Pensions 101

A defined benefit pension, sometimes called a DB plan, seeks to ensure that a retiree will receive secure, predictable income in retirement. The main feature of the DB model is that the pension is calculated based on a formula. Members know how much pension income they will receive each month for as long as they live. That way they can plan for their retirement. The OPSEU Pension Plan is a DB model. Members of the OPSEU Pension Plan have contributions automatically deducted from their pay and their employers match those contributions. The money contributed from employees and employers is then managed and invested by OPTrust. The contributions and investment returns are used to pay pension benefits to members.

DB pension plans have many advantages, including:

  • DB plans aim to provide retirees with secure, predictable monthly income for the rest of their lives. With a DB pension members don’t have to worry that they will outlive their pensions.
  • While not all DB plans have this feature, the OPSEU Pension Plan is adjusted each year for inflation.
  • Unlike retirement savings in a DC plan that are directly impacted by ups and downs in the stock market, DB plans use a set formula to calculate pensions.
  • The management fees of DB plans are  typically less expensive than most other models. A DB model like the OPSEU Pension Plan pools the contributions from thousands of people, meaning the costs are shared widely. Under other retirement models, individuals pay their own administrative fees to financial advisers.

The defined contribution (DC) pension plan model is one where employees and employers typically both contribute to the employee’s pension plan, but it differs from the defined benefit (DB) model in many ways.

One of the main differences between a DB plan and a DC plan is that the employee assumes the investment risk under a DC plan. Pension contributions under the DC model are deposited into an individual account for the employee, who is then responsible for their own investment decisions.   The other main difference is that employees in a DC plan must assume what is called “longevity” risk.   Members of DC plans have to guess how long they will live in order to make sure their savings last – or purchase an annuity from a life insurance company which can be very expensive.

  • Market fluctuations can have a bigger impact on retirement income in a DC plan than a DB plan and therefore does not offer the same level of income predictability
  • Some people in DC plans are forced to work past their desired retirement age because they are concerned they could outlive their savings
  • Many people hire financial advisors to manage their DC pension accounts. The management fees paid to financial advisers can be costlier than they would be under a DB model, which are shared among a wide pool of people.

The federal government established the Registered Retirement Savings Plan (RRSP) to encourage Canadians to put aside personal savings for their future retirement. The main incentive to set up an RRSP account is that contributions are tax deductible. Canadians don’t pay taxes on their RRSPs until the money is withdrawn. Personal retirement savings plans like RRSPs are one of the so-called “three pillars” needed for a financially secure retirement – the other two pillars being benefits provided by the federal government, such as the Canada Pension Plan and Old Age Security, and a workplace pension like the OPSEU Pension Plan.

If you are a member of a registered pension plan (DB or DC) this will reduce the amount you can contribute to an RRSP. The reason for this is that the Canada Revenue Agency (CRA) imposes limits on the amount of money that Canadians can save for retirement on a tax-deferred basis.  All Canadians, whether they belong to a pension plan or save for retirement through an RRSP, are subject to the same limits.

Personal savings plans like RRSPs and TFSAs are optional and Statistics Canada reports that about six million Canadians contribute to an RRSP each year. Defined benefit pension plans like the OPSEU Pension Plan can be seen as mandatory savings because members have their contributions deducted from their wages automatically.

For more information about RRSPs, click here.

The federal government established the Registered Retirement Savings Plan (RRSP) to encourage Canadians to put aside personal savings for their future retirement. The main incentive to set up an RRSP account is that contributions are tax deductible. Canadians don’t pay taxes on their RRSPs until the money is withdrawn. Personal retirement savings plans like RRSPs are one of the so-called “three pillars” needed for a financially secure retirement – the other two pillars being benefits provided by the federal government, such as the Canada Pension Plan and Old Age Security, and a workplace pension like the OPSEU Pension Plan.

Every worker employed by an employer in Ontario contributes to the Canada Pension Plan (CPP). Contributions are based on income and employers pay half the required contributions. Retirement age to collect the CPP is 65, although you can choose to receive a reduced pension as early as age 60. Conversely, if you choose to wait until after age 65 to collect your CPP, your pension payments will be higher. The CPP is one of the “three pillars” of responsible retirement planning. The other two pillars are personal savings and a workplace pension like the OPSEU Pension Plan.

The OPSEU Pension Plan, like many DB pension plans, is integrated with CPP.   This means members make lower contributions to the Plan up to the CPP limits (YMPE) and the pension they receive at age 65 is adjusted to reflect the fact that members are entitled to receive unreduced CPP benefits at that age.   If you retire before age 65, you will notice the pension amount you receive after age 65 is lower than before age 65.  That is because at age 65 you are eligible to start your CPP pension on an unreduced basis.

For more information about the CPP, click here.