# I am being offered a job in the federal public service, I am not sure how it compares



## kreyszig

Hi,

so I am being offered a job (term position) in the federal public service. I am currently working in the private sector and my salary is significantly higher, but I do not have any benefit. I am not sure how to evaluate how much the federal service pension plan is worth? I am currently earning $93k/year and I am offered $76k/year . I am 31 years old. It is quite the gap in salary... I have an idea what the health insurance plan can be worth since I currently pay $2700/year for roughly the same benefits with a group insurance, but I find it much trickier for the pension plan. I know that the benefits for the federal pension plan have changed for new employees on January 1st and are not as good as they used to be. Do you know how this can be evaluated?

Thanks!


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## rikk

A term position is one which has an expected date of termination, e.g. a term of six months to one year. An indeterminate position is one wherein the duration has not been determined in advance. This is also referred to as a permanent job.

I suggest that you contact/meet with the HR contact ... the neat thing about working for GC is that there are collective agreements in place detailing conditions, benefits ... I wouldn't expect much, if any (vested?), of a pension with a term position ... e.g. short story, pension calculated at 2% per year (max 70% at 35 years) x best consecutive 5 year average ... which may have, as you posted, changed.


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## MoneyGal

Are you eligible to join the federal pension plan with only a term position?


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## kcowan

A term position should pay more than a permanent one. This compensates for lack of benefits and job security.


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## gimme_divies

A term (short for Determinate) employee gets exactly the same benefits as a permanent (indeterminate) employee, except do not have a guaranteed position beyond the end of the contract. The main benefit of being term is that you are eligible to apply for job postings only open to persons currently employeed in the federal public service (which is the vast majority of positions)...it is your foot in the door, so to speak. You will pay into the pension, but if you leave at the end of the term, you will receive your contributions back but not the employer's contributions which only vest after 2 years if I am not mistaken.

Also, if you are term for 2 years, you may also be eligible for an automatic appointment into an indeterminate position, but managers sometimes find ways around this (i.e. leave 1 day break between two contracts to reset the clock). Also, when you first join the public service (not sure if this applies to term or only indeterminate), you can negotiate your salary (within the range of your level) to start at a higher increment if you are currently making more in the private sector. For example, a friend of mine was a lawyer in Toronto who became a lawyer in the federal government. He took a pay cut, but at the LA-1 level (say 58K-84K pay scale), he started at the max of 84K because he was making 90-100K in his private sector position. Either way, you may start at 76K and go up 4-5K per year until you hit the max your level which could be close to what you are at now.


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## kreyszig

gimme_divies said:


> A term (short for Determinate) employee gets exactly the same benefits as a permanent (indeterminate) employee, except do not have a guaranteed position beyond the end of the contract. The main benefit of being term is that you are eligible to apply for job postings only open to persons currently employeed in the federal public service (which is the vast majority of positions)...it is your foot in the door, so to speak. You will pay into the pension, but if you leave at the end of the term, you will receive your contributions back but not the employer's contributions which only vest after 2 years if I am not mistaken.
> 
> Also, if you are term for 2 years, you may also be eligible for an automatic appointment into an indeterminate position, but managers sometimes find ways around this (i.e. leave 1 day break between two contracts to reset the clock). Also, when you first join the public service (not sure if this applies to term or only indeterminate), you can negotiate your salary (within the range of your level) to start at a higher increment if you are currently making more in the private sector. For example, a friend of mine was a lawyer in Toronto who became a lawyer in the federal government. He took a pay cut, but at the LA-1 level (say 58K-84K pay scale), he started at the max of 84K because he was making 90-100K in his private sector position. Either way, you may start at 76K and go up 4-5K per year until you hit the max your level which could be close to what you are at now.


Thanks. This is what I was told today as well that it might be able to do some negotiation within the level. Also, from what I have found, the total RRSP contribution from a federal public service job is equivalent to about 14.21% of the salary. Of that amount, 37% is contributed by the employee in 2013 (it will go up to 50% in the next few years. So at $76k/year, the contribution from the government is equivalent to $76000*0.1421*(1-0.37)=$6760. Combining this to the $2700 health insurance plan, I would end up with $9460 of useful benefits from the employer (I do not really care about sick days, since I am not likely to use any for many years anyway). So basically what they are offering me is about $7500 lower than what I currently have in the private sector. I will try to negociate a couple of increment steps. The job I had applied for requires only an undergraduate degree and I got a PhD in the same domain, and I was told I was qualified enough for the next level, so I assume it is reasonable to ask for a couple of increment steps. It is the only time I can negociate, because once I am part of the machine, I will not have any say about a pay increase. What do you think?


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## bgc_fan

Just a note. Keep in mind that pay is dependent on the job description and classification. It does not matter what qualifications that you hold beyond what is requested on the job posting. It may make you preferred when dealing with different candidates, but it will not change the pay category. It may modify your starting incentive pay level though.


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## kreyszig

bgc_fan said:


> Just a note. Keep in mind that pay is dependent on the job description and classification. It does not matter what qualifications that you hold beyond what is requested on the job posting. It may make you preferred when dealing with different candidates, but it will not change the pay category. It may modify your starting incentive pay level though.


Yes this is what I am saying in fact. I expect to have a salary within the level of the job I am applying for. What I am saying is that within that level and the job description, the salary goes between $76k and $92k, depending on the "step". That step is based on experience and qualification. Employees also normally go one step up per year until they reach the last step, then they need to compete for another job if they want to move one level up. Due to the fact that I have significantly more qualifications than required, but also some very relevant experience, I think that a few steps over the minimum would be fair for myself and my employer. There are 6 steps per level...


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## Daniel A.

If your goal is full time down the road than it does make sense to start on a contract spot.

Most skilled hires start as contract.


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## Rainey

Kreyzig, this is a common question around Ottawa, especially among those with options in the public and private sector. The calculations are -- I think -- very much case dependant but I can throw in a couple of anectodal notes. 

Friends of mine who had legal jobs in and out of the public service used to say that to finance their own pension plan they would need up to $50k per year in pre-tax private sector income. This was a few years ago, for lawyers making about 90 to 100k.

And to pass along a personal story, after taking a few years out to work overseas I was contemplating whether or not to return to the public sector and met with a financial planner to see what kind of investment I would need to replace my pension. He said -- sure it's possible, you just need to save $6000 a month, I nearly fell off my chair.

On the levels and steps, if I could pass along one piece of unsolicited advice -- my own approach would not be to worry too much about this aspect, I'd focus instead on making sure I was in a spot which could showcase my worth. Talent rises very quickly in the public service, despite what you may have heard. But how's your French? This stands as the one complicating factor which often throws ambitious talented terms for a loop.


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## kreyszig

Rainey said:


> Kreyzig, this is a common question around Ottawa, especially among those with options in the public and private sector. The calculations are -- I think -- very much case dependant but I can throw in a couple of anectodal notes.
> 
> Friends of mine who had legal jobs in and out of the public service used to say that to finance their own pension plan they would need up to $50k per year in pre-tax private sector income. This was a few years ago, for lawyers making about 90 to 100k.
> 
> And to pass along a personal story, after taking a few years out to work overseas I was contemplating whether or not to return to the public sector and met with a financial planner to see what kind of investment I would need to replace my pension. He said -- sure it's possible, you just need to save $6000 a month, I nearly fell off my chair.
> 
> On the levels and steps, if I could pass along one piece of unsolicited advice -- my own approach would not be to worry too much about this aspect, I'd focus instead on making sure I was in a spot which could showcase my worth. Talent rises very quickly in the public service, despite what you may have heard. But how's your French? This stands as the one complicating factor which often throws ambitious talented terms for a loop.


Hi Rainey,

The numbers you are giving do not seem realistic to me. As far as I know, the federal pension plan is equivalent to a private pension plan were the assets would be gradually sold until you die. If you invest $6000 per month over 35 years at an overly pessimistic 3% rate, you end up with $4449382 at retirement, which gives you $133481/year with only 3% yield without touching the assets at all... As I said, for RSP calculations, the contributions from government will be about 14.21% * 50% = 7.11% of the salary within a few years, so this is only $5688/year for a $80k salary. Unless the RSP calculations are biased towards federal employees, or the Tresury Board's investments yield significantly better than the market, it does not seem to me that the pension plan for the public service is that exceptional.

About my French, it is my native language, so this would not be a big problem I guess. It looks like my English isn't too bad either


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## Rainey

Well, you lost me on this one, is your doctorate in finance?

The financial planner's assumptions:
40 year old EX-01
60% pension at age 57
indexed to inflation

I think he was off, but probably because he transferred value out of the plan instead of building on it.

But, hell, you don't have to worry about any of this -- bilingual PhD? You'll be a Deputy within five years -- and they have an even better pension plan!


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## kreyszig

Rainey said:


> Well, you lost me on this one, is your doctorate in finance?
> 
> The financial planner's assumptions:
> 40 year old EX-01
> 60% pension at age 57
> indexed to inflation
> 
> I think he was off, but probably because he transferred value out of the plan instead of building on it.
> 
> But, hell, you don't have to worry about any of this -- bilingual PhD? You'll be a Deputy within five years -- and they have an even better pension plan!


No I got an engineering degree and then I switched to science for my graduate studies. I am good with maths, but I have been reading a lot more about finance only recently... I am not too interested by management/politics at this point. Maybe it can change, I don't know.

I am pretty sure he did the calculations assuming that you did not want to touch the invested assets after retirement. Otherwise it simply does not add up. If I understand the documents correctly, to get 60% pension at retirement with 35 years of service, you need an average salary of 107 310$ for the last 5 years, right? I will try to perform a spreadsheet-based calculation of how much money this would represent for a private pension plan. The tricky part is to pick a path for the progression of the salary over the years...


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## Doug2000

kreyszig said:


> Hi,
> 
> so I am being offered a job (term position) in the federal public service. I am currently working in the private sector and my salary is significantly higher, but I do not have any benefit. I am not sure how to evaluate how much the federal service pension plan is worth? I am currently earning $93k/year and I am offered $76k/year . I am 31 years old. It is quite the gap in salary... I have an idea what the health insurance plan can be worth since I currently pay $2700/year for roughly the same benefits with a group insurance, but I find it much trickier for the pension plan. I know that the benefits for the federal pension plan have changed for new employees on January 1st and are not as good as they used to be. Do you know how this can be evaluated?
> 
> Thanks!


Being offered a government pension plan is like winning the lottery, you may be able to retire early and become a snowbird, the guys I work with refer to it as an exclusive club, and I call it cash for life.

As far as the difference, consider the after tax income from $76 to $93 a year, thanks I'll take the pension.


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## MoneyGal

You are looking for the present value of a future stream of income with a random endpoint. This is called the actuarial present value. If you like math, here are the basic equations: http://en.wikipedia.org/wiki/Actuarial_present_value

But more practically, you are not comparing the interest/yield on a lump sum when you look at the value of a federal government pension plan. You are comparing an amount that is accumulated with *no* risk and which is not subject to any risk during the payout phase, and you need to account for inflation. Your closet comparator would be with real return bonds.


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## kreyszig

Doug2000 said:


> Being offered a government pension plan is like winning the lottery, you may be able to retire early and become a snowbird, the guys I work with refer to it as an exclusive club, and I call it cash for life.
> 
> As far as the difference, consider the after tax income from $76 to $93 a year, thanks I'll take the pension.


Well the difference after income between $76k and $93k is not reduced terribly, because I have quite a bit more RSP contribution room right now, and I max out my RSP and TFSA every year... I am working at doing more proper calculations for the sake of comparison. First I will perform the calculations with very conservative values for the private pension plan and see how it compares...


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## kreyszig

MoneyGal said:


> You are looking for the present value of a future stream of income with a random endpoint. This is called the actuarial present value. If you like math, here are the basic equations: http://en.wikipedia.org/wiki/Actuarial_present_value
> 
> But more practically, you are not comparing the interest/yield on a lump sum when you look at the value of a federal government pension plan. You are comparing an amount that is accumulated with *no* risk and which is not subject to any risk during the payout phase, and you need to account for inflation. Your closet comparator would be with real return bonds.


Thanks. Yes I knew about this. This is why I did my calculation using an overly conservative yield of 3%. If you add an inflation rate of 2.5% on top of that, my calculations are still reasonable for the accumulation phase where you want a portfolio with some growth component. For the retirement phase I guess my calculations were a bit less conservative, although my main point was that you cannot compare a private pension plan with $4M of assets with a public service pension plan, because with the former you still have the assets at your death, while with the later you leave nothing behind you...


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## MoneyGal

Yes, for sure; but by the same token you cannot assume *any* risk in either the accumulation or decumulation phases if you want an accurate comparison. The reality is that the DB pensioner takes no investment risk, and the guarantee provided by the counterparty is the strongest available. 

Signed, not a member of a union or a pension plan of any kind


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## kreyszig

MoneyGal said:


> Yes, for sure; but by the same token you cannot assume *any* risk in either the accumulation or decumulation phases if you want an accurate comparison. The reality is that the DB pensioner takes no investment risk, and the guarantee provided by the counterparty is the strongest available.
> 
> Signed, not a member of a union or a pension plan of any kind


Well in the decumulation phase you don't want significant risk in your portfolio, but having some diversified stock component early in a career does not necessarily have an impact for the decumulation phase (in the sens that over the years it will provide better yield than risk-free investments) since the market will go through quite a few cycles over the years, right? I mean the return from the stock market beats my conservative rate of 5.5% by about a factor of two. The interest rates could not be really any lower right now and you still can get 3% from high interest saving accounts. So to get an average return of 5.5% you would only need about 31% of assets in the stock market, which would constitute a very low risk portfolio... Also the money for the public service pension plan has to come from somewhere as well. If the investments of the Treasury Board do not perform well over a long period, or because of some demographic trend, there can be pressure on the government to make changes in the public service pension plan. Right now the contribution rate from the public employees is changing from 35% to 50% because of such factors, so things are not totally risk-free with that pension plan either. For an employee, changes in the contribution rates are no better than a low yield from the stock market in the case of a private pension plan, as long as the portfolio of the private pension plan is constituted of no-risk to low-risk assets in the decumulation phase...


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## MoneyGal

I'm 100% equities. But that's my personal portfolio. I'm not comparing it to a pension plan. 

I understood that you said you wanted to determine the value of a DB pension plan. It sounds like what you are doing is saying, "what is the best portfolio for me / a rational investor, given certain assumptions about market behaviour?" and while that is an interesting discussion, it isn't quite the same thing. 

It sounds like you might be actually asking, "how could I *beat* the implicit return in provided by a DB pension plan?" There are also mathematical formulas which provide more insight into this. Can a diversified portfolio *beat* the implied return of a lifetime stream of income? Yes, of course. But the value of a DB pension is in the guarantees it provides, not a maximized return.


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## kreyszig

MoneyGal said:


> I'm 100% equities. But that's my personal portfolio. I'm not comparing it to a pension plan.
> 
> I understood that you said you wanted to determine the value of a DB pension plan. It sounds like what you are doing is saying, "what is the best portfolio for me / a rational investor, given certain assumptions about market behaviour?" and while that is an interesting discussion, it isn't quite the same thing.
> 
> It sounds like you might be actually asking, "how could I *beat* the implicit return in provided by a DB pension plan?" There are also mathematical formulas which provide more insight into this. Can a diversified portfolio *beat* the implied return of a lifetime stream of income? Yes, of course. But the value of a DB pension is in the guarantees it provides, not a maximized return.


Well what I want is to estimate the added value from a public service pension plan, when compared to a diversified and well planned private pension plan with an average yield, so I can estimate how much of a drop in salary the job in the public sector could justify...


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## MoneyGal

Yes, and I am suggesting there are conventions for doing so, and they use fair market valuation of annuities, not stock market returns. I think you are trying to estimate how *you* would value the DB pension benefit, not how an actuary would do so - which is great, but a different conversation.


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## Karen

Kreyszig, one question that came to my mind when I first read this thread is this: do you have any idea of what your chances are of your term appointment becoming an indeterminate one? If the job you're being offered is just a one-year-term position with no assurance of it becoming permanent, it doesn't seem like a good idea to base your career plans on it. I started my federal public service career on a one-year term appointment and was fortunate enough that my manager was able to convince the Human Resources people to appoint me without competition to an indeterminate position at the end of the year, but that happened because of a unique situation in the office at the time; it doesn't always work out that way.


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## kreyszig

Karen said:


> Kreyszig, one question that came to my mind when I first read this thread is this: do you have any idea of what your chances are of your term appointment becoming an indeterminate one? If the job you're being offered is just a one-year-term position with no assurance of it becoming permanent, it doesn't seem like a good idea to base your career plans on it. I started my federal public service career on a one-year term appointment and was fortunate enough that my manager was able to convince the Human Resources people to appoint me without competition to an indeterminate position at the end of the year, but that happened because of a unique situation in the office at the time; it doesn't always work out that way.


In my case I am told both by the person who would hire me as well as by some contacts that the chances are very good for the term to be renewed, but obviously it is conditional to the budget they have. It is standard procedure for that place to start with term positions that can then become permanent...


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## CanadianCapitalist

In my opinion, the public sector job will likely end up with better total compensation even though the salary is lower. Add up the value of the pension plan plus a generous leave policy that is miles better than pretty much anything available in the private sector, the total compensation will likely exceed that offered in the private sector. 

Interestingly, $93K * 0.82 (assuming you make a full RRSP contribution) = $76K.


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## GoldStone

kreyszig said:


> This is why I did my calculation using an overly conservative yield of 3%. If you add an inflation rate of 2.5% on top of that, my calculations are still reasonable for the accumulation phase where you want a portfolio with some growth component.


In my opinion, 3% real is not overly conservative.

An equal (33/33/33) mix of Canadian/US/International equities returned 3.85% nominal in the most recent 15 years (1998-2012). Subtract 2.5% inflation. You end up with 1.35% real rate of return. Less than half of your "overly conservative" rate. Is it an aberration or is it the new normal??

Remember, the next 35 years may be very different from the last 35 years.

Boomers accumulating assets vs. Boomers selling assets
Massive credit expansion vs. Unwinding of debt
Abundant good paying jobs vs. Difficult job market
Rapid economic growth vs. Slow growth or no growth at all
(I can continue...)

You would be wise to use very conservative rates of return in your calculations, or you may end up sorely disappointed.

Do a stress test using 2% real. Are you still ahead of DB plan?

For the record, I have no opinion which path you should choose. I'm playing devil's advocate here.


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## kreyszig

CanadianCapitalist said:


> In my opinion, the public sector job will likely end up with better total compensation even though the salary is lower. Add up the value of the pension plan plus a generous leave policy that is miles better than pretty much anything available in the private sector, the total compensation will likely exceed that offered in the private sector.
> 
> Interestingly, $93K * 0.82 (assuming you make a full RRSP contribution) = $76K.


Thank you. So I did some calculations... For a private pension plan to provide the same benefits, it would require a constant yield of about 6.18%, assuming the investment of 14.12% of the salary in a RSP every year, a constant inflation rate of 2.5%, 33 years of services and a pension representing 60% of the salary during retirement, indexed with the 2.5% inflation rate. And this calculation is based on a salary that only increases 2.5% per year. In reality, since their pension is based on the average salary during the five years with the highest income, and because their salaries normally increase quite faster than inflation, the real picture is probably even better for the public service pension plan. I have not yet calculated how much more income would be required to generate the same retirement income at my 3% yield though...


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## GoldStone

kreyszig said:


> In reality, since their pension is based on the average salary during the five years with the highest income, and because their salaries normally increase quite faster than inflation, the real picture is probably even better for the public service pension plan.


They don't call it _"a gold-plated pension"_ for nothing. As someone said upthread, it's an exclusive club.


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## doctrine

> Interestingly, $93K * 0.82 (assuming you make a full RRSP contribution) = $76K.


Not quite, $76k minus pension contributions. Pension contributions for the federal plans are rising, increasing to over 10% by next year. So, $76k will require probably almost $8000 in contributions. It will also, courtesy of the pension adjustment for the government contributions, virtually eliminate all RRSP room. By 2015, federal public servants will be paying 50% of the pension costs.


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## kreyszig

doctrine said:


> Not quite, $76k minus pension contributions. Pension contributions for the federal plans are rising, increasing to over 10% by next year. So, $76k will require probably almost $8000 in contributions. It will also, courtesy of the pension adjustment for the government contributions, virtually eliminate all RRSP room. By 2015, federal public servants will be paying 50% of the pension costs.


I know that the contribution from employees is rising, but I don't understand what you mean about the RRSP room. Isn't the used RRSP room given by the sum of the contributions from the government and the employee? If the employee contributes more and the government less, shouldn't the RRSP room remain the same? I am really interested by the point you raised. I could not find enough information on the web to get the whole picture. The only page I have found regarding the increase of the employee contribution is this one: http://www.tbs-sct.gc.ca/pensions/notices-avis/2012-12-14-eng.asp I could not find similar information for the government contribution, I had to base my calculations on the reported RRSP room usage in the tax report of someone I know who works in the public service...

EDIT: Ah, are you saying that the absolute governement's contribution for a given salary will remain the same while the absolute contribution from the employee will be raising such that it will eventually match the governement's contribution? This could explain how the available RRSP room could get reduced...


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## CanadianCapitalist

doctrine said:


> Not quite, $76k minus pension contributions. Pension contributions for the federal plans are rising, increasing to over 10% by next year. So, $76k will require probably almost $8000 in contributions. It will also, courtesy of the pension adjustment for the government contributions, virtually eliminate all RRSP room. By 2015, federal public servants will be paying 50% of the pension costs.


I just thought it was interesting -- not that it is an apples-to-apples comparison. Also, in the public sector one has to pay union dues, which is another $600 or so per year. I've also noticed that medical / dental benefits in the public sector for certain professions are not as good as the private sector. On the plus side, you get generous leave benefits. If you can take or bank an extra 4 weeks every year, that's equivalent to getting about 8% more in salary.


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## MoneyGal

CanadianCapitalist said:


> I just thought it was interesting -- not that it is an apples-to-apples comparison. Also, in the public sector one has to pay union dues, which is another $600 or so per year. I've also noticed that medical / dental benefits in the public sector for certain professions are not as good as the private sector. On the plus side, you get generous leave benefits. If you can take or bank an extra 4 weeks every year, that's equivalent to getting about 8% more in salary.


Tax-deductible union dues; the after-tax cost will be less, FWIW.


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## kreyszig

Do you know why the contribution rates for the new federal employees (who started working after Jan 1st 2013) are lower than for existing employees (see Figure 2b here http://www.tbs-sct.gc.ca/pensions/peserv-servpe/cr-65-tc-eng.asp compared to Figure 2a there http://www.tbs-sct.gc.ca/pensions/peserv-servpe/cr-60-tc-eng.asp)? Is it solely due to the pension age being pushed back to 65 years old instead of 60, causing the federal employees to work in the government over a longer period of time on average? Does it mean that the new plan could somehow be advantageous for someone starting to work for the government at 32-35 years old like me? What I mean is that isn't it better to work for the government for 30 years starting at 35 years old in 2013 compared to the someone starting to work in 2012 at 35 years old also for a duration of 30 years?


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## Pennypincher

Aside from everything else that has been said, the GofC is a good place to be if you plan on having kids and want some flexibility with sick time, maternity/paternity leave, wanting a1 year sabbatical, care and nurturing and income averaging if you want a few weeks off in the summer or whatever. 

It's not so great if you want a salary increase. In the 90's there was a 7 year salary freeze. 

Also after 5-10 years of working there, you might feel trapped and not want to leave because of your pension...


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## kreyszig

Pennypincher said:


> Aside from everything else that has been said, the GofC is a good place to be if you plan on having kids and want some flexibility with sick time, maternity/paternity leave, wanting a1 year sabbatical, care and nurturing and income averaging if you want a few weeks off in the summer or whatever.
> 
> It's not so great if you want a salary increase. In the 90's there was a 7 year salary freeze.
> 
> Also after 5-10 years of working there, you might feel trapped and not want to leave because of your pension...


Thanks. Well I don't plan to have kids and I never take sick days (maybe 1 per year, but normally I work more the following days to compensate).

From what I have seen, most of the salary increases come from moving to another step each year, so it means there is possibility of the salary to increase although the salary for a given step is frozen for some years, right?

About what happen when you leave sooner, you can get deferred anuities or a value transfer, right? Are these options less advantageous than a private pension plan, I don't really have a feel for it?


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## Guigz

kreyszig said:


> Thanks. Well I don't plan to have kids and I never take sick days (maybe 1 per year, but normally I work more the following days to compensate).


@kreyszig

The problem with your initial question is that you are bound to get an actuarial (i.e., worthless) answer. Firstly, the calculated "value" of your GC pension will change wildly depending on several factors that are out of your control. And second even if we say that is worth XM$, there is no way for you to cash this amount out at your volition.

If tomorrow morning, RR bonds start paying out 5% per year, suddenly, your "actuarial pension value" will drop like a rock since it would take a comparatively smaller portfolio to generate the same amount of money without risk.


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## kreyszig

Guigz said:


> @kreyszig
> 
> The problem with your initial question is that you are bound to get an actuarial (i.e., worthless) answer. Firstly, the calculated "value" of your GC pension will change wildly depending on several factors that are out of your control. And second even if we say that is worth XM$, there is no way for you to cash this amount out at your volition.
> 
> If tomorrow morning, RR bonds start paying out 5% per year, suddenly, your "actuarial pension value" will drop like a rock since it would take a comparatively smaller portfolio to generate the same amount of money without risk.


Thanks. Yes I know that there are large uncertainties and there is no certainty, but notheless I think it is good to attempt some quantitative comparison, because I need to base my decision on something, given that both jobs seem to be interesting... One of the main uncertainties I would say is the prediction of how my salary could evolve in the private sector vs the public service.


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## 44545

kreyszig said:


> Hi,
> 
> so I am being offered a job (term position) in the federal public service. I am currently working in the private sector and my salary is significantly higher, but I do not have any benefit. I am not sure how to evaluate how much the federal service pension plan is worth? I am currently earning $93k/year and I am offered $76k/year . I am 31 years old. It is quite the gap in salary... I have an idea what the health insurance plan can be worth since I currently pay $2700/year for roughly the same benefits with a group insurance, but I find it much trickier for the pension plan. I know that the benefits for the federal pension plan have changed for new employees on January 1st and are not as good as they used to be. Do you know how this can be evaluated?
> 
> Thanks!


A few points/questions:

Are you temperamentally suited to government? It's very different from the private sector and this can lead to a lot of friction with some people, which can make extending a term or getting an indeterminate position more difficult.

If you get in, would your intent be to commit to staying 20-25 years? If not, the DB pension isn't worth considering, IMO, since it's not portable and all you get if you leave early is a return of contributions, no growth. (as it's been explained to me by a benefits advisor) An independent financial advisor I spoke with estimates this becomes essentially an unrecoverable loss after about 8years. (not enough time to make it up before retirement versus just staying in the service)

Term positions can be extended and as a term employee, you would have access to internal job postings, the same as indeterminate employees. Once challenge: we're still in a "post-DRAP" environment and there don't seem to be a lot of postings. Some postings get snapped up by people who were affected by DRAP. This doesn't preclude people being hired externally if there are no qualified candidates internally.

There is a "service buyback" option. If and when you become indeterminate, there are provisions for buying back years of service in which you weren't indeterminate, to count toward your pensionable years. (I'm not sure if this applies to "term" or "casual" - term might simply be credited as if indeterminate)

I realize I haven't cited sources above and I apologize for that. There's likely a lot of room for discussion on my above points but I'm putting them out there as a starting point.


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## Guigz

CJOttawa said:


> A few points/questions:
> 
> If you get in, would your intent be to commit to staying 20-25 years? If not, the DB pension isn't worth considering, IMO, since it's not portable and all you get if you leave early is a return of contributions, no growth. (as it's been explained to me by a benefits advisor) An independent financial advisor I spoke with estimates this becomes essentially an unrecoverable loss after about 8years. (not enough time to make it up before retirement versus just staying in the service)


I don't think this is how it works.

I believe one is fully vested after two years (prior to that, I think there is a return of contributions only). After you are vested, you get to choose how to take the pension when you retire (e.g., take a reduced pension now, take a non-reduced pension at 60 or take a lump sum).

For example, someone that works 8 years in Govermnent before moving to private sector for the rest of their careers will be entitled to 16% of their best 5 consecutive salary years (from the Gov. Job) at 60. There is no penalty for not staying in the pension plan.

This is like getting an indexed annuity for life. Even if it only represent 16% of your past salary(which is indexed to CPI even when you get out of the pension plan), it is good not to have your eggs all in the same basket. 

I don't see how you "have to stick to the plan for 20-25 years...".


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## MoneyGal

I also don't see how it is an "unrecoverable loss."

Of course there would be no motivation for a financial advisor to say that, so it shall remain a mystery.../sarcasm


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## kreyszig

CJOttawa said:


> A few points/questions:
> 
> Are you temperamentally suited to government? It's very different from the private sector and this can lead to a lot of friction with some people, which can make extending a term or getting an indeterminate position more difficult.


Well I am not sure yet if I am temperamentally suited to the government, particularly about the inefficiency caused by the heavy bureaucracy. Nonetheless, I am currently a contractor working with federal employees, so I have an idea of what to expect...


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## Eclectic12

CJOttawa said:


> ... If you get in, would your intent be to commit to staying 20-25 years?
> 
> If not, the DB pension isn't worth considering, IMO, since it's not portable and all you get if you leave early is a return of contributions, no growth. (as it's been explained to me by a benefits advisor) An independent financial advisor I spoke with estimates this becomes essentially an unrecoverable loss after about 8years. (not enough time to make it up before retirement versus just staying in the service) ....


Based on my experience with private DB pensions, either the info you are getting is incomplete, was not heard or is just plain bad.

When one joins a DB pension, the clock starts ticking to what's called "vesting". The typical vesting timeline I've experienced is two years, which it appears the public service pension uses as well. The difference vesting makes is that before vesting - leaving the company means you are entitled to only your contributions (i.e. what you posted). Leaving the company after vesting, however - means that whatever choice you make, both yours and the employer's contributions plus any investment growth are yours.

So when you leave after say eight years - usually you are presented with the choices of:

1) stay in the DB pension. No further contributions are made and whatever benefit has been qualified for is what will be paid (i.e. indexing is the only possible growth).

2) transfer whatever the calculated lump sum (I forget the term for this) to the DB or DC pension at the new job, if it will accept it.

3) transfer whatever the calculated lump sum is to a locked-in retirement account (LIRA).


So there are some limits plus variables that are going to determine how it works out but there is no way it is an unrecoverable loss as someone who is not vested is losing a maximum of two years of employer's contributions and someone who is vested will get at least all the contributions/growth that has already occurred.


http://www.theglobeandmail.com/glob...eave-my-job-before-retirement/article4203857/

Cheers


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## Eclectic12

Guigz said:


> ... This is like getting an indexed annuity for life. Even if it only represent 16% of your past salary(which is indexed to CPI even when you get out of the pension plan), it is good not to have your eggs all in the same basket.
> 
> I don't see how you "have to stick to the plan for 20-25 years...".


Hmmm ... agreed but ... (you knew there was going to be a but, right? :biggrin ... someone who leaves the public service who has not carefully considered the complete package may think they improving their situation but may not be. 

Private DB pensions are both harder to find and not paying as much. So in one sense, leaving may have the "penalty" of losing some hefty benefits. 


Cheers


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## Pennypincher

kreyszig said:


> From what I have seen, most of the salary increases come from moving to another step each year, so it means there is possibility of the salary to increase although the salary for a given step is frozen for some years, right?


Yes, I believe during a salary freeze, you can still move up in the steps, but there are generally not that many steps. 
http://www.pipsc.ca/portal/page/portal/website
Are you familiar with the Professional Insititute of the Public Service of Canada? Check out their site for collective bargaining info and salary steps etc...


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## 44545

Eclectic12 said:


> Based on my experience with private DB pensions, either the info you are getting is incomplete, was not heard or is just plain bad.


I'd like to think the information I have is incomplete but I've occasionally been told that I'm thick. 

I don't know how the latest changes to the PS pension affect this formula but up until the end of 2012, the public service DB pension was based on:

number of years of service * 2% * average annual salary of "best five years."

So, if you made $80,000 for the best of your five years (usually the last years you served, due to regular increases of salary negotiated into collective agreements), and you worked 25 years, that'd be 50% of $80,000 or a $40,000 annual pension. There were some other provisions such as early retirement penalties etc and you max out at 70% after 35 years of service.




Pennypincher said:


> Yes, I believe during a salary freeze, you can still move up in the steps, but there are generally not that many steps.
> http://www.pipsc.ca/portal/page/portal/website
> Are you familiar with the Professional Insititute of the Public Service of Canada? Check out their site for collective bargaining info and salary steps etc...


If you want the full list of salary steps, you can find them by Googling "TBS Rates of Pay".

Here's where it takes you:
http://www.tbs-sct.gc.ca/pubs_pol/hrpubs/coll_agre/rates-taux-eng.asp


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## Eclectic12

CJOttawa said:


> I'd like to think the information I have is incomplete but I've occasionally been told that I'm thick.  ...


I agree that the 20 - 25 years in the public service is going to be a good pension. 


The parts I am disagreeing with are:

1) "all you get if you leave early is a return of contributions, no growth". 

Hopefully my previous post has clarified that this will only apply if one leaves the public service in two years or less. Anything after that, one receives both sets of contributions plus growth if withdrawn (i.e. portable) or a pension at retirement age.


2) " ... commit to staying 20-25 years? If not, the DB pension isn't worth considering, IMO ... "

This assumes that one is going to fall behind if one were to work in the public service for less than 20 + years and then move on to another job.

Take the example of someone who works in a private company for ten years, then public service for ten years and then back to private for twenty years.

If the two private pensions use a formula of "number of service years x 2% x average salary of best seven years" and the public pension uses "number of service years x 2% x average salary of best five years", there's only a few variables that are going to make a difference in the final total pension collected. The main factors would be salary and indexing (I believe the public service pension is far better indexed than any private pension).

*Edit:* My private db pension is 1.5% of salary to a certain salary and then 2% thereafter. So if the public pension is 2% of all salary, it's already paying more than mine, before considering indexing.

So if the salary part works out, where is the unrecoverable loss the advisor was talking about? 
And why would one feel handcuffed into staying in the public service for twenty years?


Cheers


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## Eclectic12

kreyszig said:


> ... Isn't the used RRSP room given by the sum of the contributions from the government and the employee?
> 
> If the employee contributes more and the government less, shouldn't the RRSP room remain the same?
> 
> .... EDIT: Ah, are you saying that the absolute governement's contribution for a given salary will remain the same while the absolute contribution from the employee will be raising such that it will eventually match the governement's contribution?This could explain how the available RRSP room could get reduced...


Since you mentioned in the OP that you have no benefits in your private job, you many not be aware of the pension adjustment (PA).

To level the playing field between those who have no benefits and are contributing to an RRSP and those with either a defined contribution (DC) or defined benefit (DB) pension, where the employer and possibly the employee are contributing to the pension, the PA reduces the RRSP contribution room earned.

In a DC plan, if the employer puts in $800 and an employee puts in $800, the PA is $1600 and reduces the RRSP contribution room earned in that tax year by the $1600. This is a one to one ratio as there is no guarantee involved (i.e. it's the same as a $1600 contribution to an RRSP - what it's worth at withdrawal is unknown).


In a DB plan, where the salary is the same and the employee is contributing something like $1400, the PA is something like $6600. The benefit is known and guaranteed by the employer so the PA is based on the future benefit.

So some in a DB pension qualified for the full $22,450 RRSP contribution room but had their db pension PA drastically reduce it. Or for someone like a senior manager or above, the pension PA can eliminate the RRSP contribution room entirely.

Here's a link:
http://www.tax-services.ca/rrsp-contribution-limit-2012-rrsp-deduction-limits/


Cheers


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## MoneyGal

Eclectic12 said:


> So some in a DB pension qualified for the full $22,450 RRSP contribution room but had their db pension PA drastically reduce it. Or for someone like a senior manager or above, the pension PA can eliminate the RRSP contribution room entirely.


A minor quibble: virtually every member of a DB plan gets what's called a "PA offset" to ensure they have at least $600 of RRSP room each year. See the section called "PA Offset" in this CRA guide: http://www.cra-arc.gc.ca/E/pub/tg/t4084/t4084-08e.pdf


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## kreyszig

Eclectic12 said:


> Since you mentioned in the OP that you have no benefits in your private job, you many not be aware of the pension adjustment (PA).
> 
> To level the playing field between those who have no benefits and are contributing to an RRSP and those with either a defined contribution (DC) or defined benefit (DB) pension, where the employer and possibly the employee are contributing to the pension, the PA reduces the RRSP contribution room earned.
> 
> In a DC plan, if the employer puts in $800 and an employee puts in $800, the PA is $1600 and reduces the RRSP contribution room earned in that tax year by the $1600. This is a one to one ratio as there is no guarantee involved (i.e. it's the same as a $1600 contribution to an RRSP - what it's worth at withdrawal is unknown).
> 
> 
> In a DB plan, where the salary is the same and the employee is contributing something like $1400, the PA is something like $6600. The benefit is known and guaranteed by the employer so the PA is based on the future benefit.
> 
> So some in a DB pension qualified for the full $22,450 RRSP contribution room but had their db pension PA drastically reduce it. Or for someone like a senior manager or above, the pension PA can eliminate the RRSP contribution room entirely.
> 
> Here's a link:
> http://www.tax-services.ca/rrsp-contribution-limit-2012-rrsp-deduction-limits/
> 
> Cheers


Thanks for the information. I was aware of this, but from my calculations the pension plan is worth more than the PA in practice, so it is not really a problem. What I would be interested to know though, is if the employer contribution to the pension plan has an effect on the tax bracket?


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