# DB or DC plan at work



## Erome (Jan 11, 2011)

Hello all,

I was wondering if I could poll the collective wisdom of the group here.

So I have started a new job that has offered me my choice of Defined Benefit or Defined Contribution plans. Here are the details:

Me:

30 years old
$100,000 in RRSPs
Own a 1/2 duplex worth $350,000
Still owe a mortgage of $250,000 on it
Probably getting married and starting a family with the current girlfriend in the next 2-5 years

Job scenario:

Union position
$86000 a year
Full benefits
Offer of DB or DC, my choice
Probably going to tuck in and try to work here for the next 35 years unless it turns sour, in which case I would have to leave and start all over again (seniority etc.)


The DB: 
(1.6%) x (5 year average of best earnings) x (years of pensionable service)

An example would be

(1.6%) x (86000) x (35) = $48160

I contribute 5.9% and the company contributes 7.9%.

The DC:

I contribute 4.75% and the company contributes 6.75%.

So each year $86000 x 11.5% = $9890 x 35 years = $346150



Do I guess my question is, does the DB make sense?

Let's assume I live to be 100, and assume a 4-6% return on my RRSPs, does DB still outweigh the DC?

With my 100k in RRSPs, I've been couch potatoing them for the last 4 years and have gotten consistently solid returns on it. The major drawback is most of the mutual funds are all manulife mutual funds with heavy 1.5-2.5% mers...

What do you guys/gals think?


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## My Own Advisor (Sep 24, 2012)

I would take the DB plan. In time, years from now, your income payout from the benefit plan is known - which is huge. Consider this fixed-income. You can then take more equity risk (for reward) with your own investments.

http://www.myownadvisor.ca/got-a-de...r-yourself-lucky-then-consider-it-a-big-bond/

congrats on the great job with great benefits. You're one of the lucky ones!


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## fraser (May 15, 2010)

Is this a separate, company sponsored DB plan or is it a pooled DB plan similar to what some of the trades operate? This can make a substantial difference.

How well funded is the current plan? Is the employer financially strong? Their pension dept should be able to give you an update on the last actuarial financial review of the health/funding of the plan based on wind up and ongoing concern percentages. 

Keep in mind that over the past two years in particular, most Canadian DB plans have not only done very well but have closed the large post 2008 gap that existed into 2011. So, if the last financial review is two years old, the actuals should be considerably better.

This might also help:

https://www.retirementadvisor.ca/re...iclePage=Companypension&learningMenu=articles


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## MoneyGal (Apr 24, 2009)

The math on higher equity exposure for investors with a DB pension is here: http://www.ifid.ca/pdf_workingpapers/Spending_Retirement_Vulcan_14MAR2010.pdf 

See the table on p. 15 in particular. 

Side note: a revised, international edition of PYNE (Pensionize Your Nest Egg) will be published in 2015.


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## Erome (Jan 11, 2011)

Im not too sure about the health of it.

The company is canadian blood services- so not a true company in the definition, but also not pure government. Cbs controls and manages its own pension, i think the website is

https://cbsdbpension.hroffice.com/en/welcome.asp

A quick glance i cant see the details on the financial health.


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## kcowan (Jul 1, 2010)

If it is a good COLA DB plan and you truly expect to work for 35 years, it is the best bet.

If you plan to leave because the politics at higher levels of employment bug you then take the DC. Your employer donates 2% regardless.


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## Erome (Jan 11, 2011)

The plan states that the cola is 75% of the increase above 2%.
Which sounds to me like if the cpi is 2.2%, it goes up by (.75)(.02).

That seems like a very minimal cola to me...

Im wondering if dc would be better considering the cola....


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## Erome (Jan 11, 2011)

The hospitals in albertas plan says it is 60% of the cpi each year, which seems leaps and bounds better then ours...

Any pension pros out there can lend a hand?


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## RBull (Jan 20, 2013)

from the text in the DB plan

"Any eligible member, beneficiary, or other authorized person may see and copy the full plan text, annual information returns, and other relevant documents, by contacting the Human Resources department at Head Office in Ottawa, at (613) 739-2071.
If you have further questions, please contact Morneau Shepell Ltd at 1-877-252-4442."

I would get more information, especially the funding level.


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## fraser (May 15, 2010)

All things being equal I would definitely opt for the DB plan-assuming funding levels are good. This is a very high probability since I believe the stats are that over 85 percent of Canadian DB plans are now funded at 90 percent or higher.

I would highly recommend you get a copy of Pensionize Your Nestegg. There is a second part to this-matching your personality and your pension plan/risk aversion. It is an easy read and twice through a few of the chapters should help you.


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## Erome (Jan 11, 2011)

Yes, I am definitely leaning toward the DB pension plan, however I am quite concerned over the Cost of Living Adjustment details.

The last 15-20 years of CPI increases all look to be 0.5-2.5% at the most. 

The website and the booklet state:

"Your pension will be indexed each January 1st to reflect 75% of the annual increase in the Consumer Price Index above 2%, to a maximum of 5.5%.

If the cost of living stays the same or goes down, your pension amount will not change.

Your eligible spouse's survivor pension will also be indexed in the same way."

I take that to read that 'if the CPI is 2.1%, your pension will be adjusted by (0.75) x (1%). If the CPI is 1.9%, you get no adjustment at all'.

Therefore, if the CPI is 1.9% for 10 years, my pension will be 1.9% x 10 years (compounded) behind. In 20 years it'll probably stagnate. 

http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/econ46a-eng.htm

This shows that there has only been 1 year in the last 5 where CPI was higher then 2.0%. So does that mean for those in this plan, the pension amount has only been adjusted once in the last 5 years...?

Can anyone who is familiar with wording and COLA's let me know if I am way off base here?


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## Daniel A. (Mar 20, 2011)

I retired several years ago with a DB pension that has a small CPI in it.

Some that I worked with changed to a DC plan, I'm way further ahead having stayed with the DB that is 100% funded.
One thing I have noticed is I don't have the pressure of what the markets are doing the money shows up on the first of every month and goes up a few dollars a month every year.
At some point I'll decide to take my CPP but don't need it for now. 

The other issue is back when I could have switched it was clear that the company would be the big winner in the DC world downloading cost on to me.

I look forward to reading the updated book since I did read the last one.


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## MoneyGal (Apr 24, 2009)

A DC plan will not provide any guarantees of any kind - not guaranteed income, and certainly not a guaranteed cost of living increase. 

The purpose of investments outside the DB plan is to get growth with no guarantees. If you wanted to use the DC plan to build wealth and then buy an annuity with inflation protection, it will be more expensive than just staying in the DB plan in the first place. And with the DB plan, you get guaranteed income in retirement with *no* market risk during the accumulation *and* distribution phases.


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## MoneyGal (Apr 24, 2009)

Daniel A. said:


> I retired several years ago with a DB pension that has a small CPI in it.
> 
> Some that I worked with changed to a DC plan, I'm way further ahead having stayed with the DB that is 100% funded.
> One thing I have noticed is I don't have the pressure of what the markets are doing the money shows up on the first of every month and goes up a few dollars a month every year.
> ...


Thank you so much! We are aiming for a March 2015 publication. I am busy!


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## My Own Advisor (Sep 24, 2012)

Same, big fan of the book, looking forward to the next version. I still need to post a review of the current edition on my site!


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## MoneyGal (Apr 24, 2009)

If you do, I can then take any criticisms / suggestions into account for the next edition!


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## Money We Have (Mar 20, 2014)

My Own Advisor said:


> I would take the DB plan. In time, years from now, your income payout from the benefit plan is known - which is huge. Consider this fixed-income. You can then take more equity risk (for reward) with your own investments.
> 
> http://www.myownadvisor.ca/got-a-de...r-yourself-lucky-then-consider-it-a-big-bond/
> 
> congrats on the great job with great benefits. You're one of the lucky ones!


I pretty much do the exact same thing. I have a generous DB plan so all my other investments have an asset allocation of 90% Equities and 10% fixed income which I plan on keeping that way until retirement


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## Erome (Jan 11, 2011)

Hi all,

For those who were still interested in this story, here's what else I've discovered so far:

DB pension plan, is only adjusted by the difference of CPI ABOVE 2%. So if CPI is 2%, the pension is adjusted 0. If the CPI is 2.5%, the pension is adjusted by 75% x 0.5%. 

DC pension plan funds have 12-14 funds, some including index funds. The highest MER on these funds is for the global/international equity funds with annual MERs of ~0.775%, and 0.875%.

I calculated out that to break even to age 100 after retiring, my mutual funds would need to do 5-6% after MER and management fees (with compounding) in order to break even with the benefits of the DB plan. If I live past 100, I would need 7-8% to match the DB plan.

Does 5-6% sound reasonable over the next 35 year period of stock markets?


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## RBull (Jan 20, 2013)

Go with the DB plan. We are retired now and my wife has a DB plan. It's hard to match the guarantee with your own investment performance and the knowledge of a set deposit coming every month no matter what the market is truly worth a lot. You can do your own investing on the side to add to the pension as we have done. 

Where does the 75% come from in your calculations?


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## Erome (Jan 11, 2011)

The 75% is what it says in the pension booklet.

That the pension will be adjusted by 75% of the CPI increase above 2%. I called for clarification, it is only the 75% AFTER 2%. So if it's 2.5%, they will index on 75% x 0.5%


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## brocko (Apr 20, 2009)

It may sound crazy but 35 years to retirement is not a long time, the years will fly by quickly. Its risk and reward that will be of concern. With the DB its an easy calculation in about 30 plus years hoping your still with the same employer. If not you will still get the commuted value from the plan of your earned benefit. With the DC you will get the proceeds of contributions from yourself and the employer (gain and perhaps loss) and have no clue of what that will buy at retirement. I say enjoy your life and your family as you are in a great situation with the job. Many of your contemporaries today only dream of being in the future financial shape you will be. Take the DB so as not to die early from a stroke worrying about a pension plan. Remember that no matter what happens a good benefit will be there for you in some fashion.


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## FrugalTrader (Oct 13, 2008)

Don't forget the health insurance benefit that comes with a number of DB plans (like gov).


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## Erome (Jan 11, 2011)

The newest development is that the CBS at Edmonton is going through change.

Within the next 4-6 years, CBS will move out of the current building it is in.

No one knows what will happen to my department. Currently we know that one department of production is moving to calgary or brampton and staff will be offered relocation assistance. One department is staying in Edmonton testing, and will move to a new building. The donor collections will also move to the new building.

3 theories:

1. The testing just moves out of the building, to another building with donors and the other testing department

2. The testing moves to Calgary

3. The testing gets divested to private group like Dynalife Dx. No one knows what will happen to staff if this occurs.

My question is, is this justification to go for a DC pension plan? Or should I root down into the DB plan and just see what happens? These kind of developments make it harder to gauge a 35 year career time frame...

Thanks!


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## Erome (Jan 11, 2011)

Scenario 1 and 2 means retaining jobs, just moving them physically.

Scenario 3 could mean layoffs or transfer to the private company. The current private company slated to take over of the testing if divested offers no DB, and a meager 2% matching contribution plan.


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## RBull (Jan 20, 2013)

Erome said:


> The 75% is what it says in the pension booklet.
> 
> That the pension will be adjusted by 75% of the CPI increase above 2%. I called for clarification, it is only the 75% AFTER 2%. So if it's 2.5%, they will index on 75% x 0.5%


Got it.

Reading the above sounds like you have some more thinking to do. You can't predict things far into the future, especially with your companies direction. (Part of my working career I was with same company that had 5 different owners.) Things will definitely change. Make the best possible decision for you with the information available and go with it. You'll never go wrong if you are also able to save well on your own, no matter what pension choice you make.


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## Erome (Jan 11, 2011)

I went with the DB plan. Heres to being optimistic about job security for 30-35 years!


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