Registered Pension Plans (RPP)
Defined Benefit Pension Plans:
These are the very best types of Pension Plans available to employees as they are based on formulas. Unfortunately, there are less and less of these today as employers have shifted the liability away from themselves and onto their employees in order to reduce both their liability as they are responsible for all investments and costs. Based on the formulas, at least every three years an Actuary (exotic number cruncher) must value the plan to ensure the funding status on a go forward basis. During these valuations, the contributions will be set for the next three years, and also the liability, if any, status will be determined
The three types of Defined Benefit Plans are as follows:
Final Average Earnings Plan: Under this type of arrangement, the individual's pension is based upon his length of service and his average earnings for a stated period of time. For example, the individual might receive a pension of 2% of his average earnings for the 5 years just before retirement multiplied by his years of service. An example of this type of formula would be, if he has worked for 35 years and his average last 5 years' earnings were $2,205 per month, his pension would be $2,205 x 2% x 35 or $1,543.50 per month. This is the type of formula that covers municipal workers, teachers, health care workers, etc. These plans can either be contributory or non-contributory.
Career Earnings Plan: Under this type of arrangement, an individual accumulates each year a unit of pension equal to his earnings in that year. For example, the individual may accumulate a pension of 2% of his earnings for each year of service in return for contributions of 5%. If he worked 30 years at an average monthly earnings of $1,200 his pension would be $1,200 x 2% x 30 or $720 per month. This type of plan was popular in medium and large industrial industries as it is easy to administer a long as the benefits are upgraded from time to time especially during times of inflation.
Flat Benefit Plan: Under this type of arrangement, a flat benefit is a specified dollar amount for each year of service. For example, the individual would receive a pension of $7.00 per month for each year of service. This type of plan has always been popular when the Pension Plan results from labour negotiations.
Indexing: This is a very, rich benefit that is only available to Defined Benefit Pension Plans. This benefit is protection against inflation as your pension can be increased each year by a specific amount, e.g., 1% if it is written into the Plan Document. If it is not part of the Plan Document, an employer can decide to provide this benefit on an adhoc basis. The Plan Document is the legal document, which outlines the various rules of the retirement plan. My neighbour who has spent her whole life working in the health care system just informed me that she received a raise effective April 2015, and she was incredibly pleased as this provides her with more spending money each month.
Note: If you are leaving an Employer that has one of these types of plans, it would be in your own best interest to think very carefully before taking the commuted value of your pension and transferring it to another financial institution. Under a Defined Benefit Plan, your benefit is guaranteed and you may be eligible for indexing, which is not available under any other type of arrangement so it may be in your own best interest leave your pension with your previous employer on a deferred basis.
These are the very best types of Pension Plans available to employees as they are based on formulas. Unfortunately, there are less and less of these today as employers have shifted the liability away from themselves and onto their employees in order to reduce both their liability as they are responsible for all investments and costs. Based on the formulas, at least every three years an Actuary (exotic number cruncher) must value the plan to ensure the funding status on a go forward basis. During these valuations, the contributions will be set for the next three years, and also the liability, if any, status will be determined
The three types of Defined Benefit Plans are as follows:
Final Average Earnings Plan: Under this type of arrangement, the individual's pension is based upon his length of service and his average earnings for a stated period of time. For example, the individual might receive a pension of 2% of his average earnings for the 5 years just before retirement multiplied by his years of service. An example of this type of formula would be, if he has worked for 35 years and his average last 5 years' earnings were $2,205 per month, his pension would be $2,205 x 2% x 35 or $1,543.50 per month. This is the type of formula that covers municipal workers, teachers, health care workers, etc. These plans can either be contributory or non-contributory.
Career Earnings Plan: Under this type of arrangement, an individual accumulates each year a unit of pension equal to his earnings in that year. For example, the individual may accumulate a pension of 2% of his earnings for each year of service in return for contributions of 5%. If he worked 30 years at an average monthly earnings of $1,200 his pension would be $1,200 x 2% x 30 or $720 per month. This type of plan was popular in medium and large industrial industries as it is easy to administer a long as the benefits are upgraded from time to time especially during times of inflation.
Flat Benefit Plan: Under this type of arrangement, a flat benefit is a specified dollar amount for each year of service. For example, the individual would receive a pension of $7.00 per month for each year of service. This type of plan has always been popular when the Pension Plan results from labour negotiations.
Indexing: This is a very, rich benefit that is only available to Defined Benefit Pension Plans. This benefit is protection against inflation as your pension can be increased each year by a specific amount, e.g., 1% if it is written into the Plan Document. If it is not part of the Plan Document, an employer can decide to provide this benefit on an adhoc basis. The Plan Document is the legal document, which outlines the various rules of the retirement plan. My neighbour who has spent her whole life working in the health care system just informed me that she received a raise effective April 2015, and she was incredibly pleased as this provides her with more spending money each month.
Note: If you are leaving an Employer that has one of these types of plans, it would be in your own best interest to think very carefully before taking the commuted value of your pension and transferring it to another financial institution. Under a Defined Benefit Plan, your benefit is guaranteed and you may be eligible for indexing, which is not available under any other type of arrangement so it may be in your own best interest leave your pension with your previous employer on a deferred basis.
Defined Contribution Pension Plans:
These Pension Plans are also known as Money Purchase Pension Plans as they are based on contributions rather than on a formula.
When I started in this business the average contribution for this type of plan was 5% by the individual and a matching 5% by the employer. However, over the years I have seen these contributions reduced until now I would estimate that the norm is 3% by the individual with a matching 3% from the employer. There are also many other different contribution formulas, which an employer may implement, e.g., a graded scale.
These contributions are typically deposited on a monthly basis into an account under the individual's name. Under these types of plans, the individual is responsible for ensuring that they have saved enough money for retirement as at the end of the day they will have accumulated a pot of money, which may or may not provide them with adequate income in order to retire. Individuals under this type of pension plan are also responsible for investing their contributions wisely under the options that are provided to them although in some cases the employer will decide on how their contributions are to be invested.
The employer is only liable for their contributions and providing the plan itself. This type of plan is easy to administer by the employer and cost efficient as they do not require the expertise of an Actuary to value the benefits.
Defined Contribution Pension Plans are easily portable as you strictly have an accumulated pot of money available. You can transfer these plans from one employer to another (providing that your new employer has a plan that accepts this type of transfer), or to another financial institution.
These Pension Plans are also known as Money Purchase Pension Plans as they are based on contributions rather than on a formula.
When I started in this business the average contribution for this type of plan was 5% by the individual and a matching 5% by the employer. However, over the years I have seen these contributions reduced until now I would estimate that the norm is 3% by the individual with a matching 3% from the employer. There are also many other different contribution formulas, which an employer may implement, e.g., a graded scale.
These contributions are typically deposited on a monthly basis into an account under the individual's name. Under these types of plans, the individual is responsible for ensuring that they have saved enough money for retirement as at the end of the day they will have accumulated a pot of money, which may or may not provide them with adequate income in order to retire. Individuals under this type of pension plan are also responsible for investing their contributions wisely under the options that are provided to them although in some cases the employer will decide on how their contributions are to be invested.
The employer is only liable for their contributions and providing the plan itself. This type of plan is easy to administer by the employer and cost efficient as they do not require the expertise of an Actuary to value the benefits.
Defined Contribution Pension Plans are easily portable as you strictly have an accumulated pot of money available. You can transfer these plans from one employer to another (providing that your new employer has a plan that accepts this type of transfer), or to another financial institution.
