No. The pension administrators have a “CPP offset formula” that they use to estimate your CPP during the time you were in that pension plan.

Most pensions offer you a choice when you retire of taking a flat pension or an integrated pension (if you retire before age 65). For example, if you retire at 55, you may have a choice of taking $25,000/year flat for life, or taking $30,000/year from age 55-64 and then it drops to $20,000/year from then on as your CPP of $10,000 kicks in.

If you take the flat pension, then your income will actually be higher at age 65. This may make sense if you are still working part time, for example.

Many people take the integrated pension to give themselves more travel/spending money the first few years. Then they also elect to take CPP early at age 60. Their pension will then drop by about $10,000 at age 65, but OAS still kicks in at about $6,000, so their income drop at 65 is not much.

Ed

So, do you have to annually submit any documentation to the ‘trustee’ administering your DBP detailing how much CPP you received? Or do they simply ask for a statement of contributions to coordinate the benefits?

Yes, most public sector DBP’s are integrated with the CPP. The actual pension is benefit you calculate from the formula less an estimate for CPP.

For example, if your formula is 2%/year x the average of your best 5 years x 30 years in the pension, you would expect to get 60% of the your salary for the 3rd year before retirement. However, that is what you would get from BOTH your pension and CPP.

Ed

Is that correct?

One is the risk of uncertain investment performance (let’s call it market risk), leading to uncertain level and duration of payout for retirement. This is a continuous risk – you expect it to vary with a bell curve like shape (possibly with fatter tails). In a DC scheme, the retiree bears all of this risk. In a DB scheme, the employer bears the bulk of this risk, though as mentioned above, if the whole plan gets too much out of whack, contributions may need to be adjusted.

The second is the catastrophic risk of an event wiping out (or significantly devaluing) the pension. This is a form of counterparty risk. In a DC plan with reasonable asset allocation, this is only the risk of a complete financial system failure – possible, but unlikely, and its impact is somewhat under the control over the retiree by what they do. In a DB plan, the retiree is significantly exposed to the risk of collapse of his/her employer and devaluation of the pension.

So in DC, recipient has lots of market risk but minimal counterparty risk. Employer has none of either, so prefers it. In DB, employer bears the bulk of the market risk, but recipient has a ton of counterparty risk – financial health of the employer.

The main benefit of DC plans that I see is that if you manage your withdrawals carefully, you could leave a nice inheritance to your heirs. With DB plans however once you are gone, your pension is gone as well

The bias towards those retiring is precisely one of the main reasons I’m hesitant to believe in DB plans – contribution rates have been leaping ahead for younger workers in order to fund the people retiring now.

@GTP – interesting case example. I wonder if this scenario (of the DC employee working longer to make up the difference) is common. Since I’m on a DB, perhaps we’ll just have one spouse in each type of pension plan and take the average.

you are correct about solvency company and impact on DC vs DB plan. there’s no impact on DC other than maybe future contributions. for DB there is some risk you won’t get all of your retirement benefit. the guarantee funds will kick in at this point, however i think they are biased to protect people already retired over those still working toward retirement.

Also, I really like how my current pension plan is set up:
0-10 years working: DC-Employee 4% salary, Employer 10% Salary
10 years to retirement: DC Employer 4%, DB 1.5% x Salary

The choice of plans was completely removed, but I think this is a great way to give the benefits of both plans and mitigate the risks discussed about both plans…

My wife’s company offers both – and employees select which to enroll into. They have one opportunity while at the company to switch – my wife’s will be in 2 years I believe.

As a DIY’er – I’m sorta pro defined contribution – we can hopefully build balanced (in our eyes) portfolios. However, I think it’d take some kind of growth (in the DCP) to get 70% of her final year’s income.

On the otherhand – if she doesn’t stay with the company long enough to get 50-70% – then I believe the DCP might be better.

You provided some great information and good points.

However, I don’t see that a DCP is related to a DBP in terms of risk to the plan holder. From what I understand, when a company allows you to contribute to your DCP (with possible supplementation by the company, e.g matching contributions) for all intents and purposes that money is yours as it is held “in trust” by another firm. If there is a vesting period, then that comes into play, but my feeling is that the solvency of the company does not affect the DCP holdings. (Excuse me if I’m using the wrong financial/legal terms.)

Now, if the company is faltering they may decide to reduce or stop matching contributions which may be where you were heading.

I wish our company was using low MER funds – our choices are limited and for the most part seem to be copies of other funds – with the commensurate and additional management fees by our investment provider, Standard Life.

FT – when designing a DB pension plan, the employer has the option of deciding which forms of benefit to offer. These are usually determined on an actuarially equivalent basis. I think most jurisdictions require the minimum to be Joint & Survivor 60%. That is once you die your spouse will continue receiving 60% of your benefit. This seems fair since your family will have roughly half the expenditures cut from their retirement expenses when you pass on. What may not be fair is when your employer does not off the J&S 60% as the normal form of payment, and you have to take a reduction in your pension to receive the legislated form of payment.

Scott – you will receive the same retirement income regardless of market performance, but you and the employer both have an obligation to contributing to your pension to get you there. As a taxpayer it is unfair for us to pick up your pension deficit without you having to contribute a dime. It is up to individual employers to determine whether or not their employees should share in the cost.

AndrewP – this is a perception that many DC plan members have. It seems really generous that the company would just double up your money, but in fact this is a lot less generous than a DB plan where the employer will put in everything, bear the investment risk, bear the inflation risk, bear the mortality risk….and you would put in nothing.

Its a very interesting time to be a pension consultant right now….

i think all registered pension plans are covered by the pension benefit guarantee fund. there such things as non-registered plans, but these are usually top-up plans for senior executives and are not really to be compared with RRSP, DCP.