# Public Service Pension - Just how "gold-plated"?



## yyzvoyageur (Apr 10, 2009)

I’ve only been a public servant for a couple of years now. Prior to that, I worked in the private sector and always contributed the maximum allowed to my RRSP (and now my TFSA as well). Retirement planning has been an important consideration of mine since the time I got my first job. When I first started working for the government, I thought that my pension plan was a wonderful perk of the job. The more I look at the numbers, the more I have to wonder. I currently contribute the maximum to CPP, matched by my employer. I also contribute about $4665 of my earnings to my public service pension plan. According to the pension plan documents, I contribute about 40% of the value of my pension, while my employer contributes the remaining 60%. Once I hit 65 and start collecting CPP, my public service pension is reduced by about the same amount that I’m collecting in CPP. I think of the two pension plans as one entity for my purposes. Here are the numbers:

CPP contributions

Withheld from pay: $2118.60
Employer portion: $2118.60

Public Service Pension contributions

Withheld from pay: $4665.00
Employer portion: $6998.00

*Total: $15 900*

At the moment, I can only contribute about $3200 per year to my RRSP because of the pension adjustment. Let’s say I had no pension and no CPP, but, instead, received the employer portions of those premiums as part of my pay. I could then take that $15 900 and invest it however I like.

So I ran a quick calculation with a retirement calculator on the Service Canada site. For the calculations, I assumed I had no retirement savings at all before starting with the public service at age 30. I assumed I started saving $15 900 per year at age 30 with retirement at age 60. I assumed I would need this income until I was 90. The calculator assumes an inflation rate of 3%, a pre-retirement rate of return of 7%, and a post-retirement rate of return of 6%. That gives me $44 117 per year in today’s dollars (an estimate only, I realise). In contrast, my pension and CPP combined will give me about $38 000 per year in today’s dollars.

I know that many people would love to have a defined-benefit pension plan and I know that my plan does not have the same risk that comes with investing on my own and that my pension lasts until I die. Having said that, I can’t help but think I could do better on my own.

What about you? Would you prefer to invest the 9.9% of your earnings currently dedicated to CPP on your own or rely on the government to invest it? Do you have a pension plan? Do you think it's worth the money you put into it or do you think you could do better?


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## FrugalTrader (Oct 13, 2008)

Personally, I think a defined benefit pension plan is a no brainer. You'll get 66%-70% of your average wage during the last few years of service and the payout is _adjusted for inflation_ until you die. Then a portion (if not all) is transferable to your spouse.


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## Maltese (Apr 22, 2009)

FrugalTrader said:


> Personally, I think a defined benefit pension plan is a no brainer. You'll get 66%-70% of your average wage during the last few years of service and the payout is _adjusted for inflation_ until you die. Then a portion (if not all) is transferable to your spouse.


People always assume that all government pensions are comparable to the Federal Government Pension. However, while I agree that a DB pension is a nice benefit to have, all are not created equal. In Manitoba it takes 40 years of service to earn the maximum pension of 70% and the pension is not guaranteed indexed to inflation. Currently the indexing rate is 2/3 of the CPI but this is the maximum allowed and is not guaranteed. 

I wonder if anyone has ever done an actual apples to apples comparison of the goverment plans available. If so I would be very interested in reading it.


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## OhGreatGuru (May 24, 2009)

Consider yourself lucky.

Most large pension plans (not just public service) feature "coordination of benefits" with CPP. If yours didn't, you would have to pay higher premiums.

You have to pay CPP whether you are in private or public sector, so i don't know why you have included CPP contributions in your analysis at all.

Why should the employer "give" you his share of pension plan contributions to invest as you see fit? In the current economic crisis many employers are unilaterally cancelling or reducing their share of such RRSP joint-contribution RRSP plans. Consider yourself lucky to be in a workplace where this won't (likely) happen.

You are essentially arguing in favour of replacing a DB pension plan that is 100% secure with an agreement to match contributions to a personal RRSP that is not.

PS: "Gold Plated" is an inappropriate adjective for the average public service pension plan. These plans are handsomely contributed to by employer & employee, and are generally financially sound. The deal that politicians get can be described as gold-plated, because they can go on full pension after a fraction of the service.


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## yyzvoyageur (Apr 10, 2009)

OhGreatGuru said:


> In the current economic crisis many employers are unilaterally cancelling or reducing their share of such RRSP joint-contribution RRSP plans. Consider yourself lucky to be in a workplace where this won't (likely) happen.


I do consider myself lucky (despite the possible negative tone of my post). I was just a little shocked when I calculated all of the numbers.


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## FrugalTrader (Oct 13, 2008)

yyzvoyageur said:


> I do consider myself lucky (despite the possible negative tone of my post). I was just a little shocked when I calculated all of the numbers.


In my opinion, if you are dead set on investing in the markets, use the TFSA for your equities. That way when you retire, your DB benefits will be your fixed income, with a portion of equities in your TFSA. 

As well, TFSA withdrawals will not be counted as income, thus it won't affect seniors benefits (OAS etc).


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## George (Apr 3, 2009)

yyzvoyageur said:


> What about you? Would you prefer to invest the 9.9% of your earnings currently dedicated to CPP on your own or rely on the government to invest it? Do you have a pension plan? Do you think it's worth the money you put into it or do you think you could do better?


I'm in a similar position in a solid, public-sector defined-benefit pension plan. I view the pension as the basic necessities retirement income that I'll have after 30-35 years of work, and my RRSP/TFSA money is the gravy. 

I don't think too much about investing the money on my own, since it simply isn't an option - you can't opt out of CPP or an employer pension (in most cases) so why worry about what might happen if you did?

The "gold plating" on the federal public service's pension plan is the inflation adjustment. Every year like clockwork, a public service pension increases by whatever the increase has been in the CPI for the previous year. This feature ensures that your purchasing power will never go down, and that you don't get trapped into being a senior on a fixed income.


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## DrStan (Apr 5, 2009)

Bundled with the interesting work and good working conditions, the pension plan is a very strong asset for any federal government worker. It's actually the strongest part of my compensation, because I figure that a lot of things would have to go wrong before the government would default on its pension obligations. The economy would be in shambles, there would be rioting in the streets, etc. I consider it as secure as could be. The only real risk, I believe, is a gradual increase in contributions to ensure the plan is well funded. I can live with that. 

That's why I gladly pay my pension contributions every two weeks, and consider that part of my retirement portfolio as "fixed" income because it's preset and stable. That's also why my TFSA, RRSP and non-registered accounts are 100% stocks. If the poster has enough liquidity to pay into his pension AND max out his RRSP, TFSA and build a nice non-registered portfolio, he will be ahead of 90% of the population.


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## bean438 (Jul 18, 2009)

I also view my DB pension as a bond, or fixed income. My RSP has and will always be 100% equity. Ditto the TFSA.

I am thinking about a SM potfolio too.

I also have the option of pulling out the commuted value and going out on my own. Dont know if I will. It depends on interest rates, and the whole market.

I suppose if you pulled your commuted value Mid March/09 and invested end of the month you would be singing. But would you? I found it very hard to be "greedy when others are fearfull" in March when I bought BMO for my TFSA.

Well honestly I WAS greedy, but I was also fearfull too! 

I can stomch market drops, and actually I pray for them over the long haul. I can stick it through the ups and downs.
BUT to pull a massive amount and invest the whol thing all at once? Probably not for me.


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## yyzvoyageur (Apr 10, 2009)

Having been without a DB pension plan for most of my career, I had never considered treating my pension as the fixed income portion of my portfolio. Very interesting indeed.


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## George (Apr 3, 2009)

A pension is effectively the same thing as an annuity, except it's paid by your employer (or a third-party pension organization) instead of an insurance company.

It truly is "fixed income" akin to a bond that pays a fixed amount of interest each year. The amazing thing is to see how valuable a DB pension truly can be - for many public servants, their pension is worth several hundred thousand dollars by the time they retire!


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## FeeOnly.ca (Jun 4, 2009)

George said:


> A pension is effectively the same thing as an annuity, except it's paid by your employer (or a third-party pension organization) instead of an insurance company.
> 
> It truly is "fixed income" akin to a bond that pays a fixed amount of interest each year. The amazing thing is to see how valuable a DB pension truly can be - for many public servants, their pension is worth several hundred thousand dollars by the time they retire!


The analogy above only applies to a Defined Benefit pension plan, it does not apply to a Defined Contribution pension.

Many if not most non-government DB pensions "are" provided by insurance companies. When you retire the DB plan administrator purchases a Life annuity with the features you select on your behalf from the most competitive insurance company. Voilà' you have fixed income pension for life (aka: Life Annuity).

Neither the employer/sponsor, the plan administrator or the investment managers for the plan can take the risk (neither can you, the employer may be gone next year). So the risk is off-loaded to an insurance company. Governments on the other hand are perpetual and can tax the heck out taxpayers to fund any and all liabilities. Until there are riots in the streets.


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## FeeOnly.ca (Jun 4, 2009)

George said:


> The amazing thing is to see how valuable a DB pension truly can be - for many public servants, their pension is worth several hundred thousand dollars by the time they retire!


The present value of many CPI indexed DB plans would be over a million $!

A Joint-Life CPI Inflation-Indexed Life Annuity does not come cheap.


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## George (Apr 3, 2009)

FeeOnly.ca said:


> The present value of many CPI indexed DB plans would be over a million $!
> 
> A Joint-Life CPI Inflation-Indexed Life Annuity does not come cheap.


Very true. The plan value, however, really depends on how long the person has been part of the plan. Many public servants (federally, at least) started their public service careers later in life - the average age of a newly-hired fed is 37 - so they may not have a maxed out pension (35 years of service) when they decide to retire.


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## FeeOnly.ca (Jun 4, 2009)

George said:


> Very true. The plan value, however, really depends on how long the person has been part of the plan. Many public servants (federally, at least) started their public service careers later in life - the average age of a newly-hired fed is 37 - so they may not have a maxed out pension (35 years of service) when they decide to retire.


I wonder if public service CPI Indexed DB pension plan recipients live longer on average?


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## DrStan (Apr 5, 2009)

When it comes to starting at the federal government, the ideal age is 25, even if it has to be some menial job for the first couple of years or right out of university. One cannot retire and get an immediate pension before age 55, so from 25 to 55 works out to 30 years X 2% a year = 60 % of your 5 years best salary. That's one of the reasons why you see many staffers close to retirement hang on to higher level, higher stress jobs in their last 5 years instead of moving to something less stressful to ease into retirement -- they are boosting their retirement income tremendously. It also means you can retire at 55 with a fairly good indexed retirement plan, leaving you free to pursue some other avenues or even a bit of freelancing, etc. 

Starting earlier than 25 is not bad either because you increase the number of years worked, but you still have to wait until age 55 to retire. Any coop work terms or summer jobs can also be "bought back" for pension purposes. Starting later in life can really diminish the advantage of such a pension plan.


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## yyzvoyageur (Apr 10, 2009)

Many of my colleagues started with the federal government by age 20 (a lot of bought-back service) and will have a full 70% pension at age 55. I'll be perfectly happy with a 60% pension. One thing a lot of my colleagues don't realise is that a 60% pension will actually be more like 70%+ of net income when you consider the fact that union dues and superannuation, CPP, and EI premiums will not be deducted from pension payments. I recall running some numbers for my own case at one time and finding that my 60% pension would be more like 73% (assuming tax rates, etc. remain the same).


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## apples (Apr 10, 2009)

*pension %*

I take that most, if not all, government pensions are integrated with CPP, i.e. a few % drop in pension benefits after 65. So for example, say we get 60% between 55-65 and then 53-57% (most BC pensions have a bridge benefits .3-.7%) after 65? of course CPP and OSA will be on top of the employer pension. Correct?


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## FeeOnly.ca (Jun 4, 2009)

The UBC Faculty Pension Plan provides a nice example of the formula below:

http://www.pensions.ubc.ca/staff/publications/brochures/overview5.html


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## George (Apr 3, 2009)

apples said:


> I take that most, if not all, government pensions are integrated with CPP, i.e. a few % drop in pension benefits after 65. So for example, say we get 60% between 55-65 and then 53-57% (most BC pensions have a bridge benefits .3-.7%) after 65? of course CPP and OSA will be on top of the employer pension. Correct?


Pensions that are coordinated with the CPP are usually reduced at age 65 based on a formula that roughly equals what you'll receive from CPP if you take it at 65. The specific formula will vary a bit from plan to plan.

One thing that's interesting, though, is that the reduction normally occurs at age 65 regardless of when you actually start receiving CPP benefits. You can apply for CPP at age 60 and take a reduced monthly payment, but have the benefit of the extra cash between ages 60-65.


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## investnoob (Jun 29, 2009)

Sorry, I'm not very coherent this morning, so I hope everyone can understand my rambling.

Look at it this way voyageur: free money is free money. And by that I mean the employer's contribution to our pension plan. Of course you could argue that its all part of our compensation - so its not exactly free. But I'm not about to get bothered by the fact that i can't take the employer's contribution and do what I want with it.

The way I see it, its the only way the plan works if we are going to have an inflation adjusted pension that will last for our lifetime and the lifetime of our spouse.

The only thing that I can see being a bummer, would be retiring on your 55th birthday and dying the next day of a stroke. But that is the risk of all retirement plans - not just a defined benefit plan. You work all your life and save to enjoy a nice retirement and then croak in the first year.

At least your survivors get to enjoy the fruits of your labour. And, if you have no survivors, there is a pension benefit that can be willed away to whatever cause you choose.


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