# DB pension



## Benting (Dec 21, 2016)

Recently my nephew who is working at one of the big 5 banks is elegible for their employee's benefit. He asked me what he should do and is kind of shy to ask among colleage and HR. His mom does not know much and his father is always busy and out of town a lot. So he asked me. I am not exactly the ideal person to ask either. First of all I know he can get some free stocks if he contributes part of it. It is a no brainer that he should get to the limit if possible. As for the DB pension. He gets it and can also contribute more and they will manage for you. I know a lot of people wish they have it. I have absolutely know why it is so good ?
Been googling last couple of days and still not clear. Seems to me it is good but there is a lot of restrictions. For example you won't get a cent if you leave within2 year of employment. Will get a part of it if you leave longer than 2 years but not full amount they contributed. If you work there till you retire, you can tranfer to you own RRSP. Is this is a fixed amount no matter how the pooled fund's performance ? is it a lock-in type ? Other options is to stay in the plan there and collect some monthly payment. What'll happen if you die ? Anybody will inherit the plan ?
This leads to a another question. The company I worked for has private pension that pay me certain % to my own RRSP each year base on my salary. I get all of it no matter how long I work there, absolutely no restrictions. Only thing is I need to manage myself. Which one is better if you getting the same % contribution from the DB plan workplace ? Thank you in advance.


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## Eclectic12 (Oct 20, 2010)

The key advantage is the payout is by formula. 

If you nephew makes bad decisions with the RRSP or only ends up with enough to cover say five years of retirement - he has to deal with it. In a DB pension, the employer has to deal with any shortfall. Now if the employer can't makeup up the shortfall (ex. Nortel) then it becomes his problem as well.


Re: won't get a cent if leave or are fired within two years 

Maybe ... it depends on the rules that control the pension. For example, Ontario changed their rules to get rid of the two year period so that now, as soon as one joins the DB pension, one will get money when leaving.


Re: ... will get part of the DB pension if over two years

When leaving, one usually is given the choice of keeping the pension (no more credits will be earned so the payout amount will be set) or leaving the DB pension.
https://www.theglobeandmail.com/glo...-plan-can-you-and-should-you/article33909740/


From what I recall, when leaving the DB pension he would get his contributions plus the employers contributions plus any growth at a minimum. It is a complicated formula as to whether there might be more.

If this = the credits earned, likely it will all have to go into a locked in account that can't be withdrawn from until at earliest age 55 (an RRSP can be withdrawn from at at any time).

If this > the credits earned, as happend to me - part will be locked in while some $$ will have the choice of transferring to one's personal RRSP or taking it as income that is taxed.


re: if you work to retirement, you can transfer to your own RRSP

Depends on the DB pension plan. Mine does not have this option so if I work to retirement, I can only take the pension with the health benefits associated with it. Some plans allow the employee eligible to retire to make this choice ... just keep in mind that usually leaving the pension in this manner also means any retirement health benefits are lost as well.

If one is concerned about about well funded the DB pension is or how stable the company is - losing the health benefit may not matter compared to having cash in hand.

The other thing to keep in mind is that where a sizeable benefit was built up then one chooses to take the payout instead of the pension - typically only a part of the payout can be contributed to the RRSP, tax deferred. Others have posted that taking this route meant at or over $300K+ of taxable income, in a single tax year.


Re: is employer contributions to a personal RRSP better?

Hard to say without more details ... my co-worker thought leaving the company DB pension so that he'd have more RRSP contribution room under his control. When he ran the numbers, he figured out that the DB pension guaranteed him or his estate 10 years of pension income where he figured that his RRSP would last six years.


Cheers


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## Daniel A. (Mar 20, 2011)

It does not sound like he has a choice about being in the DB pension.
Many pension plans still have a two year vesting period if he leaves before that his contributions would be transferred to an RRSP or other option so he won't lose it just won't get the company side of it before two years. 
If he were to work there till retirement a DB pension is very hard to beat, once one reaches age 55 the pension can't transfer the lump sum value but if one quits just before that then the whole thing can be transferred.

The management fee's are as cheap as you can get for such a plan likely half of anything else it should be a major consideration. 
Early on a DB plan does not look like much when you read the personal statement that you get from the plan but as your years grow its later that the value accelerates due to the funding formula.


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## Benting (Dec 21, 2016)

*Thank you very much *E12 with such detailed answers in a short time ! It would take me a little while to digest all these. One more question I forget to ask is, can he use this plan to apply Home ownership plan when he is ready to buy his own place ?


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## Daniel A. (Mar 20, 2011)

Benting said:


> *Thank you very much *E12 with such detailed answers in a short time ! It would take me a little while to digest all these. One more question I forget to ask is, can he use this plan to apply Home ownership plan when he is ready to buy his own place ?


No as he has no access to the funds, same goes for bankruptcy its protected.


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## Eclectic12 (Oct 20, 2010)

Keep in mind that usually - where a DB pension is offered, there may be a period where one can delay joining the plan but so far, I am not aware of any that allow one decline joining. For example, two of the three DB pensions I have been in automatically enrolled me in the plan after passing probation. The third plan, after probation, made it my choice up the ten year mark - at which point automatic enrollment occurred. This gives the plan more assets to work with as well as to keep costs down. 

Likely step one is what is going to happen no matter what one does.

Some DB pensions offer optional components. Going back to my three DB pensions - two of the three did not offer an optional component while the third offers an optional part that allows one to buy additional benefits (ex. have a bridge from early retirement to age 65 to smooth out income pre-CPP and after starting CPP or indexing or the reduction of the pension for early retirement).

You mention "free stocks" ... likely these are not part of the DB pension and while they may be discounted, unless one is an executive - it is usually not 100% free.


re: Anyone inherit the plan?

At retirement, where one has a spouse - taking the full DB pension usually means no one can inherit it. Where one has a spouse, one can pick a reduced payout that will be inherited by one's spouse. My dad picked this option to provide for my mom. She ended up after his death collecting pension money for longer than he did.


For the "which is better", I missed commenting on the contribution rates. 

At one employer - after a merger, the new employees to the merged company were only offered a defined contribution pension (similar to employer matching for RRSP contributions but with more restrictions). The choice of leaving the DB pension to join the DC pension was offered with everyone invited to sessions outlining the differences. Most were lost in the terms as they didn't know what their DB pension was but what jumped out at me was that the DB pension employee + employer contributions were about 5.9% where running out of money was the employer's responsibility to deal with. Moving to the DC pension meant the employer + employer contributions dropped to 2%, with shortfalls being the employee's responsibility. 

Eventually I found out it was a waste of time attending the meeting as the changes that was skipped was that after the merger, anyone below manager no longer had a pension. As I was not a manager or above - switching pension types was not available to me.


Something to note is that based on what has been posted on CMF, big 5 banks are one of the few employers that may have a DB pension plan or optional plan where the employer is the only one making contributions to the plan.


Some more info:
https://www.getsmarteraboutmoney.ca...n-savings-plans/2-main-types-of-pension-plan/
https://www.thestar.com/life/parent...ned_benefit_or_defined_contribution_plan.html
https://www.theglobeandmail.com/glo...-plan-can-you-and-should-you/article33909740/


Cheers


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## Benting (Dec 21, 2016)

Daniel A. said:


> No as he has no access to the funds, same goes for bankruptcy its protected.


Thank you very much Daniel.
The question is he is allowed to contribute more to the plan if he wanted to. If he want to take advantage of the Home Ownership plan than he should build up his own RRSP until the full amount that the plan allowed and then think about putting money into the DB. I did not know there is health benifit involved in the fund even if you are retired. Together with the stable paid out instead of uncertain performance of DIY investment, it seems to me a no brainer.


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## Benting (Dec 21, 2016)

Eclectic12 said:


> You mention "free stocks" ... likely these are not part of the DB pension and while they may be discounted, unless one is an executive - it is usually not 100% free.
> 
> 
> re: Anyone inherit the plan?
> ...


Thank you again E12.
I know the stock option is not part of the DB pension. I think the employee that eligible can buy the company stock up to certain amount with cash assistance. In other words, kind of like discount. 

As for the inheritance, guess the first one I highlighted is no spouse ?

Thank you again for the detailed answer. I'll take a long look from those links.


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## Eclectic12 (Oct 20, 2010)

Good that you know the stock plan is likely separate from the DB pension. It like the DB pension should have a booklet that spells out the rules. Some of my former co-workers loved the stock plan as it allowed them to sell six months later with the company setting the discounted price to give a 20% gain, if one sold right away. After the company was bought out, the discount price was set when buying with no guarantee of a gain plus they had to hold it for three years before they could sell. YMMV as to how useful and what limits are on the stock plan.


For the inheritance comments, sorry ... I should have been clearer.

Spouse or no spouse ... taking the full pension means the pension income for life can't be inherited. 

There may still be a lump sum payout as the plan might have a guarantee period. Using my plan as an example, it has a ten year guarantee. This means that if I collect two years of pension income then die, my estate would be paid eight years worth of pension income (likely a spouse listed as beneficiary would get it but I haven't checked). On the other hand, if I collect eleven years of pension income then die - then that's it for pension income, as more than then ten years has been collected.


In addition to the links, if you nephew can provide a web link to the details of the plan or a copy of the details - it would probably help you sort out the info from the links I have provided versus what the nuts and bolts of his plan are. For better or worse, like a "mortgage" - some things are common to all and some things depend on what was setup.


Cheers


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## OhGreatGuru (May 24, 2009)

Benting said:


> ...
> Been googling last couple of days and still not clear. Seems to me it is good but there is a lot of restrictions. For example you won't get a cent if you leave within2 year of employment. Will get a part of it if you leave longer than 2 years but not full amount they contributed. If you work there till you retire, you can tranfer to you own RRSP. Is this is a fixed amount no matter how the pooled fund's performance ? ....


These are questions your nephew should pose to his pay & benefits section. Though in a large corporation they should have a written document for employees detailing these options.

2-yr vestiture is not uncommon, though some jurisdictions are moving to less. But it does not sound right that he would get "nothing" back. Ordinarily I would expect him to receive a return of his own contributions.

As phrased, the reduced amount that he would receive if he stays longer than 2 years bothers me too. I would check. I am not up on current pension laws, but it sounds punitive. However, maybe there is a misunderstanding in terminology here. With a DB pension, you only receive a full pension if you have a certain number of years of service (typically 35 years) and have reached a certain age. If you take an early pension, it is reduced. So the partial payout he understands he could receive after 2 years may be a "commuted value" based on both employer & employer contributions, and earnings, up to the time of separation. If he only works there 10 years, he is not going to receive a full pension immediately; nor is he going to receive it at retirement age. And it sounds like they have constructed this pension so he has to leave the pension plan and take the commuted value if he leaves early.


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## Calmoney (Dec 19, 2013)

I would not hesitate to join a DB plan, especially with a company that should never have a problem fulfilling the pension obligation. I consider most DB plans a "gift", with a guaranteed monthly income for life, that is in many cases indexed or partially indexed to inflation. Invest on the outside in TFSA's and the little bit of room that you will have for RRSP's. Along with CPP, OAS, a few registered accounts and a DB plan......retirement doesn't get much better.

A selling point for your nephew is that it is forced savings, if he leaves the plan, in most DB structures, he will get both his and the employers portion. Normally the employer will fund more than 50% of the monthly contribution. Hard to lose with a DB plan.


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## Eclectic12 (Oct 20, 2010)

OhGreatGuru said:


> These are questions your nephew should pose to his pay & benefits section. Though in a large corporation they should have a written document for employees detailing these options ...


That would be the best source ... though depending on how well written the document is - it can take a bit of effort to sort it out.




OhGreatGuru said:


> ... 2-yr vestiture is not uncommon, though some jurisdictions are moving to less. But it does not sound right that he would get "nothing" back. Ordinarily I would expect him to receive a return of his own contributions.


Apparently Quebec has had vesting on joining the plan a long time. Ontario switched in 2012. I am not finding the reference now but I seem to recall BC and Manitoba as examples of other provinces that move to immediate vesting.

Alberta and Newfoundland seem to still have a year limit. One Newfoundland plan referred to needing to be a member of the plan for five years to vest.



Cheers


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## Benting (Dec 21, 2016)

Thank you all with the valuable info.
He has already joined the plan.
I am sure he got some kind of booklet that outlined most of the questions I asked. Should have asked him before I went on this board. Anyway, the immediate action is whether he should contribute to the plan right now with additional money. That is the question he asked. He told me he planned to buy his own place as soon as possible using the Home Buyers' Plan (sorry, I said Home Ownership Plan) to help. Currently the lucky (?) young man is living at home, free food and rent. He is dying to move out but won't be able to with blessing with his parents. Only way out is getting his own place. His parent even promised him to help out for the down payment under the condition that he has the max HBP limit in his RRSP. They just want him to save. So, getting the full allowed HBP asap is the priority. Since he cannot take out money from the DB plan then the only option is to build up the HBP limit first. I'll tell him to max his own RRSP contribution each year till the time comes. The refund money should go into the TFSA. Don't think it would take too long since the only expense is his car and he is getting pretty good salary. After he gets his own place then all will depend on what kind of financial situation he will be in. Sounds like he really love to work there. Would not be surprise if he work till retirement.
One thing I have a bit of question is the after one retired. This is actually for my curiosity. Great thing about this plan is the health assistance and indexed. Other than that is they use some kind of 'formula' to calculate the amount of the fund. For those currently getting the full DB pension, how much would you say the fund's growth in turns of average annually in %, 6-8% ? Another one is the transfer to spouse or inheritance upon death which I not too crazy about.
Anyway, I really appreciated for all of those answering my questions in a such short time.


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## Eclectic12 (Oct 20, 2010)

Re: How much growth annually in %?

The growth in the payout is from the credits earned and any salary increases. The booklet usually has a formula for the credits earned each year. 
Using my DB pension as an example, from $0 to YMPE which is $55,300 for 2017, 1.5% is earned with anything above YMPE earning 2%. More salary means more contributions as well as more credits.

When one decides to retire, usually an average is applied over three to five years for income, to end up with a YMPE income and total income. The sample calculation uses $54,600 for YMPE and $82,000 for the above YMPE part. The YMPE $54,600 x 1.5% = $819 with the above YMPE being ($82,000 - $54,600) x 2% = $548. This totals up to $1,367.

This is where the number of years makes a big difference. Have ten years of service then the $1,367 x 14 = $13,670 annually. Have 30 years of service then $1,367 x 30 = $41,010.

The calculation assumed one waited to retire for the age when the full pension will be paid, in my case age 65. Retire earlier then the calculated benefit will be reduced while retiring after age 65 means the benefit will be boosted.


Re: Another one is the transfer to spouse or inheritance upon death which I not too crazy about.

Keep in mind that there be $150K in an RRSP at death where the right moves aren't made then the $150K goes against the estate's income, at a high tax rate.

In any case - this is why getting a copy of the plan is important. I notice that in my current plan, dying while working for the company gives the surviving spouse the option of taking a pension equal to 60% of what has been accumulated to the date of death *or* taking the commuted value (i.e. lump sump payment). Being in the same situation (i.e. vested) but working for another company means the commuted value is the only payment to the spouse.

For the plan with a previous company - the estate being paid a commuted value was it. 

I'm not sure if this difference is because of changes to the pension rules or whether it is what the employer and/or their pension advisors decided when setting up the plan. 


Cheers


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## Benting (Dec 21, 2016)

May I ask what is YMPE ?

I asked the approx. average annual performance for the DB Plan is just try to compare with my own plan. My employer paid me 6%/yr, base on my salary, directly to my own RRSP. I manage myself. I think I did ok with my investment, average closed to 12% in 21 yrs. Just wanted to know roughly at what point it would match the DB plan in the same time frame. I know the DB plan has the extras like index and health assistants.

Thank you again.


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## Eclectic12 (Oct 20, 2010)

Year's Maximum Pensionable Earnings ... it is set by the gov't for CPP/QPP contributions and benefits.

I'd have to dig it out to be sure but I seem to recall an article saying the lower % contributions for being at or under the YMPE is to reflect that when one starts CPP/QPP starts, more pension income will be flowing.

The DB pension plan has managers so typically the updates are few and far between, plus tend to focus on how well funded the plan is instead of how the portfolio is doing.

The bigger problem IMO with trying to compare performance of a DB plan to an employer matched RRSP is that it is apples to oranges. It is sort of like comparing a GIC that pays 2% versus a stock that pays a 3% dividend. The stock sounds better but selling at the wrong time may more than wipe out the difference. 

That's without attempting to make some assumptions on how long one lives to model how fast the RRSP money runs out where without a bankruptcy, the DB pension keeps paying. 


Cheers


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## Benting (Dec 21, 2016)

Thank you E12. There are a lot of info I need to digest.........


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## GreatLaker (Mar 23, 2014)

Here are a couple of articles that should be helpful:

http://www.osfi-bsif.gc.ca/Eng/pp-rr/ppm-rrm/Pages/ppm-rrm.aspx

https://www.retirementadvisor.ca/retadv/apps/articles/pdf/Companypension.pdf

http://www.fsco.gov.on.ca/en/about/brochures/Documents/your_pension_rights.pdf

Note the first 2 are generic or federal. The third is from FSCO which is specific to Ontario.

Also consult the company provided pension documentation for any specifics not covered in the above.

Enjoy


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## Benting (Dec 21, 2016)

Thank you GL. I think I open a can of worm. The info I have so far is just way over I was expecting. I should have ask my nephew show me the booklet first probably is the best. Anyway, it is still very helpful. Thank you all.


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