Pension questions, I can sense, are coming to you.
I have touched on the subject a few times recently, I would like to come back to it in order to advance the debate and clarify certain elements.
A column published last week, “The Value of a Public Service Pension,” focused more generally on defined-benefit (DB—plural, one picky reader clarified) pension plans. These pension funds promise a lifetime annuity to participants, it’s a dream.
DB and DC plans
They are opposed to the much more widespread defined contribution pension plans (DC – in the singular, according to the same reader). Those leave retirees to fend for themselves with their accumulated share in their plan. In this respect, it is similar to an RRSP.
In both cases, employees and employers contribute to the fund. In the DB formula, the risk falls more on the employer. The latter must bail out the fund if the financial markets do not achieve the expected returns in the calculation of the promised annuities. In DC plans, the risk is on the shoulders of the participant. The retiree must manage his money and tighten his belt when things go wrong.
It is true that the former is generally more expensive, particularly for workers nearing the end of their career. What I especially want to emphasize here is that it is not free for the beneficiaries, a more or less significant part of their salary is used to finance this business.
A friend just joined an organization that offers such a plan, he took the leap when he saw the cost on his first pay stub.
Are these future pensioners excessively spoiled? When we talk regarding civil servants, this opinion is widespread, and much less when it comes to university professors or bank staff.
To judge, we must not focus only on the pension fund, but on all remuneration. The money injected into a pension plan is money that might have been paid as a salary.
The question, then: do you find government employees overpaid?
Sub-question: what are you waiting for to send your CV there?
18% RRSP savings and pension adjustment
Which brings me to the question of the reader Alexandre: do these same employees see their pay reduced by 18% every two weeks? In the column mentioned earlier, I said that to “bank” a public servant’s defined benefit pension plan, you had to contribute the equivalent of 18% of your salary to an RRSP, hence the question.
Answer: no.
Participants in RREGOP, the plan for employees paid by the state (including nurses, teachers, etc.), pay 10.04% of their pay into the fund, with this nuance: no contribution to be paid on the first 16,000 or so salary dollars (25% of maximum eligible earnings – MPE). The rest is funded by the employer. As I said above, it is part of the overall compensation.
The 18% figure does not come out of nowhere, I wrote. It corresponds to the RRSP contribution limit… for a person who does not benefit from a pension plan.
Employers who offer a pension fund to their employees must calculate a “pension adjustment” and report it to the Canada Revenue Agency. This factor reduces the RRSP contribution room of plan members, and it can go down to zero. A civil servant must not be far from it.
The system is such that everyone ultimately benefits from a comparable retirement savings space. Some have to manage to fill it with their income (RRSP). Others are helped in part by their employer (in return for a smaller paycheck – DC plan + RRSP). Still others don’t even have to worry regarding it, their entire space is filled by the system set up at work (generous DB plan).
In the latter case, it should be emphasized that the lifetime annuity is only possible by pooling the risk. I often recall this principle: the first to die finance part of the retirement of the last to leave.
Not everyone likes knowing that a portion of their contributions to a DB fund might be used to pay for co-worker travel.
With the CD plan, the money will stay in the family, if you haven’t seen the end of it before you die.
