Endangered Species: Defined Benefit Pensions

So another defined benefit pension plan officially kicked the bucket just recently.  Air Canada’s pilots have agreed to switch any new employees over to a defined contribution plan (ie: shift the risk from the employer to the employee for market returns).  While this would be interesting if it were a unique problem, but it isn’t.  For example, the City of Regina’s pension plan currently facing a $238 million shortfall and was recently denied a request to raise rates to 14% (each, 14% employee and 14% employer for a total of 28% – YIKES).  So you have to wonder what solution will happen there?

In general there are several defined benefit pension plans that are facing some serious problems because a combination of factors.  Some of the more common factors are:

  1. Poor Investment Returns – 2008 knocked around a lot of plans, just when they needed to start paying out to more retirees.
  2. Poor Retiree to Worker Ratios – With the boomers now leaving the workforce and the pressure almost everywhere to rein in spending is resulting in a higher number of retirees compared to current workers.  What is also pushing this ratio down is the fact retirees are living longer.
  3. Too Generous Perks – While the core of these plans might have been sustainable often they were adjusted over the years to slowly turn them unsustainable.  Some common examples include allowing overtime pay to count towards the pension or a bridging benefit for early retirees to make up what they will collect in CPP.

This isn’t to say all plans are screwed, but the pressure is growing to either shut them down or adjust the bad plans to make them sustainable over the long haul.  Also depending on what sector you work in they are getting hard to find, while public sector often still has them, the private sector is turning a defined benefit plans into an endangered species.  For example, in my career I’ve only ever had one employer in the private sector offer a defined benefit plan.  I currently work for a Crown corporation (which is almost public sector) and even it doesn’t offer a defined benefit plan anymore and hasn’t for decades.

So perhaps the lesson for today is don’t get too dependent on your defined benefit pension plan with your retirement planning (especially if you are in the private sector).  While the plan is a good place to start and you will likely get most of your benefits you would be wise to have some of your own savings around if your spending projects are very close to the amount you expect to get out of the plan.  For example, if you plan to spend about $3000/month in retirement and you are planning on getting $2800 of that from your pension plan you might want to consider a backup plan like not depending on your CPP or OAS income so that can back fill your pension if it gets a cut back.  While that scenario might have been a remote one previously, now a days it is starting to look a little bit more likely.

Do you have a defined benefit pension plan?  If so, are you worried about it being able to provide for you?


9 thoughts on “Endangered Species: Defined Benefit Pensions”

  1. Mrs SPF and I work for the ON government. After 2008 our plan OPTrust got approval for a 6% hike to our pension contributions. This hike essentially eliminated our bargained cost of living / inflation “raises” (1.5% isn’t really keeping up with inflation but it was better than getting nothing) so now our real salaries are falling behind inflation.

    We do rely on our pensions – we sort of have to. With almost $7000 of my income being added to the pension each year that is money I can’t invest elsewhere. We do contribute to our TFSAs and hope to max those out soon, and if we have left over money we eye our RRSPs strategically (more to get us below certain tax brackets than anything).

    Thing is, I am 23 years from retirement. I have no idea if the plan will still be there so we keep investing and hoping the money we slug into the plan works out long term.

    Now, all of this being said I think the financial people at the plan should all be canned. Why? Well, i’m hardly and expert – I prefer index investing – but my portfolio has rebounded from 2008. Why can’t these overpaid suits have similar success? Why are they taking more money from us when I just can’t see how badly they must have invested to have not caught back up now that the markets are healthy. Has me confused to no end and their responses to my inquires are nonsense.

  2. In 2001, my company (USA) froze its pension for younger employees while maintaining the pension for older ones if they had enough years of service already. For new hires, there was no pension, only a profit sharing and cash-balance plan (and its existing 401(k) plan with a company match). A cash-balance plan, for those of you unfamiliar with it, is a hybrid of a defined benefit and defined contribution plan. This was used in place of extending the pension for us younger employees and for new hires.

    However, the additional amount I am entitled to under this plan is very small compared to what I would have added to my pension had it not been frozen. Furthermore, a few years later the cash balance plan was discontinued for new hires but maintained for existing employees who were not grandfathered under the old pension plan.

    Like most private sector US employees, we have no unions, no contracts, no collective bargaining. The bigwigs realized they could not afford the growing legacy costs (they cut back on retiree medical benefits, too) so they quickly and efficiently did something about it (and without a mass exodus of employees, either). This is why I do not have any sympathy for the US public sector unions who are seeing these benefits reduced or eliminated, too. Welcome to the real world, I say to them.

  3. Deegee, can’t agree with you more!

    And plus we did (I worked for a private Canadian company at that time) have pay cuts of 10-15% too. We can only rely on own discipline to continue saving and investing to achieve what we want.

  4. I have a defined benefit pension where I work (Public Service).

    I think that employee contributions should be augmented so that the plans become sustainable (I am thinking 5-10% increases accross the board).

    Other suggestions:

    – Lessen the impact of defined benefit contributions on RRSP room. I can only contribute a small portion (about 30%) of what I would normally be allowed to put in my RRSP if I did not have any defined benefit pension. What happens if the pension system gets canned? Ooops, no pension and little RRSP !….
    – Cap the maximum payout for public service employees (and other defined benefit pensions) to about 60,000$ per year. There is no reason that public employees should be able to secure 100,000$ pensions. Especially given that the systems consider only the 5 most paying consecutive years.

  5. I’m wondering why there seems to be more and more public servants (politicians) encouraging the private sector to continue working past 65 while in many of their cases, their DB pensions kick in at 55. It seems to encourage pension envy when the public sector DB pensions are backstopped from market losses by tax payers. Alberta Teacher’s Union has a 3 billion dollar DB pension shortfall? No problem, Alberta tax payers will cover that… just promise not to strike for 5 years… in the meantime, statistically many of us that are self employed are working into our 70s to pay for these lavish pensions and benefits. Seems fair to me.

  6. I got hit by this with one of canada’s courier company three years ago.I’m glad I took what they had to offer then.They had a big shortfall.good luck with people wtih defined pensions in the private sector

  7. My husband’s company (US) had a pension plan which he took when he retired but he they no longer offer this to their employees. It is well-funded and we are grateful to have it but we also saved for years to make early retirement possible AND comfortable. We are making plans this summer to sell our too-large house and buy a much smaller one in a co-op community and invest the extra money.

    Once upon a time our health insurance was 100% paid for by the company … now we’ve chosen the plan with $5000 deductibles EACH to keep it affordable. But that is another topic altogehter …

  8. I’m definitely one of the luckey few; I’m in the military (Canadian). Not only do we have a DBP but it kicks in as soon as we retire after 20 or 25 years of service, depending on the plan we signed up under. I could retire right now, at 40, with a $25,000/yr pension… Of course there are certain downfalls to this, one of which is I put my life on the line to defend Queen and Country. In my mind, the pension is just gravy, it’s not why I joined and not why I continue to serve.

    I checked out the financials behind our pension a few months ago and it is running at a very nice surplus, so I think we’re safe for the time coming. We had some very smart people investing our money, which is more than I can say for some of the private corporations that had to cut thier DBPs.

    I count on my pension because it’s all I have to count on… If it goes away I’ll be up $#!ts creek… but I think we’re safe. And while I’m a sailor, and have been known to get drunk on occasion, unlike what Ignetieff is quoting as saying, I don’t spend my money irresponsibly! 😉

  9. I completely agree with Sustainable PF. I am a young public school teacher and so I have really no choice but to fund my retirement through a DPB plan. I am extremely worried that with all the boomers retiring there will be nothing left in the plan when I’m ready to retire. This will coincide with the CPP and OAS also shrinking or disappearing. My ‘experts’ also fail to hit the averages of index investing. I wish every month for a defined contribution plan where I could see the money in my personal account and be able to choose my own investments.

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