Defined Benefit Pension Plans are a thing of the past

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 Recently I was working on the annual contributor report for a Defined Benefit Pension Plan (DBPP). While the corporate world has traded these in favour of Defined Contribution Pension Plans (DCPP) to no longer deal with the headache and liability, there are many reasons why employees should consider converting as well.

Let’s say your DBPP is 2% per year of your average best 5 years to a maximum of 35 years.  At the simplest level, if you worked for 35 years and your average best 5 was $100,000 per year, you might see a $70,000 per year pension.


But with most plans, when you die your spouse receives 50%, and when they die your adult children get zero. Also, if you married after you started drawing your pension, your spouse gets zero let alone your children or grandchildren.  


Now consider Defined Contribution Plans where your employer matches you 1:1 of 9% and 9% of your wages similar to a Defined Benefit Plan contribution rate, and it all goes into your Registered Retirement Savings Plan (RRSP in Canada). If you die, your spouse get it all even if married at a later time, if they die your children get it all, and if they die, your grandchildren will inherit the balance.


If you think you receive a medical plan with your pension I have two true stories for you: a retired USA teacher who has to pay for their medical plan, and the premiums are more than what is available outside the plan; a Canadian pensioner whose plan cut all extended medical benefits due to budget issues. For those who do have a Defined Benefit Pension Plan in Canada, you do not get much more than what publicly funded medical gives you. For the USA residents, you receive Medicare when you draw Social Security.


Can it get worse? Sure. How about the plan where the 2% per year will be penalized 5% per year for every year you are short the 35 years service? If you had 30 years service you would not get 60% (2%X30) you would lose 25% of that (5X25%) due to not achieving 35 years. Another scenario is you lose 5% per year for every year you are short from age 55; If you had 30 years but started at age 20 therefore you are 50, you could lose 25% for not achieving 35 years, and another 25% for not reaching age 55. In this scenario where you thought you were getting 60% of your salary (30 years X 2%) you could be getting half of that. If you think I am mistaken, do your homework and note not all plans work as I have described. 


Now imagine you work in an industry where some companies are in Defined Benefit Plans where others are not, and you move around as part of your advancement. You now have a mixed bag of pension funds some of which may be so watered down due to age and years of service penalties, you and your employer’s contribution has just become a donation. If you were on match to RRSP, you would lose nothing. 


Can it get worse? Yes it can. With most plans once the employer enters into it, everyone must participate. For those of us who do not want to be in a Defined Benefit Pension Plan, our employment opportunity window is narrowed unless we want to make the donation. At 57 years old and managing my own affairs, when I took a job for three years to bring me to retirement, the 18% match has just been a donation to the pension fund.


Know the plans including asking the questions at interview time, know your options, and choose wisely.

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