This is a column by Sean Cooper.

With uncertain economic times upon us, pensions have been a hot button issue as of late. One of the major issues in this past federal election was pension reform. The federal government isn’t alone; a number of provinces have reformed their pension legislation, such as Manitoba.

Pensions are important because they provide a major source of income for retired workers. Working as a pension analyst, there are a number of misconceptions out there about pensions that I would like to clear up.

Myth 1: My Spouse will Receive my Full Pension if I Die before Retirement

Unfortunately, it isn’t that simple. The benefits received by your spouse for a pre-retirement death and a post-retirement death can be totally different. For a post-retirement death, if you chose a 60% or 100% joint & survivor pension, you’ll know the exact amount your spouse will receive.

However, with a pre-retirement death, the amount isn’t so clear. Your spouse may receive nothing if your employer provides life insurance and the benefit of that exceeds the commuted value of your pension; it all depends on the plan text. If you would like peace of mind it’s a good idea to read your annual statement or talk with your pension administrator. You don’t want your loved one to have debts and have problems paying them when you aren’t around.

Myth 2: My Pension is Guaranteed

Again, in almost all cases this is false. One of the major disadvantages of defined benefit pensions is that they depend on the financial stability of your company. If you’re a young worker who is retirement eligible in 2045, you have to ask yourself, will the company still be around and in good financial shape in 2045 when it’s time to collect your pension?

You also have to consider that your pension formula can always change. A lot of employers are switching from the generous final average earnings formula (your pension is based on the average of your three or five highest earning years) to the more certain career average formula; this helps make the pension more stable, but it also can significantly reduce your accrued pension. That’s why it’s still a good idea to invest in RRSPs and other retirement vehicles because it can be risky and doesn’t make good financial sense to depend solely on your company pension.

Myth 3: If I Remarry, my New Spouse will Receive my Pension Upon my Death

Marriage breakdowns are very complicated when it comes to pensions. If you die before retirement and you’ve remarried, depending on what the court order says your ex-spouse may be entitled to a portion of the pension for the years you were married.

However, if you’ve elected a 60% or 100% joint & survivor pension and you divorce and remarry, in most cases your ex-spouse will be entitled to the pension. The reason for this is that your monthly pension amounts are calculated using the date of birth of your ex-spouse and you. It’s a good idea to keep this in mind if you remarry.

Myth 4: Defined Benefit Plans are Better than Defined Contribution Plans

If you plan to stay with a company your entire career, in most cases a defined benefit plan will provide a more valuable pension than a defined contribution plan. However, if you plan to switch employers as you move up the corporate ladder, a defined contribution plan can offer more flexibility and a greater benefit.

Defined contribution plans are a lot easier to transfer to a new employer because the value of your pensions is simply the assets in your plan. With a defined benefit plan, the formula can be complicated. You also have greater choice with defined contribution because you get to choose the investments your money goes into and see the return.

Myth 5: My Commuted Value will Increase as I accrue more Service with my Employer

In most cases this is true. There is a direct relationship between employee age and the commuted value; the older you get, the higher your commuted value. However, that’s only one of the factors.

The commuted value is also determined using current interest rates. There is an inverse relationship between the commuted value and the interest rate. As interest rates fall, the commuted value goes up and vise-versa. Since, in most cases, the only thing you have control over is when you leave your employer, it’s important to realize that your commuted value may be lower when you decide to leave even despite your age.

This has only been a very high-level review of pensions. It’s very important to speak with a financial advisor and consult with your pension administrator regarding your pension before making any major decision.

About the Author: Sean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University.


  1. Sustainable PF on August 10, 2011 at 9:20 am

    Ah, things I don’t want to – but need to – hear.
    Thanks Sean. I work for the public service and am 20+ years from retirement. Hoping that the DBP is still there when it is all said and done.

  2. Money Beagle on August 10, 2011 at 9:33 am

    A pension? What’s that? I’ve heard the term but as a 36 year old guy, it’s never been brought up in conversation with me, and nobody around my age seems to have any idea what that means either. My parents talk about theirs from time to time, but I think they drop it when the looks of confusion hit our faces.

    Ah, to have these worries :)

  3. Steve on August 10, 2011 at 10:34 am

    HR Rep: We provide retirement benefits for all our employees. You will be eligible for our defined benefit plan in 6 months.

    Me: Ummm….I’m 31 years old. Do you have anything that is not a pyramid scheme?

    HR Rep: We also offer an opt-out option where we have a defined contribution plan.

    Me: I’ll take number two.

    1) If you have a private pension and are young, you’re screwed. Sorry. Your pension isn’t fully funded and has been getting worse for quite a few years. Go ask your HR dept!

    2) If you have a public pension and are young, you *may* be screwed. You are very likely to receive less than your retiring co-workers do now but you’ll get something. Unless your country turns out to be another Greece. Then you will likely get almost nothing.

    Moral: I DBP that you wont’ collect for 25 years from now is a significant RISK to your retirement planning. Start saving some on your own to reduce the risk!

  4. Brandon on August 10, 2011 at 11:31 am

    I recently switched from one large company to another large company … I went from a defined contribution to a defined benefit and I am just now realizing my new DBP will require me to work until 65 to get a decent pension. Tough pill to swallow at 25… Especially considering my defined contribution plan had me retiring between 45 and 50 (assuming 3% yoy returns)

  5. Echo on August 10, 2011 at 11:58 am

    @Brandon – I think you need to re-calculate your retirement date with the DBP. There’s no additional benefits paid once you reach 85 years (combined age and years of service). If you’re 25 now, you should be able to retire at 55 with the full value of your pension (55 + 30 years of service).

    @Steve – I think you’ve been watching way too much Glen Beck.

  6. Bill on August 10, 2011 at 12:32 pm

    @Echo – I think you’re assuming the DBP is the Federal government. The formulas are not necessarily the same accross governments and corporations. In fact, the Federal Dept of Finance just changed their formula to make the min penalty-free retirement age 60, rather than 55. I can’t imagine this not being extended to the rest of the federal public service in the near future, given the significant unfunded liability that exists. If you add in the fact that the current government is shrinking the size of the federal public service, you have even fewer people paying into an already underfunded defined benefit pension plan… doesn’t make Steve sound quite so crazy. I don’t believe it will be entirely pulled, but also can’t imagine it resembling it’s current level of payout when I retire in 25-30 years.

  7. Bill on August 10, 2011 at 12:34 pm

    After that rambling comment, can anyone offer advice on how to value a defined benefit pension as a percentage of annual salary? Say I have a job with the federal government, with the benefit package that goes along with it, and have a job offer from a company that doesn’t offer that benefit package, but at a significantly higher salary. I’ve no idea how to properly compare the two financially, at this point.

  8. NYCer on August 10, 2011 at 1:00 pm

    I’ll chime in that I have a DBP and so far if they make changes it’s to subsequent hirees and not existing members.

    Mine is rule of 85 (went up from rule of 82). I earn 2% a year for my pension cummulative for up to 35 yrs of service = 70% max for my best 5 years (up from 3 years).

    I should be able to retire with 60% pension when I am 56.

  9. Little House on August 10, 2011 at 3:46 pm

    I pay into a pension fund, but according to the latest newsletter, they only have enough funds to cover their employees until 2044-I’ll be 71 and still kicking. I’m anticipating some changes over the next few years which will most likely affect how much I’ll receive upon retirement. I’m making alternate plans to help cushion the blow.

  10. LJR on August 10, 2011 at 7:53 pm

    I’ve been in a defined benefit plan for 13 years now (I’m in my 30s). Fortunately, the plan at my company is fully-funded – in fact, it even has a surplus. Every defined benefit plan is different, so truly, the only way to know what your plan provisions are is to read the employee booklet you receive and/or request a copy of the plan document from your employer (they are required by law to provide this to you upon request). If they won’t provide this to you, you can file a complaint with the CRA or the provincial pension authority in your province. Also, I seem to remember reading an article in MoneySense magazine in the last year or so that had a listing of major Canadian companies with defined benefit plans and whether their plans were underfunded, fully-funded or had surpluses.

  11. Sean Cooper on August 10, 2011 at 10:59 pm

    Thanks for the comments. My company recently switched from a 2% DB plan, final average earnings 3, to a 1.3% career average plan. This was due to a merger. All current employees have their benefits frozen at the end of this year and must switch to the new plan. There go my plans of retiring at age 50 out the window!

  12. Mike Holman on August 11, 2011 at 10:26 am

    @Bill – I think the best way to value your pension in terms of annual salary is to find out the amount of employer contributions per year. Typically, they will contribute a percentage of your salary (ie 10%) and you can just consider that part of your salary.

    Your HR department should be able to help you.

  13. Bill on August 11, 2011 at 10:45 am

    Thanks Mike, that’ll work for my net worth, I guess I should have been more specific, especially since I’m a bit off-topic.

    Any idea how to compare 2 jobs? One high salary no pension, one lower salary with DBP? The real question being, how much higher would my salary need to be to make up for the lost pension? I’ve done some calculations, but they’re wrought with massive assumptions, I’m just wondering if there’s a better way.

  14. Brandon on August 11, 2011 at 11:01 am

    @Echo – the public company I work for has an online calculator. Retiring at 55 gives me approx 60% of the annual income versus retiring at 65 no matter how I configure the variables. The annual income they are promising was comparable to retiring at 45 through my DCP at my former job using a 3% return (though the DCP is locked in so I couldn’t get money out of it until I’m 55).

  15. Al on August 11, 2011 at 11:37 am

    Bill – it all depends on your assumptions. For me I reckon a DB plan is worth about 20% of salary at age 33 for retirement at normal retirement around age 60 to 65 real returns of around 3%. Not sure about your situation, but DB is worth more if you work for the armed forces or the police or somewhere that lets you retire early, it’s worth less if you’re not a lifer. But for me rule of thumb is I would rather have +20% now than some promise from an employer anyway they can always change the goal posts – and they will.

    Here are some numbers from the economist regarding imputed contribution rates in the public sector in Britain and the US as an indication of ranges:

  16. RD on August 21, 2011 at 10:31 am

    You are not qualified to comment on these issues… get an MBA, CFA, and CMA designations – then get your chartered financial planner designation – then spend 10 years in the industry – then and ONLY then are you qualified to comment. Your whole analysis doesn’t even mention the biggest source of defined benefoit pension plans – gov’t and quasi gov’t…. the risk analysis you present is in large measure not true as it relates to these more prevalent (relatively speaking) pension plans. We are not Greece.. nor will we be anytime soon. Financial planning and video games – good grief….

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