What is a Pension Adjustment (PA)?

Whether you’re a member of a defined benefit (DB) or defined contribution (DC) pension plan, you’ll receive a pension adjustment (PA) each year. It’s important to understand what a PA is because it affects the maximum amount you can contribute to your RRSP each year. Let’s explore the PA, how it affects RRSP room and how it’s calculated.

If you are a member of a Registered Pension Plan (RPP) or a Deferred Profit Sharing Plan (DPSP) your PA amount will appear in Box 52 of your T-4 slip. The PA is the value assigned by Canada Revenue Agency (CRA) to your accrued pension in a year. It is an estimation of the value of your pension.

The PA was introduced by CRA to create a level playing field for employees saving for retirement by reducing the RRSP contribution limit for employees with RPPs. Your PA from the previous year is used to reduce your RRSP contribution limit for the current year. For example, your PA from 2010 is used to lower your RRSP contribution limit for 2011.

How Do I Calculate my PA?

Calculating your PA is different depending on whether you have a DC or DB pension.

If you have a DC pension, calculating your PA is rather simple: it’s the sum of the employer and employee contributions to the plan. For example, if you contribute 2% of your earnings on a yearly salary of \$40,000 (\$800 = 2% x \$40,000) and your employer matches that (\$800), then your PA for the year will be \$1,600 (\$800 + \$800).

If you have a DB pension there is a formula for calculating your PA:

(9 x annual accrued benefit) – 600

The annual accrued benefit depends on the formula of your pension plan. For example, if your plan has an accrual rate of 2%, and you have a yearly salary of \$50,000, then your PA would be: [9 x (\$50,000 x 2%)] – 600 = 8,400.

How did CRA come up with this formula for DB plans? The formula assumes that every DB plan offers employees a generous 2% benefit. This isn’t always the case, which is why the Pension Adjustment Reversal (PAR) was introduced.

What is a Pension Adjustment Reversal (PAR)?

If you terminate your employment during a year, you may receive a PAR.  A PAR restores the lost RRSP contribution room that the PA has taken away in past years.

Whether you receive a PAR depends on a number of factors. For non-vested members, you will receive a PAR if a PA has been reported on your T4 slip. For vested employees a PAR is calculated in the following way: Total PAs – Commuted Value = PAR.

For example, if the sum of your PAs from 2007 to 2010 was \$12,000 and your Commuted Value was \$10,000, then your PAR would be: \$12,000 – \$10,000 = \$2,000. \$2,000 would be restored to your RRSP contribution room for the following year.

Final Thoughts

Understanding the PA is important if you have an employer-sponsored pension plan, as you’ll need to know how much it reduces your RRSP contribution room each year. The easiest way to do that is to file your income tax and find out from your notice of assessment how much you can contribute to your RRSP. With good tax planning you can still maximize your RRSP without over contributing, you just have to be careful.

About the Author: Sean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University.

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About the author: Sean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University. You can read some of his other articles here.

• lewin September 28, 2011, 10:17 am

Is the PA related in any way to the accrued value of a DB pension? That is, let’s say my T4 lists RSP contributions of \$4000 and a pension adjustment of \$8000. Can I assume that the value of my pension went up by \$12,000 last year? I know it’s tricky with DB benefits, but I’m just looking for a rough number so I have some idea of what that’s worth relative to our other investments.

• Alex C September 28, 2011, 12:09 pm

So if my 2011 RRSP contribution limit is 4000. And I start my employers pension plan in May of 2011 which will, between my contributions and match, contribute 3000 up to the end of 2011. Does this leave me with 1000 of personal contribution for 2011 or is the 3000 simply deducted from next year and I have the full 4000 in personal room for 2011?

It seems it could work both ways and still make sense.

Thanks.

• Sean Cooper September 29, 2011, 12:47 am

Lewin – Yes, the accrued value is a component of the formula of how your PA is calculated (see above). Calculating the value of your DB pension is tricky – it involves a lot more than the PA. The commuted value might be listed on your annual statement, otherwise it’s a good idea to speak with your pension administrator.

Alex C – Your 2011 PA applies for your RRSP contribution limit in 2012 (not 2011), since you file your income tax in that year.

• FrugalTrader September 29, 2011, 9:45 am

@lewin, I would wait for the DB statements to determine the DB value.

• Lewin September 29, 2011, 1:23 pm

Thanks for the replies, Sean and FT. Although I said “my” pension it’s actually my wife’s and it’s like pulling teeth to get her to retrieve paperwork from work. She doesn’t care much about tracking this stuff whereas I’m kind of anal about it. I’ll see if she can get a statement…

• SPBrunner September 30, 2011, 5:39 pm

I had pension plans of the Defined Benefit and the Defined Contributions type and I must say that I liked the DC better. If you do not work for the company with the DB plan to retirement, you get the present value of future benefits and, depending on what interest rate they used, you can get a lot less than you would have expected. With the DC type, you know what you will get because you have an account and you get what is in the account.

I know others do not prefer this as they feel that they take the risks and have to make the investment decision, but my experience is that if you leave before retirement the DC seems to provide you with more money.

• mode3sour October 1, 2011, 6:42 pm

Nice post. I don’t get any sort of DB statements so I do use the PA as an indication of its value

• Mike March 14, 2014, 2:14 pm

Can I cash out my pension adjustment on line 206??

• Mike March 14, 2014, 2:15 pm

Can I cash out my pension adjustment on line 206?

• Rich February 18, 2015, 10:53 am

Question: Looks like next year my PA will be larger than my RRSP room… what then? Basically no RRSP contributions going forward?

• jack ellefson August 17, 2016, 12:45 am

Pension adjustment exists because members of defined benefit pension plans do not annually contribute half the yearly contributions to build their pension plan.(The employer often contributes two thirds of the annual contribution) .Thus a DB plan member can contribute approximately one sixth of the annual allowed contribution to an RRSP and receive a tax deduction to match the 50% deduction DC plan members receive.