Understanding
your employer pension plan
The two main types of employer pension plans include:
·
Defined benefit pension plan (DBP)
·
Defined contribution pension plan (DCP)
The following table below compares the two.
Characteristics
|
Defined contribution pension plan (DCP)
|
Defined benefit pension plan (DBP)
|
What is it?
|
·
DCPs are a form of savings for retirement
where you and your employer contribute an established amount to your pension
each year.
·
Your contribution is usually a percentage
of your pay.
·
The value of the pension is based on the
performance of the investments.
·
Amount of the pension is uncertain.
|
·
DBPs are an agreement where the employer
promises to pay a certain amount of money each year after retirement.
·
Employees often but do not always make
contributions in addition to their employer’s contribution.
·
How much you receive depends on a formula,
generally based on your income and years worked.
|
How is it managed?
|
·
Generally, you have
to choose how your contributions are invested.
·
Consider the level of risk and time frame
when making investment choices.
|
·
Your contributions are pooled into a
retirement fund and managed by your employer or pension plan
administrator/sponsor.
·
Investment results affect the amount of the
employer’s contributions.
|
Advantages
|
·
You have more control.
·
You can invest in a way that suits your
goals and risk tolerance. A financial professional can help you understand the risks of
various investments.
·
You have the possibility of benefiting from
higher returns if your investments perform well.
|
·
The amount of your pension is set primarily
on a set formula often based on your career earnings and years of service and
is therefore generally less sensitive to annual returns in the stock market.
·
Funds are professionally managed and you
are not required to make any additional investment decisions.
·
Your investment risks are pooled across
time and different individuals, so that investments have time to recover from
really bad years and/or benefit from years with really good returns.
|
Disadvantages
|
·
The amount of retirement income is not
guaranteed. If your investments do not perform well, you have to deal with it
yourself. It could be affected by the ups and downs of the stock market.
·
Some people are not comfortable managing
their own retirement fund or investments.
·
Because of the limited advice available,
obtaining separate financial advice may involve additional costs.
·
You may not be able to invest exactly the
way you want as the employer may offer only a limited number of investment
options within the plan.
|
·
The risk that the fund is not managed properly
or that your employer experiences financial troubles or even bankruptcy can
affect the amount of your pension.
·
You are not able to directly benefit from
high stock market returns. These are passed along to all members in various
ways (often in terms of lower contributions or increased benefits).
|
Both DCPs and DBPs have advantages and disadvantages, but
ultimately you won’t have a choice over which type of pension plan your
employer has in place. What’s most important is that you fully
understand how your pension plan works.
Your pension will likely be a cornerstone of your retirement
income, so if you don’t know how your pension works, be sure to speak to your
human resources staff member, union representative or pension plan manager to
find out.
Group
Registered Retirement Savings Plan (Group RRSP)
A Group RRSP is
an employer-sponsored retirement savings plan, similar to an individual RRSP,
but administered as a group by your employer. Your contributions are made
through regular pay-roll deductions on a pre-tax basis.
While Group
RRSPs function similar to individual RRSPs, the details of the plan often vary
by the employer. For more detailed information on your Group RRSP, consult your
human resources, union, or pension plan representative.
Pooled
Registered Pension Plan (PRPP)
Pooled
registered pension plans (PRPPs) are a new type of pension plan to help
Canadians save for retirement. PRPPs are designed mainly for people who do not
have access to a workplace pension, such as employees of small-sized and
medium-sized businesses, and self-employed individuals.
The federal Pooled Registered Pension Plans Act (the federal PRPP Act) and the Pooled Registered Pension Plans Regulations (the Regulations) came into force on
December 14, 2012.
How do PRPPs work?
PRPPs are defined contribution (DC) pension plans. In a DC plan,
you and your employer contribute a certain amount to your pension each year. In
the case of PRPPs, employer contributions are optional. DC plans do not
guarantee how much you will receive when you retire. Your pension income
depends on how well the investments held in your DC plan perform.
Employer participation in PRPPs is voluntary. To set up a PRPP, an
employer must enter into a contract with a PRPP administrator. PRPPs are
administered by licensed third parties such as banks or insurance companies,
not employers.
Once an employer enters into a contract, employees are automatically
be enrolled as members unless an employee chooses to opt out. Members’
contributions to the pension plan will be made through deductions from their
pay.
Who can join a PRPP under the federal PRPP Act and Regulations?
You can join a PRPP offered by your employer if:
·
you are employed in a federally
regulated business or industry (such as banks,
telecommunications companies, interprovincial transportation sectors, etc.)
anywhere in Canada and your employer offers PRPPs
·
you are employed in any type of work in the Yukon, the Northwest
Territories or Nunavut.
You can join a PRPP on your own if:
·
you are employed in any type of work in the Yukon, the Northwest
Territories or Nunavut and your employer does not offer PRPPs
·
you are self-employed in the Yukon, the Northwest Territories or
Nunavut.
Note: The availability of PRPPs for provincially
regulated employers, employees and self-employed individuals will depend on
provincial government decisions on whether to put in place similar provincial
legislation.
Provinces
Quebec: Voluntary Retirement Savings Plans
In 2013 the Quebec Government introduced the Voluntary Retirement
Savings Plans Act for employers with businesses in Quebec – Voluntary
Retirement Savings Plans (VRSPs) are Quebec’s version of PRPPs.
VRSPs and PRPPs are similar in many ways. However, one of
the main differences is that employers with businesses in Quebec with more than
five employees must offer their employees a VRSP, a Tax-Free Savings Account,
or another retirement savings plan, however, employees have the right to
opt-out.
For more information on VRSPs visit the VRSP section of the Régie des rentes du Québec website and for more detailed
information on eligibility see section 45 of the Voluntary Retirement Savings Plan Act.
More key facts about
PRPPs
·
PRPPs must be low-cost. This means that the costs charged to plan
members must be at or below those charged to members of defined contribution
pension plans that provide investment options to groups of 500 or more members.
·
Costs include all fees, levies or other charges that reduce a
member’s return on investment, other than those triggered by the actions of a
member, such as requesting copies of documents.
·
Under the federal PRPP Act, the Office of the Superintendent of Financial Institutions issues licenses for administrators to
offer PRPPs.
A
few things to keep in mind about employer pension plans
If you have a defined contribution pension plan, contributing at
least the amount your employer will match will enable you to fully benefit from
your employer’s contributions.
Many people switch jobs and careers throughout their working
lives, which means many people might have two or more smaller pensions from
different employers.
If this is the case for you, be sure to investigate what’s best
for you. Are you able to transfer your old pension to your new plan? Talk to a financial professional or your human resource advisor to
better understand your options.
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