Pensions

Pension Plans

Marvin Krawec, Pension Chair

Over the last little while, there has been much discussion of the different pension plans that are available. The following plans are the ones that are receiving the most attention. Of the whole lot, there is no question that the Defined

Benefit Pension Plan is most conducive to our needs. In a Defined Pension Benefit Plan, one’s pension is predetermined according to a formula based on one’s earning history, age, plus years of service. The Defined Benefit Pension Plan takes into account future salary increases in the funding. I have attempted to outline briefly, the three most discussed pension plans below.

DEFINED BENEFIT PENSION PLAN

It costs much less to operate because individual savings are pooled in large funds, giving them the scale to lower member administrative & investment expenses (Leech and McNish - authors of the Third Rail).

It is the most effective retirement

savings system in the country. No other supplemental plans can provide members with the same level of security (Leech and McNish).

It guarantees a certain benefit at retirement.

Those who subscribe to the Defined Benefit Pension Plan, contribute between $50-$63 billion dollars to the Canadian economy. (Boston Consulting Group).

They contribute $14-$16 billion annually to government coffers (sales tax, income tax, property tax). ( Boston Consulting Group)

Defined Benefit Pension Plan has

the greatest impact in small towns, some 9% of the economy.

Those who subscribe to the defined benefit plan are less likely to collect Guaranteed Income Supplement (GIS) (10-15%), thus reducing the annual payout (GIS) by approximately $2-$3 billion a year.

DEFINED CONTRIBUTION PENSION PLAN

Individual contribution plans cost double those of defined benefits

plans to administer.

Forty-five percent of those subscribing to a Defined Contribution Pension Plan collect GIS.

The employer is not obligated to pay a specific amount at retirement. The employer ceases to be guarantor of the pension.

The amount, received at retirement, is dependent on one’s investment choice and how that investment performs.

There is no way to know how much the plan will pay employees upon retirement. Benefits are not set.

Contributions may increase with the member’s age and/or with the service completed. Should the investment yield a lower return, the pension will therefore be less.

TARGET BENEFIT PLAN

This is a hybrid plan that has elements of both of the plans mentioned above.

It is a plan in which the employer established a target benefit for the employees. Each employee’s actual pension is based on the amount in the employee’s individual account.

This plan does not recognize future salary increases in advance whereas a defined benefit plan takes into account future salary increases in the funding.

Contributions to the target plan can rise sharply as the age and salary levels of participants increase.

One major drawback of a target plan is the tendency to backload benefits.

Employees may be subjected to adjustments depending on the market volatility.

Pensions will be calculated on enhanced average earnings and not the best five years

There is a loss of cost of living increase under this plan.

We, the retired teachers of Manitoba, must be ever so vigilant because the Defined Benefit Pension Plan seems to be in disfavour in some quarters of the business community as well as in some provinces. This does not bode well, in that it’s possible for this province to follow the example of some other provinces. n