Employer Pension Plans: Defined Benefit Plan | Your Money, Your Choices with Susan Daley


For those of you who have a defined benefit
employer pension plan, you may have had people tell you that you’re very fortunate. That these plans are the Holy Grail. If you’re wondering why that’s the case,
you’re in luck, because that’s my topic for today’s video. I’m Susan Daley and this is Your Money,
Your Choices. A defined benefit pension plan is a retirement
savings plan offered through your employer. The big draw to defined benefit pension plans
are just that – in retirement, you have a defined amount that you will receive each
and every year. This amount is often linked to inflation. As items become more expensive each year,
your pension income goes up by the rate of inflation. Another benefit of this type of pension plan
is that it provides you income for as long as you live. If you live to age 150, you’ll still receive
the same amount of money! Survivor benefits are also often available. If you pass away, your surviving spouse will
continue to receive a portion of the pension. Many plans have this survivor pension set
at 60% or 66%, while others will allow you to choose the amount of survivor benefit you
want. If you choose a 100% survivor option, the
ongoing pension you receive will be slightly lower, but your survivor won’t see a drop
in their income when you pass away. How is the benefit calculated? This is different for each plan but it is
a calculation based on the number of years of service within the plan, and your employment
income. The employment income used is often an average
of your final 5 years’ income, or sometimes your highest earning 5 years. You may or may not contribute to the plan
yourself, but your employer certainly does. An actuary uses a bunch of estimates and assumptions
to calculate how much you and your employer need to save each year in order to provide
that benefit. This is typically less than you would have
to save yourself for the same amount of pension income because it pools the risks across many
retirees with different ages who will pass away at different times. Ultimately, your employer take on all of the
risks. If there isn’t enough money in the pension
plan to provide the benefits that have been promised to you, your employer will have to
make up the difference. These plans also allow for early retirement
if you meet certain thresholds, called the 85 factor. If your years of service (i.e. the number
of years you’ve been enrolled in the pension plan) and your current age add up to 85, you
can retire early with an unreduced pension. For example, let’s say that you are 55 years
old, and you started working and paying into the pension plan when you were 25, so you
have 30 years of service. Adding your age, 55, and your years of service,
30, would result in a total of 85. This means you’d be able to retire at age
55, with an unreduced pension. If you don’t meet this 85 factor and want
to retire at age 55 still, you can, but you won’t get the full pension promised to you. This doesn’t happen quite as often anymore,
but wasn’t atypical to see our parents in this situation. So you get a guaranteed amount of money from
retirement for the rest of your life, you don’t have to take any investment risks,
and often your monthly pension increases with inflation and continues to provide your spouse
with income even after you die. So what’s the catch? With anything there are tradeoffs. One major drawback is that you don’t have
control over your money, although some view this as a good thing: there are professionals
looking after your money. Secondly, if you don’t live a long life,
your heirs may not get as much in your estate as they would have if you had savings outside
of the pension plan. And finally, if your employer goes bankrupt,
the benefit you receive could be significantly lower than what was promised. Usually, the benefits outweigh the risks when
it comes to defined benefit pensions. Unfortunately, they’re declining as employers
no longer want to take on the risk and expense associated with these types of plans. Over the time period of 2012 to 2016 alone,
these plans have declined by 14%. The number of Canadians with Defined Benefit
plans have declined by 12% since 1992. So what’s replacing these plans? I’ll outline that in my next video. I’m Susan Daley and this has been your money
your choices. I put out new videos every other week, so
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