Pension primer: any pension is great, but a defined-benefit pension is the gold standard

Pension primer: any pension is great, but a defined-benefit pension is the gold standard


Workers need pensions! It’s important to understand the types of pensions for organizing, bargaining, and arranging your personal financial health. This post is a quick intro to Defined Benefit and Defined Contribution pension plans from the Pension & Benefits Unit.

A pension is a form of retirement plan designed to provide financial support and income for individuals during retirement. It is a fund into which amounts are paid regularly during your working career, are invested and upon retirement, payments are made (typically monthly) to support you in retirement.

There are two main types of pensions: Defined Benefit and Defined Contribution.

Defined Benefit Plans (DB)

  • In a defined benefit plan, the retirement benefit is predetermined and is usually calculated based on a formula that will often include things such as the employee’s salary and years of service.
  • The pension that is payable is guaranteed for life, aims to replace a significant portion of an employee’s pre-retirement income, and often has survivor benefits available. This eliminates the risk of outliving your retirement savings.
  • Most often, both employees and employers contribute to the plan; by law employers must contribute at least 50% of the contributions.
  • While the benefits are predetermined and guaranteed, the contribution rates may vary.
  • The investment risk and responsibility for ensuring there are enough funds to meet pension obligations are borne by the plan sponsors. The plan sponsors will hire investment professionals to manage the funds; an employee doesn’t have any responsibility in managing the funds.

Defined Contribution Plans (DC)

  • Most often the employer and employee contribute a specified amount of funds to the employee’s individual account; by law the employer must contribute at least 50% of the contributions to the fund.
  • While the retirement benefits are not predetermined, the contribution rates.
  • The benefit at retirement depends on the total amount contributed to the account, the investment returns, and how the individual manages their account over time.
  • Employees are fully responsible for how funds are invested and bear all the investment risk in a DC plan.
  • The value of the retirement account can fluctuate based on market performance, which means the eventual benefit may vary depending on the investment choices made by the employee.
  • Gender/sex impacts the amount of pension received in retirement; women will be paid less monthly because they are predicted to live longer than men.
  • Date of retirement can impact the amount one receives in retirement; changes in interest rates and portfolio performance can adversely impact the assets in your account requiring you to work longer than anticipated and ultimately impacting your retirement date.
  • People can outlive their pension savings.

Why Are DB Plans Considered the Gold Standard of Pensions Plans?

DB plans have long been understood to be the gold standard in pension plans. As life expectancy increases, providing Canadians with a retirement solution that ensures financial security is of the utmost importance. A defined benefit plan provides a specific retirement benefit based on a predetermined formula, with the risk being pooled amongst everyone participating in the plan. The benefit of a known retirement income makes planning for retirement significantly easier. In addition to fixed annual pension payments, a DB plan may provide additional plan features like cost-of-living adjustments (guaranteed or conditional) to ensure that the value of your pension, disability benefits, and survivor benefits, where a pension will be paid to your spouse after your death, providing piece of mind knowing that your loved ones will be taken care of after you have passed on.  By its very nature, a DB plan encourages long-term planning and helps prevent retirees from outliving their savings.  These plans typically provide more equal benefits across the workforce, promoting social equality among employees. They are especially advantageous for low and middle-income earners who may not have the means to save substantial amounts in a DC plan.

Ultimately, having any pension plan is great. It means you will have some income to mitigate your expenses into retirement. However, if the opportunity presents itself to bargain for a pension plan or for pension plan improvements both OPTrust and CAAT Pension Plan offer lower cost alternatives that provide DB benefits but at costs that are more like DC plans; in addition, the risk to the employer is often the same as a DC plan. For more information visit the CAAT Pension Plan website Pension solutions – CAAT Pension or the OPTrust select website OPTrust Select.

If you already have a DB pension plan, we encourage you to learn more about it. For information on the major Ontario pension plans that many OPSEU/SEFPO members are a part of, visit these links:

If you aren’t sure if you have a pension, or what type of pension it is, ask your employer and/or your colleagues.

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