# Pension Adjustments vs how safe your Defined Pension Plan is



## mind_business (Sep 24, 2011)

Just finished making my last RRSP contribution for the 2011 tax year, and was disgusted by the large Pension Adjustment that limits my maximum contribution room. 

In a perfect, and fair world it wouldn't bother me, however my actual Pension is only as safe as my corporation's handling of it. The Federal Government legislates the maximum RRSP to be limited by the PA, yet they don't provide adequate Pension safeguards when a company goes under. Correct me if I'm wrong, but if the Co's Pension Plan is underfunded at bankruptcy, you likely end up with the underfunded valuation when winding up the fund. I assume this is what happened to Nortel Retiree's??? 

Ontario requires companies to insure their Pensions by paying into the Pensions Benefits Guarantee Fund, which guarantees a 'small' pension benefit to the employee. It's not enough though.

So how would a person in that situation make up for the lost years of potential RRSP contributions and lost compound interest? They don't.

I'd like to see some legislation providing worker's Pensions with first dibs to the remaining assets when a Company goes bankrupt. Creditors should come second, not first.

Thoughts?


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## Saniokca (Sep 5, 2009)

Think about the following:

1) Currently there are laws to defer your taxes into the future and hopefully pay less (because you will presumably be in a lower tax bracket). Legislated by the federal government. This is good.

2) You are a member of a defined benefit pension plan that has a high PA. This means that it's a fairly generous plan. This is great. 

3) If your company defaults, you would still get a benefit to the extent that the fund is funded (70%? 80%?). Do you know what is the funded status of your plan? You live in a province that provides some protection against bankruptcy (up to $1,000/m I believe). Again, good.

4) First dibs - why do you believe that you deserve "first dibs" on the company assets? If I bought a corporate bond issued by the company you work for, why would you be in front of me? Also, if this was the case, I would ask for a higher yield for my money which would mean it would cost more for the company to borrow and will slow down business (which might mean your job would not be there)

5) If your payout from the plan is less than the sum of your PAs (a bit more complicated but this should be enough here), you will get some RRSP room back (the difference between the two). You don't get any interest on that though which I agree sucks but not "make it or break it".

Basically you have a DB pension, a tax deferral system, and some protection from the province. That's a great deal. Think of the DB pension as an investment - it has some risk...


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## doctrine (Sep 30, 2011)

Honestly, I would take a 1:1 matched contribution DC plan over a DB anyday.

If you work for a company or the government for 35 years, and retire with a nice 70% DB pension, and then die the next day, the value of that pension has been at best case reduced to a small survivorship bonus for your spouse, and if you're single/divorced with adult children, likely near zero. 

If you work for 35 years and with true dedication make 1:1 matched contributions and have a $500k RRSP and then you die, the RRSP is cashed out and taxed but you will likely be leaving at least $300k to your heirs. You could, however, have a much larger RRSP if you were a long term, low cost conservative investor. A properly managed $500k RRSP, combined with CPP and OAS, can certainly provide a decent retirement, and you could have more like $1M+ if you were a maximum contributor for 35 years.


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## Daniel A. (Mar 20, 2011)

My DB pension pays the surviving spouse 100% of my pension that was the option I picked. It could have been 75% or 60% .

A DB plan v DC the DB will be far superior in the long run.
In order to accumulate 500 K you would have been long term in the DC likely 30 years. Pull out 30,000.00 per year and see how long it lasts.
Remember the moment you retire that 500K starts dropping and in the case of 2011 TSX down 11% so your 500K just took a 50K hit. The chances of two or three bad years is much higher than one good year.

The purpose of a pension is to provide for you & your spouse in retirement not heirs .

When I worked the PA adjustment was always there but I figure I'm still much better off.
I know my pension is safe as it's third party managed and topped up yearly if needed. My union had an actuary company go over it a few years back looking for weakness and to confirm the numbers.

I may be wrong but Ontario's pension Guarantee Fund could not support a major hit.
With the number of companies complaining about having to borrow to fund their pensions, yes pension funding should have equal status to bond holders in bankruptcy not ahead of them just equal.
It is the job of the bond holder to do diligence on the company and they have no reason to complain about the lack of pension funding.


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## Eclectic12 (Oct 20, 2010)

doctrine said:


> Honestly, I would take a 1:1 matched contribution DC plan over a DB anyday.
> 
> [ ... ]


I've worked with people who thought the same.

So far, after making some reasonable assumptions and running the numbers - all have decided to stay in a DC plan. The last one figured that with an aggressive growth assumption for his RRSP would fund his retirement for a 6.5 years compared to a minimum 10 year payout from the DB plan.


As for the: 


> ... then die the next day, the value of that pension has been at best case reduced to a small survivorship bonus for your spouse, and if you're single/divorced with adult children, likely near zero


I'd check your DB plan. 

All three private DB plans, where the plan member dies the next day - the plan pays the estate a minimum of ten years worth of pension money. 


Then too - my dad elected to take a smaller DB pension so that if he died before my mom, his pension would pay her. She is now on year three of being paid a pension since he died. 



Cheers


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## Square Root (Jan 30, 2010)

it's hard to have both a large legacy and a secure pension. The benefit of a pension is that provides protection against longevity risk. The conventional wisdom, with which I agree, is that DB is usually better than DC. Obviously it will depend on the terms of the plan.  Keep in mind there is no reason you can't invest outside your RSP. I certainly did because my PA amount was also very high. My dividends are pretty close to my pension on an after tax basis.


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## mind_business (Sep 24, 2011)

Saniokca said:


> Think about the following:
> 
> 1) Currently there are laws to defer your taxes into the future and hopefully pay less (because you will presumably be in a lower tax bracket). Legislated by the federal government. This is good.
> 
> ...


1) Agreed.
2) Based on the last actuarial valuation of the Plan (Dec 31, 2009), the solvency ratio was 70%. My Pension is pretty good, but does not compare to the Public Sector plans. My pension is not indexed, and the pension formula is 1.25% x Average Final Compensation x Pensionable Service VS the 2% formula used by the Public Sector ... with indexing.
3) My guess is that company entering into BK protection would likely have a funding ratio much less than 70%. 
4) Good question. I see an employee being very similar to a creditor. When you look at the financial agreements the company enters into with the employee, it's really no different than the agreements made with creditors.
5) Yes it sucks. You can never make up the lost years of growth.



Daniel A. said:


> My DB pension pays the surviving spouse 100% of my pension that was the option I picked. It could have been 75% or 60% .
> 
> A DB plan v DC the DB will be far superior in the long run.
> In order to accumulate 500 K you would have been long term in the DC likely 30 years. Pull out 30,000.00 per year and see how long it lasts.
> ...


Agreed.


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## mind_business (Sep 24, 2011)

Square Root, I too am trying to sock away as much cash as I can in non-registered investments. We started getting serious about saving once our mortgage was paid off last summer. We should be saving approx $41600 total in 2012.

With the lack of confidence I have in both our Government Pensions and company Pensions, we need to ensure we at least have some backup investments just in case. If the Pensions turn out to be safe, then we should have a nice retirement 

I think I read at some point that your dividends were paying you a large 6 figure income. How did you manage that? Lucky with an investment, or just a very large household income prior to retirement, with a high savings rate?


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## sags (May 15, 2010)

Since companies would rather fashion a DC pension plan, to the expense of a DB pension plan, I think the "company match" for the average person would never be high enough to acquire a great deal of wealth.

If wealth was to be acquired, it would be mostly the employee's money.

From what I have read, the company match contributions are capped at a fairly low level.


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## brocko (Apr 20, 2009)

I took the CV and it is invested in conservative dividend stocks and bond etf's along with a cash component. The investment income is 65% of what the pension would have been. The survivor pension would have been 60% so effectively I have covered my spouse's income should I die in the near future. Yes there is risk but there is also opportunity and I am betting on the opportunity. DB in my mind is far superior to DC if you have the years of service and the pension formula is decent. What many folks on here who have the individual knowledge and expertise may be forgetting is that the greater majority of people in DC's do not have this same level of knowledge and oftentimes do not look for it until its too late. It is interesting that employers hire and pay for investment knowledge for their DB investment fund but offer nothing to employee's in the DC plan other than making the financial contribution.


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## londoncalling (Sep 17, 2011)

My employer matches about 1/3 of the amount you suggested.


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## HaroldCrump (Jun 10, 2009)

sags said:


> Since companies would rather fashion a DC pension plan, to the expense of a DB pension plan, I think the "company match" for the average person would never be high enough to acquire a great deal of wealth.
> 
> If wealth was to be acquired, it would be mostly the employee's money.
> 
> From what I have read, the company match contributions are capped at a fairly low level.


I agree with what you said.
I also would have agreed with your previous message that companies are more and more reluctant to pay into employee pensions and RRSPs.
Hence the PRPP game.

Alas, that is the trend these days.
With bad economic conditions, uncertainity, margin pressure, etc. employee retirement plans are the first things on the chopping block.
That is the sad reality of typical small and mid size private sector corporations.
Hardly any of such companies have the luxury of an everlasting, unlimited source of funding like the government sector.

Also, companies would say that they are already contributing the employee retirement plans via the CPP contributions.


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## Saniokca (Sep 5, 2009)

mind_business said:


> 1) Agreed.
> 2) Based on the last actuarial valuation of the Plan (Dec 31, 2009), the solvency ratio was 70%. My Pension is pretty good, but does not compare to the Public Sector plans. My pension is not indexed, and the pension formula is 1.25% x Average Final Compensation x Pensionable Service VS the 2% formula used by the Public Sector ... with indexing.
> 3) My guess is that company entering into BK protection would likely have a funding ratio much less than 70%.
> 4) Good question. I see an employee being very similar to a creditor. When you look at the financial agreements the company enters into with the employee, it's really no different than the agreements made with creditors.
> ...


2) Their PA is also higher (ironically not because of indexing)... Nothing prevents you from getting a job with a public plan...
3) The funded status of a plan is not perfectly correlated with BK - the funding status is very low not just because the asset returns were below expectations or company's policy is to make lowest possible contributions (which by the way will still aim to eliminate deficit within 5 years in ontario), it has a lot to do with the low bond yields if these were to rise 1%-2% the situation would be very different.
4) it is different in my opinion. The pension fund is protected from creditors already, you have first dibs to that. When I buy a bond, why shouldn't some of it be protected from you? 
5) but you are getting so much more! Usually you get a PAR when you're young which means there are enough years to make up for the "lost growth" (note that I am not arguing that it doesn't suck - just not too much). As you get older, the possibility of a PAR is lower, because 1 year of accrual is worth more.

I guess what I'm saying is that if your RRSP room is very important to you, you should either:
1) push your employer to have a group RRSP or DC pension plan
2) seek a different employer

Great discussion though.


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## atrp2biz (Sep 22, 2010)

Daniel A. said:


> A DB plan v DC the DB will be far superior in the long run.


It really depends. The company I work for contributes 10% of your salary into a DC plan, which I think is fairly generous. This is straight-up...no matching required. I also like the control - I pick the funds.


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## Daniel A. (Mar 20, 2011)

The company paid for my pension no contribution by me.
All studies to date have made it clear that DB is far superior to DC.

In a DC plan you pay the administration fee's and are limited to what funds the management company has.
The cost of managing a DB plan is high paid by the company.
If one is changing jobs every five or ten years the DC makes more sense as the DB requires a high number of years service to pay.

If you were to work at a company with a DB plan for 15 years and leave the commuted value would be low compared to what you would have in a DC.

Two people working 25 or 30 years for one company one in DB the other in DC the DB will be much better.
The average income is around 50,000.00 my guess so they put 5,000.00 a year into your pension that's not much I would hope your matching.

In the first twenty years of service my pension had a commuted value of less than 100,000.00 in the final ten years the total was 500,000.00
I expect the pension to pay for 30 plus years or 1.2 million 

The only reason that companies have been pushing DC for the past 15 years is it's cheaper for them. I remember when companies started pushing DC one of the selling points was look the market can return 15% this was the DOT COM error. Today and for many years going forward I believe most will be lucky to see 3-4 % return.
Having said all this your DC is far better than what most have to look forward to and in time others with less will be going ( I wish I had that pension)


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## Eclectic12 (Oct 20, 2010)

mind_business said:


> 1) Agreed.
> 
> 2) Based on the last actuarial valuation of the Plan (Dec 31, 2009), the solvency ratio was 70%.
> 
> ...


Hmmm ... other than being interesting to know, I'm not sure what comparing your DB pension version a public sector DB plan has to do with anything. 

I wish I was paid like my company's CEO but so far, it hasn't happened. 


Cheers


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## Eclectic12 (Oct 20, 2010)

brocko said:


> I took the CV and it is invested in conservative dividend stocks and bond etf's along with a cash component. The investment income is 65% of what the pension would have been.
> 
> The survivor pension would have been 60% so effectively I have covered my spouse's income should I die in the near future.
> 
> ...


Maybe you've covered off the survivor pension and maybe not. 

Being single, I've never looked into it so I'm wondering whose name the investments are in and what options are available to transfer them to your spouse.

I've heard of RRSP's being rolled over tax free but it sounds like there investments are in a taxable account. If say 50% of the investments are in your name - at your death, are they not part of your estate and taxed in one fell swoop? 


Also - on the knowledge front, I find the lack of interest and knowledge about pensions (DC, DB or RRSP) pitiful. Over 98% of co-workers that I talk to about pensions don't want to talk about it.

Several companies I have worked for provided sessions, only a handful of people showed up. I tried to explain parts to co-workers and they weren't interested. 

One woman's comment was:


> It's too complicated. If I don't have enough money when I've retired, I'll go be a bag lady on Yonge Street.


So if it isn't being provided, that's bad but at the same time, just because it's provided does not mean it will be well attended or used.


Cheers


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## brocko (Apr 20, 2009)

It all transfers over to my spouse at 100% as she is the beneficiary and then upon her death the remaining funds go to the estate to be taxed accordingly.

In one medium sized manufacturing company that I had as a client when I was working the management provided excellent employee benefits which included a group rrsp. A number of the employee's despite advice from management used the rrsp as an ATM with little thought to the future.

The vast majority of small to medium sized employers that I dealt with either were unable financially or unwilling as a matter of principle to provide a pension savings vehicle.


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## Eclectic12 (Oct 20, 2010)

sags said:


> Since companies would rather fashion a DC pension plan, to the expense of a DB pension plan, I think the "company match" for the average person would never be high enough to acquire a great deal of wealth.
> 
> If wealth was to be acquired, it would be mostly the employee's money.
> 
> From what I have read, the company match contributions are capped at a fairly low level.


Then too - there is the combined contribution rate.

As part of a merger, I went to a presentation comparing the "pre-merger" DB plan that some could choose to stay in and the "post-merger" DC plan. Both had employee/employer contributions but when the numbers were analysed, for the same salary the DB plan was putting away 7% and the DC plan was putting away 4%.

So not only would a switch benefit the company by predictable costs/risks, it also cut the dollar amount required.


I stopped worrying about it when I reached the slide that indicated for my position's level, the choice was stay in the DB plan or have no pension at all.


Cheers


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## Eclectic12 (Oct 20, 2010)

Daniel A. said:


> The company paid for my pension no contribution by me.
> All studies to date have made it clear that DB is far superior to DC.
> 
> In a DC plan you pay the administration fee's and are limited to what funds the management company has.
> ...


Ah - but the options for funds in a DC plan is another risk.

The range of funds may not be what the management company offers but what the employee's company has contracted for. One DC plan where I worked, the range of choice was four mutual funds. If I recall correctly, it was one Money Market, one Canadian equity, one bond and on US equity.
I don't think I have the details any more but as I recall, the management company offered far more than the DC plan.

For that particular DC plan, I'd have rather the company contributed to a self-directed LIRA where there would be more choice.


Cheers


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## Square Root (Jan 30, 2010)

mind_business said:


> Square Root, I too am trying to sock away as much cash as I can in non-registered investments. We started getting serious about saving once our mortgage was paid off last summer. We should be saving approx $41600 total in 2012.
> 
> With the lack of confidence I have in both our Government Pensions and company Pensions, we need to ensure we at least have some backup investments just in case. If the Pensions turn out to be safe, then we should have a nice retirement
> 
> I think I read at some point that your dividends were paying you a large 6 figure income. How did you manage that? Lucky with an investment, or just a very large household income prior to retirement, with a high savings rate?


Made a very high income(7 figures) that was mostly company stock related. Borrowed money to buy shares while working. Always fully invested in conservative dividend paying stock. Lived below my means prior to retirement.


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## Eclectic12 (Oct 20, 2010)

atrp2biz said:


> It really depends. The company I work for contributes 10% of your salary into a DC plan, which I think is fairly generous. This is straight-up...no matching required. I also like the control - I pick the funds.


IMO, it depends on the "contributes" part.

One of the two DC plans that the company I worked for put in 3% of your salary and the company put in 2%, for a total of 5%. There was an optional part to add more of your own salary to bump up the percentages.


Cheers


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## atrp2biz (Sep 22, 2010)

To clarify, the DC contribution from the company is over and above the salary (no deduction from salary). If an employee wants to contribute, it can be done through a group RRSP. I prefer a self-directed RRSP, so I don't bother with this.


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## Daniel A. (Mar 20, 2011)

I do understand your point with that but mine was the same DB no contribution from me.
Also realize that at some point another poster will come back and point out that it makes no difference where the money comes from at the end of the day it still comes down to a cost of having the employee. Benefits always have a value placed on them.


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## donaldmc (Feb 27, 2012)

Wow..That's great. So nice that i found this great forum here, thanks a lot for such a great info.


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