee is not only likely to have a bigger salary as well as more risk medical costs, they are also more likely to be partially or fully covered by a DB pension.


Cheers


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## Woz (Sep 5, 2013)

One weird thing about DB pensions is that even if a DB pension is considered to be fully funded, there’s not enough cash to pay out the commuted value of everyone’s pension (at least in today’s low rate environment). This is because the commuted value uses a lower rate of return in calculating the present value than the rate used to calculate future returns in the actuarial report.

With that in mind, I think a company would be hesitant to layoff a large number employees with DB pensions as it would hurt the solvency of their pension if those workers opted for the commuted value.


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## BigMonkey (May 31, 2016)

From what I have seen, the actual cost of a defined benefit plan in today's environment to the company is in the range of 25-45% of the person's salary (depending on how generous that pension plan is). Meaning if a person made $100k, the company has to pay their $100k salary plus 25-45k to the pension plan administrator for their future pension. 

While this might temporarily be sustainable for a couple years. Multiply this 25-45% by 1000s of employees and that is a lot of additional cost that would be hard or any business to bare. I find it would be hard for any business to sustain this additional cost without having to take any drastic action. Government is probably the exception since they can just borrow and put this additional cost on future tax payers.


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## Woz (Sep 5, 2013)

BigMonkey said:


> From what I have seen, the actual cost of a defined benefit plan in today's environment to the company is in the range of 25-45% of the person's salary (depending on how generous that pension plan is). Meaning if a person made $100k, the company has to pay their $100k salary plus 25-45k to the pension plan administrator for their future pension.


That seems on the high side.

OMERS is 18% to 28.6% split equally between emloyee and employer, so a $100k salary would cost an additional 9-14.3k to the pension plan administrator. http://www.omers.com/pdf/OMERS_AnnualReport_2016.pdf

Pensions BC PSPP is 17.36% to 20.36% with the employee contributing 7.93% to 9.43% and the employer contributing the rest, so a $100k salary would cost an additional 9.4-10.9k to the pension plan administrator. https://pspp.pensionsbc.ca/document...l+report/5efcd7fd-334f-4b37-8b52-5f39aa0d1ab7


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## BigMonkey (May 31, 2016)

OMERS currently uses a discount rate of 6.2% is is extremely high and not in line with the industry average. 

Pension BC uses a discount rate of 8.1 - 9.2% which is extremely high even by historical standards.

In review of OMERS financial statement, they specially deviate from international financial reporting standards to present the numbers they currently are. 

When you present value the future pension obligation to today's terms using these higher discount rate it creates an artificially lower contribution requirement by both the employee and the employer. If they were to follow current markets and if they chose to actually follow how the world presents their pension. The amount of money they actually need to put in will be quite a bit more (probably more than double or triple).

In summary, they aren't putting enough in. They got around this by choosing a higher discount rate. Eventually the pension money will run out as bonds returns are not aligned with the discount rates used.

As a reference: Ontario Teachers pension currently uses 4.8%.


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## lonewolf :) (Sep 13, 2016)

Beaver101 said:


> ... and why were they invented? Who did it benefit?


 The unintended consequences of wage & price controls. Employers started offering bigger & better benefits to attract employees as government would not let employers pay higher wages. Now companies having trouble paying benefits. 

The tides have turned & now the government wants employers to pay higher wages i.e., min wage increase if your not worth min wage the government will not let you work. Though you can start your own company & work for less then min wage. 

The government does not care about the economy only doing that which gets them voted in to collect their fat pensions.

the government thinks they can do a better job then the market regarding wages. Only an egotistical pig would think that way


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## m3s (Apr 3, 2010)

BigMonkey said:


> From what I have seen, the actual cost of a defined benefit plan in today's environment to the company is in the range of 25-45% of the person's salary (depending on how generous that pension plan is). Meaning if a person made $100k, the company has to pay their $100k salary plus 25-45k to the pension plan administrator for their future pension.


Public service DB pension contributions are 50:50 matched and it's about 10% up to Maximum Pensionable Earning ($55,900 in 2018) and about 12% above that (probably to adjust for CPP contributions)

($55,900*0.10)+(($100,000-55,900)*0.12)=$10,882 matched by employer. So around 11%. Treasury board increases these rates incrementally every year lately

RRSP contribution room limit is 18% of salary so 25-45% doesn't make sense. Pension adjustments to RRSP room seem to be about 15%, leaving about 3% for RRSP contribution


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## MrMatt (Dec 21, 2011)

fireseeker said:


> DB benefit plans do not inherently cost more that DC plans. At times they have even cost less. (Google Dominion Stores and Conrad Black.)
> The issue is that DB plans have more risk for plan sponsors (the employer). /QUOTE]
> 
> Higher risk is actually the point.
> ...


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## ian (Jun 18, 2016)

The real benefits of a DB do not really kick until after a longer period of employment and a higher age.

Many of today's employees can expect to have multiple employers. It is not unusual to see employees changing jobs every five years or less. In that situation, a DC is typically much better. The payout from a DB for a younger worker with low service is very low.

A DB may not be the preferred choice for people like this.


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## lonewolf :) (Sep 13, 2016)

MrMatt said:


> fireseeker said:
> 
> 
> > DB benefit plans do not inherently cost more that DC plans. At times they have even cost less. (Google Dominion Stores and Conrad Black.)
> ...


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## peterk (May 16, 2010)

ian said:


> The real benefits of a DB do not really kick until after a longer period of employment and a higher age.
> 
> Many of today's employees can expect to have multiple employers. It is not unusual to see employees changing jobs every five years or less. In that situation, a DC is typically much better. The payout from a DB for a younger worker with low service is very low.
> 
> A DB may not be the preferred choice for people like this.


Is that really how the numbers work out? I don't think it's a fair comparison.. You'd be comparing an "investment returns" amount of growth in a DC vs. a series of smaller guaranteed pensions for the hypothetical DB pension job hopper.

What if the DB job hopper takes the CV and LIRA each time and invests same as the DC pension guy?


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## Thal81 (Sep 5, 2017)

DB pensions are such a rip-off, someone must be filthy rich on top of that pyramid, and it's not the people contributing to those plans. 

In my case, I've calculated that if I was to invest that money myself (my contribution and the employer's) in a modest balanced portfolio, and if I was to withdraw 4% at retirement, my withdrawals would be twice what my DB payouts will be. Twice!

And on top of that, with the DB plan I don't own the principal, so that goes poof when I die. Imagine the amount of capital that must be piled up in those DB funds, must be insane. But apparently that's not the case, so where is the money going? 

Wish I could opt out of that scam invented for people too irresponsible to plan their retirement, but I can't :-(


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## sags (May 15, 2010)

We collected our pension benefits through the recession, while people I know who took the commuted values had to go back to work.


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## Eclectic12 (Oct 20, 2010)

BigMonkey said:


> From what I have seen, the actual cost of a defined benefit plan in today's environment to the company is in the range of 25-45% of the person's salary (depending on how generous that pension plan is). Meaning if a person made $100k, the company has to pay their $100k salary plus 25-45k to the pension plan administrator for their future pension ...


It would seem to depend on whether one is in a DB pension that is solely funded by the employer. 

For my DB pension plan, the contributions are made by both employer and employee. This means that without special contributions being made to deal with an under funding situation, the employer has to come up with $100K in salary but hold back $6K for the employee pension contributions. If that year is a 50/50 split, then an additional $6 has to be added to the $6K from the employee to send a total of $12K or 12% to the DB pension administrator.

*Edit:*
It ends up being $100K that includes the employee contributions + an added $6K for a total of $106K.


I'll have to see if I can find something in the pension statements that indicate how the split has worked out over the years and if special contributions were made to deal with funding.


Cheers


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## peterk (May 16, 2010)

Thal81 said:


> DB pensions are such a rip-off, someone must be filthy rich on top of that pyramid, and it's not the people contributing to those plans.
> 
> In my case, I've calculated that if I was to invest that money myself (my contribution and the employer's) in a modest balanced portfolio, and if I was to withdraw 4% at retirement, my withdrawals would be twice what my DB payouts will be. Twice!
> 
> ...


You're only saying that because your and your employer contributions are "high" right now due to low interest rates. You are using a "modest balanced portfolio" on one side, but not a "modest interest rate" on the other side. You're entitled to a certain payout at the end, not required to make a certain contribution amount during. When interest rates go up the contributions will be decreased, and the bad deal will suddenly look like a good deal. 

It certainly appears like a bad deal these days, with low rates and high market returns.


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## Plugging Along (Jan 3, 2011)

lonewolf :) said:


> MrMatt said:
> 
> 
> > It was not that long ago someone would buy a company with the primary focus to get their hands on the pension money no interest in running the company. Corruption leads to politicians allowing companies to raid pension funds.
> ...


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## GreatLaker (Mar 23, 2014)

peterk said:


> Is that really how the numbers work out? I don't think it's a fair comparison.. You'd be comparing an "investment returns" amount of growth in a DC vs. a series of smaller guaranteed pensions for the hypothetical DB pension job hopper.
> 
> What if the DB job hopper takes the CV and LIRA each time and invests same as the DC pension guy?


Many, maybe even most, DB pensions base the retiree's pension payment on their salary, typically the average salary of their last or highest 5 years.

Say someone worked 35 years for one company for a final average salary of $100k. That's what their pension would be based on.

On the other hand, say that 35 year career was split equally among 4 different jobs, with final average salaries of each job of $40k for the first job, $60k for the second, $80k for the third and $100k for the fourth. They would be entitled to 4 pensions, each of which is based on their final 5 years salary in that job. Or if they took a LIRA from each, they would be entitled to the present value of the pension at the time they left each job (based on actuarial pension CV calculations.

So the DB pension job hopper would have pensions (or the corresponding CVs) based on much lower final average salaries throughout their career. DB pension payouts really reward long-term employees because of inflation and wage increases over a career.


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## GreatLaker (Mar 23, 2014)

Thal81 said:


> DB pensions are such a rip-off, someone must be filthy rich on top of that pyramid, and it's not the people contributing to those plans.
> 
> In my case, I've calculated that if I was to invest that money myself (my contribution and the employer's) in a modest balanced portfolio, and if I was to withdraw 4% at retirement, my withdrawals would be twice what my DB payouts will be. Twice!
> 
> ...


Do you mind saying what rate of return and life expectancy you used for your analysis? 

Pensions spread longevity risk across multiple members/retirees, so can base their funding requirements on average life expectancy. An individual investing for their own retirement needs to provide funding for as long as they live, or have a risk of running out of money if they fail to die in a timely manner.

I took the CV or a pension and based on a 4% investment return the breakeven point is age 90. If I get better than 4% I win. If I live longer than 90 then taking the pension instead of CV would be a better choice. Can I get better returns than 4%? Well historically yes, but there have been times in the past where returns have been less, particularly the stagflationary 1970s or the lost decade of the 2000s. Imagine the plight of a 1999 retiree, living through the dot com crash and the financial crisis, and about a decade of relatively flat returns at the start of their retirement.


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## Eclectic12 (Oct 20, 2010)

Plugging Along said:


> ... Do you have any substantiated examples?
> I have never heard of the purchase of the company to access the pension funds. In fact, there are special laws regarding the pensions in case of a bankruptcy or acquisition.


Most of the examples I remember are American ... though I recall that Harris while premier of Ontario bringing forward legislation to make Ontario more like the US.

For Canada, Conrad Black prefered to extract in 1985 the remains of Dominion Stores Ltd. pension surplus solely to the benefit of shareholders. He talked about "not running a welfare agency for corrupt union leaders and a slovenly work force" as he closed or sold the chain's stores and shed employees. The court case meant having to return $38 million to the employees. Going forward, a negotiated split happened.

The legislation being delayed would have put the decision as to the whether the employer owned the surplus or the combination of employer/employee owned it be the decision of the provincial official. https://www.theglobeandmail.com/rep...urplus-issue-not-retired-yet/article18290172/

It seems inconsistent that the Gov't of Canada apparently was allowed to extract $28 Billion in the '90s from the public service, Canadian Forces and RCMP pensions to pay down the deficit. In 2012, the Supreme Court of Canada wrote "The government was not under a fiduciary obligation to the plan members, nor was it unjustly enriched by the amortization and removal of the pension surpluses". http://www.cbc.ca/news/politics/top...not-entitled-to-28b-pension-surplus-1.1292628

Similar has happened in the US ... http://www.nytimes.com/1985/11/03/b...-the-company-pension-plan.html?pagewanted=all

GE is reported to have shut down their DB pension in 2010 despite not having contributed to it since 1987 plus having the pension in a surplus position. They are reported to have made a small contribution in 2012.


Cheers


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## Eclectic12 (Oct 20, 2010)

Beaver101 said:


> OptsyEagle said:
> 
> 
> > ... DB plans should never have been invented in the first place, but they were.
> ...


It is all the first Caesar's fault, way back in Rome.

When the Roman army became a full time job instead of a short term commitment or a seasonal one, it was seen as a way to redirect the retired soldier's loyalty from their commander to the emperor. It also cut down on the complaints from those using "public lands" for profits when it was granted to retired soldiers.



> The aerarium militare was the military treasury of Imperial Rome. It was instituted by Augustus, the first Roman emperor, as a "permanent revenue source"for pensions (praemia) for veterans of the Imperial Roman army. The treasury derived its funding from new taxes, an inheritance tax and a sales tax, and regularized the ad hoc provisions for veterans that under the Republic often had involved socially disruptive confiscation of property.


https://en.wikipedia.org/wiki/Aerarium_militare

The US is reported to have done similar for the Spanish-American and Civil wars. As of 2013, one child of a Civil war soldier was still being paid for her father's service.
https://www.usnews.com/news/newsgra...terans-pension-remains-on-governments-payroll


Not sure where to find the Canadian info but privately for the US ... but the B&O Railroad created theirs in 1884 where ten years of working for them and being age 65 would get benefits of 20% to 35% of wages.


Cheers


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## milhouse (Nov 16, 2016)

To the original question, there sure seems like a lot of people in their 50's with DB pensions have been pushed out the door at my megacorp. However I can't definitively say if it's solely due to their DB plan or they're just overall more expensive in terms of salary, vacation time, etc. 

Just to comment on if DB's are a curse...
This is a first world/cry me a river type problem but the missus has a quasi-public sector DB pension. They have an issue with too many retirees and too few workers funding it so they've had to make significant changes to it. In particular, it now fairly heavily penalizes people who take early retirement. She's been throwing the bulk of her retirement dollars at it with little room for RRSP's. Thankfully she saves in addition to that though. However, there's no reasonable way to get her money out of it to allow her to join me in early retirement and get a reasonable (open for debate) bang/return for the dollars she's put in (in context of the current market conditions as discussed above), particularly compared to others that retired early before her. I think the difference for her retiring at 55 instead of 62 is like $20k/year.


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## Beaver101 (Nov 14, 2011)

Eclectic12 said:


> It is all the first Caesar's fault, *way back in Rome.*
> 
> When the Roman army became a full time job instead of a short term commitment or a seasonal one, it was seen as a way to redirect the retired soldier's loyalty from their commander to the emperor. It also cut down on the complaints from those using "public lands" for profits when it was granted to retired soldiers.
> 
> ...


 ... I wasn't expecting you to do research on this. And today is year *2018*, March 1st., Wednesday. Have you made your 2017 RRSP contribution?


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## Beaver101 (Nov 14, 2011)

milhouse said:


> To the original question, t*here sure seems like a lot of people in their 50's with DB pensions have been pushed out the door at my megacorp. *However I can't definitively say if it's solely due to their DB plan or they're just overall more expensive in terms of salary, vacation time, etc.
> 
> Just to comment on if DB's are a curse...
> This is a first world/cry me a river type problem but the missus has a quasi-public sector DB pension. *They have an issue with too many retirees and too few workers funding it so they've had to make significant changes to it. In particular, it now fairly heavily penalizes people who take early retirement. * ...


 ... doesn't this seem like a paradox? 

Maybe the pension experts can come up with another scheme that goes perpetually - future generations' pension funded by inheriting bank of dad & mom's retirement funds, tax-free?


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## Eclectic12 (Oct 20, 2010)

milhouse said:


> To the original question, there sure seems like a lot of people in their 50's with DB pensions have been pushed out the door at my megacorp. However I can't definitively say if it's solely due to their DB plan or they're just overall more expensive in terms of salary, vacation time, etc ...


The manager's I have spoken to when younger said it was the immediate gain on salary by not replacing or replacing with a rookie making a fraction of the salary. Sometimes, the manager would have preferred to keep the 50+ person for their knowledge but the employee was in a rut so that the wrong toes were stomped on.




milhouse said:


> ... the missus has a quasi-public sector DB pension. They have an issue with too many retirees and too few workers funding it so they've had to make significant changes to it. In particular, it now fairly heavily penalizes people who take early retirement ... However, there's no reasonable way to get her money out of it to allow her to join me in early retirement ...


Assuming she really wants to retire early - I would have though that with interest rates low, increasing the CV, quitting early in year then taking the CV would work - would it not?
What issues do you see with going this route?




milhouse said:


> ... I think the difference for her retiring at 55 instead of 62 is like $20k/year.


I know the early retirement penalty in my DB pension has been increased ... but this sounds on par with the previous, smaller early retirement penalty. I will have to find an old copy of the plan to confirm.

Is there any sort of bridge benefits to help offset the early retirement reduction?
Can she buy back some service to help out?


Cheers


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## Eclectic12 (Oct 20, 2010)

Beaver101 said:


> ... I wasn't expecting you to do research on this. And today is year *2018*, March 1st., Wednesday.


You are welcome. :biggrin:

I remembered the US having railroad DB pensions well before the '50's when some assume DB pensions started. I was fascinated that Caesar Augustus gets credit for the start and that the US gov't would be paying a Civil War pension still in 201x.




Beaver101 said:


> ... Have you made your 2017 RRSP contribution?


Good reminder for others where for me, it as taken care of six weeks ago or so.





Beaver101 said:


> ... doesn't this seem like a paradox?


Assuming the megacorp's DB pension also increased early retirement penalties like the quasi-public sector DB pension that needs more workers paying into the plan - maybe the idea is to make sure enough knowledge in fewer older workers sticks around to balance the lower paid, younger workers?

Or maybe management latched onto a part of the puzzle without understanding other parts?

Or maybe they are plain loco like the megacorp that I worked for that the bean counters said based on the quarterly numbers, two people had to be cut. The section director responded that fat had been cut where to do so would require calling someone off of a paying contract. The bean counters response was "tell us who you are calling in to fire".




Beaver101 said:


> ... Maybe the pension experts can come up with another scheme that goes perpetually - future generations' pension funded by inheriting bank of dad & mom's retirement funds, tax-free?


 Isn't that the idea of having a son/daughter the TFSA beneficiary?

In terms of the pension itself, I suspect doing this would mean lots of changes to make it supportable. Think of what it cost for the US gov't to cover the Civil War vet for their lifetime plus possibly more kids than the current 1.84.


Cheers


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## Beaver101 (Nov 14, 2011)

Eclectic12 said:


> ...
> 
> Good reminder for others where for me, it as taken care of six weeks ago or so. ...


 You welcome too. :biggrin:



> Assuming the megacorp's DB pension also increased early retirement penalties like the quasi-public sector DB pension that needs more workers paying into the plan - maybe the idea is to make sure enough knowledge in fewer older workers sticks around to balance the lower paid, younger workers?


 ... maybe.



> Or maybe management latched onto a part of the puzzle without understanding other parts?


 ... likely or whatever cliché it is of the month.



> Or maybe they are plain loco like the megacorp that I worked for that the bean counters said based on the quarterly numbers, two people had to be cut. The section director responded that fat had been cut where to do so would require calling someone off of a paying contract. The bean counters response was "tell us who you are calling in to fire".


 ... funny enough, firing the director can save more than 2 or more jobs.



> Isn't that the idea of having a son/daughter the TFSA beneficiary?


 ... I'm talking about "retirement" as in RRSP, RRIFs, LIRA, etc., not TFSA.



> In terms of the pension itself, I suspect doing this would mean lots of changes to make it supportable. Think of what it cost for the US gov't to cover the Civil War vet for their lifetime plus possibly more kids than the current 1.84.
> 
> Cheers


 ... well, why aren't we worried about how many Canadian government pension plans that have to be funded? Doesn't seem to be a problem there, only the private sectors, funny enough. What's the problem then?


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## milhouse (Nov 16, 2016)

Beaver101 said:


> ... doesn't this seem like a paradox?
> 
> Maybe the pension experts can come up with another scheme that goes perpetually - future generations' pension funded by inheriting bank of dad & mom's retirement funds, tax-free?


One point of clarification, my megacorp is private sector, the DB pension is well funded, and the DB plan changed to a DC plan for non-unionized staff just before I started. 
Methinks the missus' DB plan was overly generous with their packages to start with and now they've had to go hard in the other direction.


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## milhouse (Nov 16, 2016)

Eclectic12 said:


> Assuming she really wants to retire early - I would have though that with interest rates low, increasing the CV, quitting early in year then taking the CV would work - would it not?
> What issues do you see with going this route?
> 
> Cheers


Thanks for the suggestions.

We likely have to looking into it more closely as I couldn't find any good info on CV in the material that gets sent out. However, she says if she pulls out, she loses all the employer contributions. If true, not sure how great that would be with respect to all the lost pension adjustment room and corresponding lost opportunity costs. 

The bridge benefits at 55 dropped from $300/month to $100/month after the changes to her program. 
I'm not sure if she has any options to buyback any service.


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## Eclectic12 (Oct 20, 2010)

Beaver101 said:


> ... I'm talking about "retirement" as in RRSP, RRIFs, LIRA, etc., not TFSA.


Up until 2009, the TFSA didn't exist so there was no option beyond handing over tax already paid gifts to kids, which my parents did.

Not sure how the balance would shift for gov't tax revenue if the gov't expanded the "to spouse tax free rollover" to include more than dependent kids. 




Beaver101 said:


> ... well, why aren't we worried about how many Canadian government pension plans that have to be funded?


Not sure why the impression is the gov't pensions don't have funding issues ... though like some private DB pensions, some gov't pensions have had billions pulled out to pay down the deficit when interest rates where higher and funding was better.

From what little checking I have done provincially - gov't pensions, like my private DB pension have had contribution rates increased - officially for the same reasons.


Cheers


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## Eclectic12 (Oct 20, 2010)

milhouse said:


> ... We likely have to looking into it more closely as I couldn't find any good info on CV in the material that gets sent out.


That is the trick as the DB pension administrator typically does not want to spend the money to get the CV valuation figured out when things like interest rate changes will affect it. Some who have posted here on CMF say their annual pension statement includes the CV but to date, none of mine have had a value.




milhouse said:


> ... However, she says if she pulls out, she loses all the employer contributions.


Then it is a special DB pension as all of the private DB pensions I have left, where management would have loved to keep their contributions have been well over employee + employer contributions. I'd have to check but I seem to recall the pension legislation usually preventing the employer from keeping their contributions.




milhouse said:


> ... If true, not sure how great that would be with respect to all the lost pension adjustment room and corresponding lost opportunity costs.


If it is a DB pension where taking the CV means she won't be getting the guaranteed payout, she likely will also be getting a pension adjustment reversal (PAR) to give back RRSP contribution room.

Both DB pensions I left gave back in the five digits of RRSP contribution room. The only issue I had was that the first PAR was keyed in by the CRA clerk as over writing my existing RRSP contribution room instead of adding to it. This created an RRSP over contribution with lots of penalties/interest. Once the problem was identified by talking to a CRA agent - I have to file adjustments for something like five tax returns to fix it as "I might choose to not fix it plus pay the bogus penalties/interest".

http://www.fiscalagents.com/newsletter/4penadj-par.shtml


Cheers


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## ian (Jun 18, 2016)

I am very thankful for my DB pension. So glad that I stayed in the program when given the option to move to a DC.

The value of my DB, and the supplemental pension, increased substantially over my last six years of employment due to age and increases in salary/bonus. Our plan was relatively small. My employer made numerous comparatively large cash injections into the plan in order to bring it up to the proper funding level. When the plan was finally closed, about 25 percent of it's final balance was made up of those additional payments over and above the normal amounts. We rec'd regular reports on plan assets, liabilities, employer contributions and employer top up contributions. Now closed, but fully funded.


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## londoncalling (Sep 17, 2011)

I have a long history of pension plan contribution. I was in a DB plan for most of my 20s. Took the CV as my payout at retirement would not see an increase. Spent my late 20s to mid 30s in a DC plan. I have seen this plan grow (as it should) YOY. I have spent the last 7 years back in a DB plan which I now act as a trustee for. 6months ago I moved to a different DB plan which over contributes (21% which will eat my RRSP room over time). Like any retirement plan it is easy to determine what to do if we know how long one will live. I feel that my DB will guarantee a happy retirement should I live to a decent age. I also fear that I have no ability to provide a legacy with this plan should I expire early. I will admit this is a first world problem but wanted to point out a DB plan has its benefits and drawbacks. It may not be the golden handshake that we are all led to believe it is. Cheers


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## Daniel A. (Mar 20, 2011)

My DB which I've been collecting now for 8 years gave me the option of three levels of support for my spouse I chose 100% so I die my wife collects till she dies. For someone without a spouse the plan pays to the estate for 10 years.


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## My Own Advisor (Sep 24, 2012)

I think it depends. Not all DB plans are created equal. I would like to think it would be hard to argue with "gold-plated" DB plan or teacher's pension plan as a curse.


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## sags (May 15, 2010)

Now that so many are facing retirement with no money, it is a shame there isn't a way to force those who advocated against DB pension plans to pay all the extra costs to government.


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## Eclectic12 (Oct 20, 2010)

Beaver101 said:


> ... funny enough, firing the director can save more than 2 or more jobs.


The bean counters aren't admitting to knowing this.




Beaver101 said:


> ... I'm talking about "retirement" as in RRSP, RRIFs, LIRA, etc., not TFSA.


Fair enough ... though as long as it is a gift, nothing stops Mom & Pop from withdrawing from the RRSP, paying low tax, give the net $$ as a gift to Junior who can then fund their TFSA and/or RRSP as they see fit.

Not the same as the TFSA flowing mostly tax free but for some, at a better tax rate than waiting for the last parent to have the combined RRSP taxed as part of the estate.




Beaver101 said:


> ... well, why aren't we worried about how many Canadian government pension plans that have to be funded? Doesn't seem to be a problem there, only the private sectors, funny enough. What's the problem then?


When one factors low or skipped contributions by employers as well as things like Feds pulling out of the pension plan $28 Billion to pay the deficit down, it is not as clear that the current funding problems are because of the plan design.

https://www.theglobeandmail.com/new...pension-repayment-court-rules/article6554298/


If you mean pensions like CPP, I keep having people tell me over the last thirty years that it won't be there when I am eligible. That adjustments were made to address the funding seems to be ignored. In a similar line of thinking, people say they are skipping the RRSP as according to them, RRSPs will be cancelled any gov't now.


Cheers


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## Eclectic12 (Oct 20, 2010)

londoncalling said:


> ... I also fear that I have no ability to provide a legacy with this plan should I expire early.


If the pension booklet is anything like mine, it will spell out what happens if you die before retiring, after retiring before any guarantee period is up and after retiring after any guarantee period is up.




londoncalling said:


> ... It may not be the golden handshake that we are all led to believe it is.


YMMV ... in my dad's case, my mom collected a reduced pension after he died for longer than he did. For my cousin, as he died before retiring - his estate collected ten years worth of the pension he had earned (a little lower than had he made retirement but not substantial like dying at age 45). 


Cheers


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## Thal81 (Sep 5, 2017)

Eclectic12 said:


> If you mean pensions like CPP, I keep having people tell me over the last thirty years that it won't be there when I am eligible. That adjustments were made to address the funding seems to be ignored. In a similar line of thinking, people say they are skipping the RRSP as according to them, RRSPs will be cancelled any gov't now.


Those types of comments come from people with deep ignorance of what these plans are and how they work. They come from the same people who can't save any money despite ever larger pay checks yet drive around in brand new SUVs and complain that they will never be able to retire.


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## bariutt (Feb 2, 2013)

*Vesting of Individual DB Plans*

I am retired now and am collecting a DB pension. For me this worked out to be great however i worked for over 30 years for the same company. 

I believe that in the new workplace where you will work for many employers during your career that a DC pension plan is the best alternative. 

In many DB plans you must work for 10 years until the amount held in the plan is vested. Even then the vested calculation really does not work out that well for the employee. I know that each plan is different. One must really look at how the DB plan works if you leave the employer and move to another.


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## ian (Jun 18, 2016)

People make some silly comments about retirement programs. I suspect it is because they have not bothered to plan and prepare. Or have done little real research or reading on the subject.

The facts is that CPP is well funded into the next 30 years. No, it will not run out of money. The most recent survey that I read from Mercer was that for the most part Canadian DB plans were well funded. There will always be some plans that are significantly underfunded. These are the ones we hear about. Not the hundreds of well managed employer plans that are topped up with supplementary payments when the funding levels drop.

The notion that RSP's will be legislated away in some future budget. makes no sense. No Government that wants to get re-elected would even consider this. RSP is a tool. Keep in mind that we have an aging population and seniors are the group that has the highest voter turnout. Harper understood this well. 

RSP is one part of a retirement plan that may or may not be for you depending on your individual financial situation. You really do have to understand the pros , cons, how it relates to your tax tax bracket today, how it will relate when you retire, rather than blindly assuming that it is a great tax/investment income sheltering tool for today.


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## Beaver101 (Nov 14, 2011)

Thal81 said:


> Those types of comments come from people with deep ignorance of what these plans are and how they work. They come from the same people who can't save any money despite ever larger pay checks yet drive around in brand new SUVs and complain that they will never be able to retire.


 ... a twisted response in what I was referencing or perhaps a simple "misinterpretation"? Or a re-read is required?


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## twa2w (Mar 5, 2016)

Thal81 said:


> Those types of comments come from people with deep ignorance of what these plans are and how they work. They come from the same people who can't save any money despite ever larger pay checks yet drive around in brand new SUVs and complain that they will never be able to retire.


Nah, these comments originate from financial planners who have a vested interest in having you save more so they can make more. This is a scare tactic to convince you to buy and invest in increasing amounts of their favorite fund.
It gets spread around, often misquoted or twisted and exaggerated, and becomes urban legend. And folks start believing it - you can't trust the government dont cha know.


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## Eclectic12 (Oct 20, 2010)

Thal81 said:


> Those types of comments come from people with deep ignorance of what these plans are and how they work. They come from the same people who can't save any money despite ever larger pay checks yet drive around in brand new SUVs and complain that they will never be able to retire.


There are those ... and there are also those the don't have brand new SUVs, don't have car loands and were sending as much as they could to pay down their mortgage early who have said the same thing.


Cheers


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## Eclectic12 (Oct 20, 2010)

bariutt said:


> ... In many DB plans you must work for 10 years until the amount held in the plan is vested ...


Odd ... Ontario used to be two years to vest but changed to immediate vesting July 1st, 2012, following in the footsteps of Manitoba and Quebec. Alberta switched to immediate vesting in 2014. Others that include immediate vesting are the Feds and Nova Scotia.

New Brunswick is confusing as they say five years continuous service or two years of plan membership (not sure the difference). Newfoundland until 1996 mentions ten years continuous service but has switched to two years continuous service. 


If you mean vesting in terms of having a pension paid out, that is typically the pension eligibility date (some are 55, some are 62).




bariutt said:


> ... Even then the vested calculation really does not work out that well for the employee. I know that each plan is different. One must really look at how the DB plan works if you leave the employer and move to another.


In what sense does it not work out?
I will have to check what my payout was but it certainly exceeded the three years of employer/employee contributions from what I recall. It didn't hurt to be getting six figures of RRSP contribution room back as I was switching jobs for a bigger salary.


Cheers


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## bariutt (Feb 2, 2013)

Originally Posted by bariutt View Post
... In many DB plans you must work for 10 years until the amount held in the plan is vested ...

I believe that in Ontario legislation was passed in 2012 that made employers provide immediate pension vesting. Previous to that with the private sector company that I worked for it took 10 years of continuous employment before your pension was vested.

Originally Posted by bariutt View Post
... Even then the vested calculation really does not work out that well for the employee. I know that each plan is different. One must really look at how the DB plan works if you leave the employer and move to another.

Here is a test to see if vested pension calculations are fair:
1. Calculate the commuted value of a full pension (say 30 years of continuous employment)
2 Calculate the commuted value of a broken pension (say 15 years with company A and 15 years with company B)

I think that you will find Case 1 to be a much higher figure.


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## Daniel A. (Mar 20, 2011)

There are many formulas for DB pensions continuous employment or service years is a major part of most formulas. There is no test, know what your pension formula is. Fair does not have anything to do with working all your life its about choices we all make and being aware of the information concerning future pension benefits.


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## Eclectic12 (Oct 20, 2010)

bariutt said:


> Originally Posted by bariutt View Post
> ... In many DB plans you must work for 10 years until the amount held in the plan is vested ...
> 
> I believe that in Ontario legislation was passed in 2012 that made employers provide immediate pension vesting. Previous to that with the private sector company that I worked for it took 10 years of continuous employment before your pension was vested ...


Ten years in Ontario to vest?

I guess I am lucky then as all three of my Ontario DB pensions vested in two years. Anyone willing to talk to me about the details of their Ontario pension (be they in other companies or competitors) said theirs was the same. Pension number two, while vesting was the same - did differ from numbers one and three. It allowed one to defer joining the pension for up to ten years where the others signed me up the day I started full time work.



bariutt said:


> ... Here is a test to see if vested pension calculations are fair:
> 1.Calculate the commuted value of a full pension (say 30 years of continuous employment)
> 2 Calculate the commuted value of a broken pension (say 15 years with company A and 15 years with company B)
> 
> I think that you will find Case 1 to be a much higher figure.


Aren't you really testing for the retirement income is the same, the pension credit rate is the same?
Where the shift to company B puts doubles one salary versus staying at company A and/or the pension credit rate is higher (ex. 2% at company B instead of 1.5% at company A) - option 2 could win.

Then there's the variables of age, gender, time to retirement, interest rates that all factor into the CV value, potentially swinging the CV all over the map.



> As you may be aware, *a low interest rate* at the time you take what is called the commuted value payout of your pension, *can add hundreds of thousands or even millions to the value of that payout* depending on the size of your overall pension. *As interest rates rise, that payout gets smaller.*


http://business.financialpost.com/p...might-be-slipping-away-as-interest-rates-rise


With so many variables - it is not clear to me that this is an apples to apples comparison that is demonstrating what you think.


Cheers


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## bariutt (Feb 2, 2013)

Yes I agree there are many variables and it is not easy to compare.

All that I know is the private sector company that I worked for used a formula to calculate vested pension payouts that did not work out all that well for the employee that was leaving their employ. This is very typical in the mining industry. 

It was very difficult to carry your vested pension to another employer. Most took a payout which they rolled into an RRSP. These payouts were usually not a great sum of money. This was due to the formula the company used to calculate your vested pension payouts.

We used to call their pension "golden handcuffs". The DB pension was excellent if you achieved full service (usually 30 years). However if you left mid-career you really took a beating on your vested pension payout.


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## Eclectic12 (Oct 20, 2010)

Where the payouts at least equal to the employee contributions doubled plus some growth?
For example, if the employee is putting in 5% of income ... the payout is bigger than 5% from employee + 5% from employer with additional funds on top of that amount.

In my case, leaving early to have the DB pension payout this type of amount was fantastic compared to the DC pension alternative for those joining the firm a month after me. 
Those at my level had no pension at all or RRSP matching so that the employee was entirely on their own, after CPP contributions were deducted. 

Those at the manager level and above did slightly better as they had a DC pension but it was 1% from employee and 1% from employer instead of the DB pension at just under 6% from each. To add insult to injury, the investment choices where four Mutual Funds with 2.5% MERs for anything but cash or equivalents.


Fortunately - there are better DC pensions but this was a major accounting firm where I am sure they recommended setting up better plans for their clients.


Cheers


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## milhouse (Nov 16, 2016)

Eclectic12 said:


> If you mean pensions like CPP, I keep having people tell me over the last thirty years that it won't be there when I am eligible. That adjustments were made to address the funding seems to be ignored. In a similar line of thinking, people say they are skipping the RRSP as according to them, RRSPs will be cancelled any gov't now.
> 
> Cheers


When I was young and green about personal finance, I had a financial planner do up a sketch outlining the value of my nest egg and spending needs over my lifetime. One of the key assumptions he talked about was not being able to rely on CPP being there when I retire. Looking back, it was a pretty dumb comment that IMO should have raised red flags about him.


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## Eclectic12 (Oct 20, 2010)

IMO it depends on when the assumption was made and possibly if it was an extremely conservative plan.
As I recall, at one point, CPP was based on more coming in than going out with not much in the way of assets/planning to take into account the changes in the workforce.


Cheers


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## ian (Jun 18, 2016)

When my former employer ended their DB program two things happened. The first was that everyone under a magic age/service combination was simply moved to the DC program. 

Others, like me, who were grandfathered were given a choice. Remain until the DB windup, in 7 years, move to DC, or freeze DB at current state, and move to DC.

Most employees that I am aware of in the grandfathered group decided to cash out, take the CV, and move to to the DC plan. The so called incentive for some was that this would free up as much as $40K in additional RSP room. I decided to stick. Fortunately the plan was not wound up in seven years. I got another 10 years of service in to the DB prior to retirement.

I think that employers are looking at the total cost when deciding who to cut. Salary, cost of DB,bonus program, stock options, vacation entitlement, benefit cost, days missed because of sickness. I was told by a senior US person in a multitnational that I worked for that that consulting companies have these tools and that they are engaged by employers to specifically target employees for termination/layoff.


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## Beaver101 (Nov 14, 2011)

ian said:


> ...
> 
> I think that employers are looking at the total cost when deciding who to cut. Salary, cost of DB,bonus program, stock options, vacation entitlement, benefit cost, days missed because of sickness. I was told by a senior US person in a multitnational that I worked for that that *consulting companies have these tools and that they are engaged by employers to specifically target employees for termination/layoff.*


 ... can't be further from the truth ... and how to screw these "dispensible" disposables.


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## Crisman (Mar 2, 2018)

milhouse said:


> When I was young and green about personal finance, I had a financial planner do up a sketch outlining the value of my nest egg and spending needs over my lifetime. One of the key assumptions he talked about was not being able to rely on CPP being there when I retire. Looking back, it was a pretty dumb comment that IMO should have raised red flags about him.


I think people liked to say that back then to make you think they know something that you don't. You're not the only one who believed guys like that.


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## latebuyer (Nov 15, 2015)

It seems like if you have rrsp matching or a contribution pension the money is guaranteed. But i feel like with the uncertainty surrounding defined benefit the money isn't guaranteed.


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## MrMatt (Dec 21, 2011)

ian said:


> I think that employers are looking at the total cost when deciding who to cut. Salary, cost of DB,bonus program, stock options, vacation entitlement, benefit cost, days missed because of sickness. I was told by a senior US person in a multitnational that I worked for that that consulting companies have these tools and that they are engaged by employers to specifically target employees for termination/layoff.


Any decent company breaks out all those costs into the actual cost per employee as a normal part of business.

As a business owner you can't just say "I pay then $20/hr, so they cost $20/hr".
The payroll taxes, benefits, vacation pay, paid sick days etc all have to be added in.

If you bill out services, you also have to add cost of any equipment, including computer, software, trucks, tools etc.

Then once you know all that, you can add your markup and resell the service. If you don't have all that you don't even know if that new contract is profitable or costing you money.
If the company doesn't know their "all in" cost of staff, they have a serious problem.

Finally at the end of the day if you have a $25/hr employee and a $35/hr employee, the higher cost person has to justify the premium. In some cases they do, in some cases they don't.


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