Defined Benefit Pensions On The Chop Block?

I came across this article the other day in regards to cost cutting in the next federal budget.  While a 5 to 10% cut in department spending is a noticeable drop, what caught my eye was the discussion around government worker pension plans.  Why would that stand out for me?

Perhaps of some stats (from The Taxpayer, Fall 2011) that I came across over the holidays on pension plans in Canada for the public and private sectors.

Employees with Workplace Pension Plans

Government Workers
1977 – 75.5%, 2009 – 86.2% for a +10.7% increase

Private Sector Workers
1977 -35.2%, 2009 – 25.3% for a -9.9% decrease

It gets worse when you look at who has defined benefit pension plans.

Employees with Defined Benefit Pension Plans

Government Workers
1977 – 74.8%, 2009 – 81.0% for a +6.2% increase

Private Sector Workers
1977 -31.4%, 2009 – 14.2% for a -17.2% decrease

Holy, S*&$! 81% of government workers have defined benefit pension plan while less than 18% have one in the private sector.  Talk about the classic 80/20 split. That isn’t great for a lot of retirements, but what is more concerning is the huge liability the government keeps growing for having those type of pension plans.

I should know. I work at a crown corporation that got rid of defined benefit plans for new workers about 20 years ago.  Which is precisely what the government has to be thinking about in the long term with this.  By shifting plans for new workers you can then contain the cost to the taxpayer…ie me and you.  Not to mention on an early retirement perspective, you really don’t want to be tied to a given employer for the next 20 years.  I rather have the cash and be able to leave when I like.

Of course this is hardly just a federal problem, all levels of government have similar cost issues and pension issues.  I know there was discussion on my local city council in the last year with regards to not wanting to raise taxes purely to fund pension plans.  You can bet that went over like a lead balloon with the unions involved.

So overall, I can see the next few years being very hard on defined benefit pension plans as struggling governments at all levels take a hard look at those increasing costs and shrinking revenues.

What is your thoughts for the future on defined benefit plans?  Keep them, cut them or do you wish you had one?

11 thoughts on “Defined Benefit Pensions On The Chop Block?”

  1. I have one so these types of conversations scare me. I understand the issues with keeping them running but if they decide to take them away there is going to be mass chaos for those who no longer have the income coming in. We save in addition to our pension so we could make do if we needed to but the bonus is nice.

  2. I shoulda gone to work for the government! Defined pensions ‘have to’ go the way of the dodo bird..

  3. Everyone, who has an once of brains understands that it is up to each individual person, to do the best they can, to prepare for that period in their lives when they will, NOT, be working. It is each persons responsibility. Do not depend on anyone else, except maybe your marital partner, to help you out.

  4. So, Dave, we don’t have a community to help? Is all one’s success truly the result of their own personal efforts? Better close down those libraries, hospitals, schools, Medicare, etc… Ayn Rand llaissez faire capitalism in the type we seem to practise here in Canada.. and I do have a few ounces of brains 🙂

  5. I worked at a university with a defined benefit pension plan that was under-funded. I wasn’t personally part of the plan, but I think the deductions went up to over 13% on the employee side to cover the under-funding.

    Here’s some data on the UAPP unfunded liability:
    “As of December 31, 2010, the actuarial value of net assets was $2,427 million and the accrued pension liability was estimated at $3,550 million.”

    1/3 shortfall is pretty bad and Dec. 2010 wasn’t even a bad period market-wise. I’d like to see how it looked in September of 2011.

    So yes – I’d like a DB plan. 😉 No, I’m not likely to ever get one and I wouldn’t even want to work in most places where they have them – once was enough. And yes, I’ll be fine with my own RRSP maxing plan + TFSA’s plus my DC plan which I’ve moved over into a self-directed LIRA.

    I sort of don’t get it though. Everyone I personally know (apart from one ex-RCMP that’s about 65) that has one of these pensions is working full or part-time after “retiring”. Not sure how common that is or if it’s just my circle.

  6. All hail the defined benefit plan….:)

    My husband has a super stressful job with the provincial government and is very underpaid for what he does…so why stay? it is that pension plan and we hope to start collecting next year when he finally hits the magic number and his pension is no longer reduced. He has looked into changing jobs for the big money, but after all the calculations the retirement plan works for us. We have done a fair bit of saving and own our house and 2 vehicles…we are not totally relying on this plan (which has lost medical benefits, dental benefits and more in the past years and may soon no longer be indexed)
    In a few months i get to start collecting a very small pension from an old that, combined with hubby’s pension, the related annuity, the bridging benefit….we will be fine without touching any of our savings….that is for travel…and more.

    And, about working after retiring with a pension…TONS of people we know do it…there is no incentive to continue to work after your magic number–the rates go up very slowly. So retire, get re-hired at a lower and way less stressful position and get very well rewarded!!

  7. Or just force corporations to have defined benefit pensions for all employees…

    I suppose there wouldnt be anywhere to work in this country after that though….

    Hmm real catch 22 there 😉

  8. First, and most frustrating to me is the fact that in the 90’s the Federal Government took a surplus which exceeds the current shortfall from these same pensions to pay down their deficit. All fine so long as there were a plan to pay it back. There isn’t, which is why several public service unions are currently suing the Government for their action and inaction on this. Now that this asset is not so healthy they are crying fowl, not so fast.

    Second, I work in the Federal Government with such a plan. I am a skilled and highly educated professional. My classification of work would fetch 40-45% greater salary than I am currently paid for. I began working here and continue to do so because the benefits have a cash value of 20% of my salary and the security of employment + work life balance provide what I feel is worth the net.

    I am simply insulted by the ignorant attitudes towards that which I chose to invest in.

    So yes Funk, you should have sought employment with a group with such a plan. You had that opportunity but you didn’t, now you simply want to pint the finger? I say again, not so fast. See my first point in the above for a bit of humble crumble reality pie and a sip of what you actually owe to such groups.

  9. See Mike, it’s that sense of entitlement (and implied sacrifice) that irks many private sector employees/workers/employers, if you wanted to gain a greater pay structure you could take more risk, have less work/life balance, and MUCH LESS security.

    In our ‘current system’ there’s only so much money to go around, but if we were willing to change there might be a greater panacea at the end of another rainbow (read Web of Debt for insight to what the ‘real problem’ is).

  10. I am a memeber of a DB plan… but I barely factor it in as part of my ER strategy. I save and invest every month as though I will receive ZERO pension money in retirement… probably an unlikely scenario, but I am a bit of an “assmume the worst will happen” type of person.

  11. @Mike: unfortunately there are many government employees who are not highly skilled/educated (admin, call centers, etc.) that benefit both from higher pay in the public sector and a DB plan.

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