Defined Benefit Plans

A defined benefit pension plan promises you income in retirement. For example, your plan might pay you $100 per month from age 65 until death.

With a defined benefit plan, you’ll have a retirement income for the rest of your life and, if you have a spouse, for the rest of your spouse’s life, depending on the option you select at retirement. During your working years, your employer or union will tell you how much you’ll receive when you retire. You don’t have to worry about whether this money will run out or how it’s invested. The people overseeing your plan do this for you.

No. No law requires an employer to give workers a defined benefit plan. However, some employers are required by a collective bargaining agreement with a union to provide a pension to their union workers.

A defined benefit plan promises you regular payments for life based on factors such your age, pay and years of service. Plan officials are responsible for making sure you receive what you’re promised.

Other retirement plans, called defined contribution plans, do not pay you a promised income for life. Instead, you and/or your employer put money into an account that, over time, will hopefully grow large enough to support you in retirement. Generally, you’re responsible for deciding how much you’ll put into the account, where to investment the money and when you’ll take it out of the account. The amount you get depends on how much money was put into the account and how well this money was invested. It is up to you to make sure you don’t run out of money.

When you can become a member varies across Canada. Typically, full-time employees must be allowed to join their plan after completing two years of continuous employment. Part-time employees must generally be permitted to participate when they have completed two consecutive calendar years of employment during which they have earned at least 35% of the Year’s Maximum Pensionable Earnings (YMPE) in each of those years. Rules differ by province. Check your plan booklet or ask your benefits/HR department, fund office or third party administrator about your plan’s eligibility requirements.

The Year’s Maximum Pensionable Earnings or YMPE is the maximum earnings from your employment on which your Canada Pension Plan/Quebec Pension Plan (C/QPP) contributions are calculated. This amount increases each year based on increases in the nation’s average wages.

It depends on two factors: your retirement age and how long you’ve worked for your employer or through your union. In many parts of Canada, laws require that your plan immediately vest you in your pension plan. This means you’re immediately entitled to the pension earned and payable to you at retirement. There are some provinces, however, where two years of continuous full-time service is required for vesting.

Vesting is a schedule that spells out when you’re entitled to your pension. Being vested, however, doesn’t mean you’ll be able to take money out of your plan any time you want. It only means you have a right to your pension at retirement age.

Whether you will need to save additional money for retirement will depend on whether there are any gaps between what you need and what you will get from the government and your defined benefit plan. Retirement benefits from the government include:

• The Canada and Quebec Pension Plans (C/QPP)
• The Old Age Security (OAS) pension
• The Guaranteed Income Supplement (GIS)

If you have a lower income, you may receive enough from the government and your defined benefit plan to replace the money you earned before retirement. On the other hand, if you have a middle or higher income, it is likely you will need to save additional money on your own.

When determining how much money you’ll need, make sure to consider:

• Your health before and after retirement
• When you want to retire
• Whether someone else, like a spouse, also depends on your retirement income
• What you want to do after retirement
• Where you want to live after retirement
• How long your retirement might last

It isn’t easy to know exactly how much money you’ll need. Ask your benefits/HR department, fund office or third party administrator whether they have a worksheet or other tools that can help you decide how much money you’ll need and how much you should save to reach your retirement goals. Here are  two worksheets to get you started.

Most defined benefit plans use a formula to figure out how much money you’ll receive when you retire. The formula is based on things like the number of years you were part of the plan, your pay and your age. Some plans reduce your benefits based on how much you will receive from the Canada Pension Plan/Quebec Pension Plan (C/QPP). Since benefits vary from plan to plan, ask your benefits/HR department, fund office or third party administrator to explain how your benefits are calculated. Your plan may send you a pension statement that will tell you what benefits you’ve earned so far.

How your pension is determined depends on who is sponsoring your plan. Some plans are set up by one employer. Decisions for these single-employer plans are made by (1) the employer or (2) negotiation between the employer and a union.

Some unions set up plans with many employers in the same trade or industry to provide their workers with pension benefits. These plans are called multi-employer plans. A collective bargaining agreement and other legal documents determine how much money each employer has to contribute to the plan for each worker. A group of trustees decides how the money will be invested and how much workers will receive at retirement. Decisions to change a plan or its benefits are usually made by the trustees, but there are some situations where benefits are part of the collective bargaining process.

No. There are no mandatory retirement age requirements. If you work past your plan’s normal retirement age, you will continue to earn (accrue) pension benefits up to age 71, subject to any plan limitations. Some plans, for example, set a service maximum of 30 years; this means that once a worker reaches 30 years of pensionable service, they won’t earn any further benefits.

You’re not at risk from investment losses with a defined benefit plan. Even if the investment market goes down, you’ll get your promised pension payments as long as you live. If your plan runs low on money to pay benefits, your employer is expected to contribute enough to close the gap, or the plan might change the way it invests. With most types of defined benefit plans, benefits that have already been earned can’t be reduced, but those you will earn in the future can be reduced if necessary. With some types of defined benefit plans, however, all benefits—already-earned and future—can be adjusted. Check with your benefits/HR department, fund office or third party administrator to find out more.

To encourage people only to use money set aside for retirement during retirement, money in defined benefit plans is locked in until retirement. The specific rules on locking in vary from province to province. Generally, you’re not allowed to take money from your plan until you retire. Some provinces provide exceptions if you’re experiencing a financial hardship such as low income and/or the loss of your home, disability or high medical expenses. Someone who is not expected to live very long or who is no longer considered a resident of Canada may also be allowed to withdraw money if it is allowed by the province and plan rules.

At retirement, your plan will begin to pay the benefits you were promised. You will be given options from which to choose. One common option involves survivor benefits for your spouse, if you have one. For example, if your plan will provide you a lifetime benefit with a minimum 5 years of payments and you have a spouse, the benefit would likely be reduced to provide a lifetime pension to you with 60% of the benefit provided to your spouse if you should die first.

If your plan lets you make voluntary contributions, you can use this extra money to buy additional pension benefits under the plan or you can transfer this money out of the plan to provide retirement income some other way. For example, you might:

• Transfer it to an RRSP or LIF. If you are age 55 or older, you may be allowed to move your money to a Registered Retirement Savings Plan (RRSP) or Life Income Fund (LIF). With LIFs, there are provincial rules that set minimums and maximums on how much you can take out each year based on your age. Some—but not all—of these accounts require you to purchase an annuity by the end of the year you reach age 80. Like with RRSPs, LIRAs and most defined contribution plans, you can continue to control how the money in a LIF is invested.
• Purchase an annuity. You can also use your money to purchase a deferred or immediate life annuity from an insurance company that promises to pay you a regular income throughout retirement.

With all of these options, you avoid paying federal income tax until you actually withdraw the money or start receiving annuity payments.

Yes—the money you get from your plan at retirement is considered taxable income.

Yes. Federal law and most provinces require your spouse be given an interest in your pension plan. Generally, your surviving spouse must get a pension payment amount that is at least 60% of what you received before you died. The amount received during your lifetime will be lower with this joint and survivor option than payments for you alone because your spouse might outlive you, requiring the plan to pay benefits longer. The joint and survivor option is a common option for plan members with spouses. If your plan allows you other payment options and you choose one of the alternatives, your spouse must approve the choice in writing.

Sometimes. Generally, the amount of benefits you’ve already earned can’t be changed. The amount of benefits you earn in future years can be increased or decreased when the plan is properly amended. In certain types of plans, like multi-employer plans and target benefit plans where the employer contributes a defined amount into the plan, benefits can be reduced to some degree.

In most plans, pension payments aren’t adjusted for inflation after you retire. Over time, the purchasing power of your benefits may shrink considerably. Other plans, however, do increase payments. The increase may be automatic or at the direction of the plan sponsor. Ask your benefits/HR department, fund office or plan administrator whether your benefits will be increased for inflation after retirement.

Some defined benefit plans are sponsored by a union/labor organization with many employers contributing to the same plan (a multi-employer pension plan or MEPP). Similarly, many government employers like hospitals, schools or community colleges offer Specified Multi-Employer Pension Plans (SMEPPs). If you remain with the same employer but transfer to a job not covered by the MEPP, your employer must give you vesting credit for the time you work even though your employer won’t be contributing to the plan on your behalf. If you get a job with another employer that contributes to the same MEPP, you will continue earning benefits the same as if you were with your original employer. If you get a job on a project in another city or region, working for an employer that doesn’t contribute to your plan but instead to a different plan, you may be able to continue earning benefits in your original plan under a reciprocity agreement.

If you worked for an employer with its own plan (a single-employer plan), what happens next depends on whether you’re vested in that plan.

• If you’re not fully vested at the time you change jobs, you may lose the portion of your pension that was contributed by your employer on your behalf and not vested. You have the right to the return of any money you contributed along with interest.
• If you’re fully vested but haven’t reached your plan’s normal retirement age, you’ll get benefits when you retire. Legislation also gives you the option to transfer the current value of your pension into another pension plan if the other plan agrees to accept it. Another choice is to transfer the money to a Registered Retirement Savings Plan (RRSP). The RRSP must be locked in and, in many provinces, is referred to as a Locked-In Retirement Account (LIRA). At some later date, you can use this money to buy an income-producing product such as an annuity or Locked-In Retirement Income Fund (LRIF). Some provinces permit the direct transfer of funds from a pension plan to a locked-in Life Income Fund (LIF).

Check the vesting rules of your plan in your plan booklet. You can also talk to your benefits/HR department, fund office or third party administrator to find out exactly what would happen in your situation.

If you stop working for an employer providing a defined benefit plan and then return, you will generally be treated as a new employee and start to earn (accrue) a new pension amount based on plan provisions in effect at that date. Any benefit earned and vested previously will not be changed. In some circumstances, the plan may recognize all pensionable service/credits for determining your total pension.

Because these rules can be different for every plan, it’s very important to read your plan booklet and talk to your benefits/HR department, fund office or third party administrator before you make any decisions.

Generally, many plans will agree to an approved leave of absence for various reasons like military service. If the leave is for family or medical reasons, each province has rules that time taken can’t be considered a “break” in your service for vesting purposes. This means you’ll vest in the same amount of time as if you hadn’t taken the leave. If the leave is unpaid, however, you might not earn additional pension benefits during this time, depending on your employer’s plan.

When there is a divorce, your spouse may be entitled to a share of the pension you earned during the period you were together as part of your family property. How the money is split is subject to the provincial legislation where you live and court orders. Your plan sponsor may be involved in performing the calculations needed to determine how the money is divided. In some locales, there are limits on the amount your pension benefits may be reduced.

What happens if you become disabled before you retire can vary greatly from one employer to another. Much depends on the extent of your disability, how long it lasts and whether your employer has provided disability protection through an insurance company.

If your employer provides long-term disability (LTD) coverage, you will probably draw benefits from it. You employer may continue to let you earn pension credit at the level in effect before you were disabled. When you reach your plan’s normal retirement age (usually age 65), your LTD payments will stop and your defined benefit pension payments will begin, based on your years of service (including your years of disability, if your plan provides this.)

If there is no LTD insurance covering you, your pension plan may pay you a disability benefit if you are totally and permanently disabled. The benefit is usually based on a pension plan formula that recognizes service up to when you were disabled.

Totally and permanently disabled is defined by the federal government to mean you are suffering from a physical or mental impairment that prevents you from doing any work for which you are reasonably suited and this condition is expected to be permanent.

The Canada Pension Plan and Quebec Pension Plan (C/QPP) provide a total disability benefit payable until you reach age 65. This benefit generally reduces the amount of the LTD benefit you’ll receive from your employer’s pension plan.

Generally, all benefits are vested immediately, and the value of these benefits are payable to your named beneficiary. Your spouse is the automatic and required beneficiary unless he or she has elected to waive this entitlement in writing. If your beneficiary is your spouse, the pension amount can be paid from the plan as retirement income or can be transferred to his or her own RRSP, LIF or other account. The amount can also be paid in cash; it would then be considered taxable income for your spouse. For a beneficiary other than your spouse, the amount would be paid in cash and would be subject to income tax payable by the beneficiary.

Legislation lets workers retire within 10 years of the plan’s normal retirement age. For example, if a plan’s normal retirement age is 65, the plan allows an early pension for retired workers between ages 55 and 64. To qualify for an early pension, you must be vested. Since you’ll be receiving your pension sooner, your plan will probably reduce your payments to take into consideration the extra years you’ll be paid.

Some pension plans provide a temporary increase in pension payments to early retirees until they reach age 65 and are eligible to collect full Canada Pension Plan/Quebec Pension Plan (C/QPP) retirement benefits. Bridging benefits are subject to a maximum that cannot exceed the maximum C/QPP pension at age 65.

If you go to work for a different employer, it generally won’t affect your pension payments.

If you go back to work for your previous employer—the one paying your pension—you generally can’t collect your pension and earn additional pension credit in the same plan at the same time. As a result, your pension benefits would stop being paid if you were entitled to earn additional credit. If your employment is temporary or contractual and/or you would not be entitled to be a plan member this time, pension payments could continue. The rules are different from one plan to another. Make sure to read your plan booklet and talk to your benefits/HR department, fund office or third party administrator before you make a decision to go back to work.

Pension laws across Canada protect members when there is a plan termination or windup. Employers are required to fund any financial shortfalls so you receive the benefits you have been promised. Plan members are usually treated as if they are fully vested even if they haven’t met all of the plan’s requirements for vesting. In most locales, members also have the right to a notice from the plan administrator on rights to benefits under the plan. As a member, you must also be given the opportunity to decide how you will get the benefit to which you are entitled.

If your plan is underfunded, you will receive less than the amount you were promised. In some provinces, the government provides a guaranteed minimum benefit to retirees. For example, in Ontario, the Pension Benefits Guarantee Fund insures some pensions up to $1,000 per month. But not every province has this protection.

At least every three years a defined benefit plan must submit a report to its provincial or federal regulator, the Registered Plans Directorate and, if appropriate, the union representing plan members. You can ask the plan administrator or the regulator of your plan for a copy of this report which contains information on the financial status of your plan.

While many defined benefit plans do not require worker contributions, some do. Contribution decisions depend on who sponsors your plan. If your plan is set up by one employer—a single employer plan—these decisions are made by (1) the employer or (2) negotiation between the employer and a union.

If you have a multi-employer plan that permits many employers in the same trade or industry to contribute to the same pension plan for their workers, a collective bargaining agreement and other legal documents state how much you and your employer must contribute to the plan.

In both cases, your promised future benefits are based on contributions plus investment earnings.

Most provinces require that plans send you (as a current “active” worker) an annual pension statement. This statement will tell you, among other things, the plan’s financial status. You can also request financial information from your plan’s administrator.

At least every three years a defined benefit plan must submit a report to its provincial or federal regulator, the Registered Plans Directorate and, if appropriate, the union representing plan members. You can ask the plan administrator or regulator of your plan for a copy of this report which contains information on the financial status of your plan.