Workplace pension plans
Did you know that you may be retired for as many years as you will work? That’s a long time to cover general expenses and have the money to be able to afford your retirement dreams.
As you go through life however, other financial commitments such as a mortgage or financing your children’s education may seem to be more important than planning for retirement. But there is something you can do right now to make contributions towards your retirement without having to find a large amount of new money: participate in a workplace pension plan.
Participating in a workplace pension plan is a great way to save for retirement.
- If your workplace has a pension plan, your employer MUST contribute towards it, which means free money for you! In fact in some cases you don’t need to contribute, your employer does it all!
- If you are required to make contributions to your pension they usually happen automatically through deductions from your paycheque, which means you don’t have to think about it. These automatic deductions also mean you never have the money in your hands – and what you never get, you’ll never miss.
It’s for these reasons considering a job with a workplace pension plan more favourably than a job without one makes sense. Even if you have a job offer with a higher salary, you may ultimately come out ahead with a lower salary but the ability to contribute to a workplace pension plan. You should note that while workplace pension plans together with the Canada Pension Plan are unlikely to be sufficient alone for retirement living (see Three pillars of retirement), they will get you much closer to your dreams than personal savings alone.
Prioritizing jobs with pension plans
Liz is 31 and lives in Toronto with her partner and their dog. She recently used all her savings to purchase a home, including her RRSPs. She knows she can’t save a lot with her hefty mortgage but that retirement is the ultimate end goal, so she decided to look for a job with a workplace pension that would do some of the saving for her. She knew that she could potentially get a higher salary in some jobs, but that she would ultimately spend what she earned, so having a workplace pension was one way to keep herself focused on retirement. While job hunting, she only applied to jobs that offered a workplace pension plan. Within a few months, she got a job that had a defined benefit pension plan. It did pay less than other jobs she saw on the market, but she’s comfortable with her decision, and will be even more comfortable as she nears retirement!
How do they work?
Workplace pension plans, or registered pension plans, receive and invest contributions from employers and/or employees which ultimately provide income during retirement. In Ontario, there are two types of benefits offered by registered pension plans: defined contributions and defined benefits.
Defined contribution (DC) pension plan
With a DC pension plan, your pension benefits are based on contributions from your employer and you (if it’s a contributory plan), and investment income on those contributions. Contributions often have matching formulas, however the minimum employer contribution is one per cent of a member’s salary. Contribution amounts differ for each pension plan, so be sure to ask your pension plan administrator (the person, group or entity that manages your pension plan).
Some DC pension plans also have the option for you to make additional voluntary employee contributions, and your employer may also match some or a portion of these, so be sure to ask if this is possible.
With a DC pension plan you will not know the amount of your ultimate pension benefit until you retire. This is because the amount of your pension benefit is based on several factors that cannot be determined until you retire, such as the amount of money put into the pension plan, the number of years the money has to grow and the investment interest rate achieved.
Defined benefit (DB) pension plan
With a DB plan, your pension benefit is “defined” by a formula that calculates how much you will receive each year after retirement. The formula is usually based on your annual earnings and how many years you have been a member of your employer’s pension plan, but each DB pension plan has its own formula, so it’s best to check what that formula is.
In addition to annual pension benefits, a plan with defined benefits may provide ancillary or extra benefits such as: disability benefits, death benefits and early or postponed retirement options.
There are other types of pension plans including hybrid and combination plans, which incorporate both DB and DC plans. For more information about the types of pension plans there are in Ontario, visit FSCO’s Types of Registered Pension Plans and Benefits .
How can you join your workplace pension plan?
Joining your workplace pension plan is a no-brainer. Even if you are part-time, you shouldn’t pass on joining and contributing now towards your retirement. Ask your employer or human resources representative if/when you can join your workplace pension plan and if it’s possible to join early so you can begin contributing towards your retirement as soon as possible. If you have a job offer on the table, try to negotiate the ability to join the workplace pension plan as early as possible.
If you are a full-time employee with a company that offers a pension plan and in a class of employees for whom the plan is maintained (e.g. salaried employees, managers, employees who work at a specific location), you are entitled to apply to participate in the pension plan any time after completing 24 consecutive months of continuous full-time employment.
If you are a part-time employee, you are eligible to participate in your workplace pension plan if in each of the two consecutive prior years, you meet the lesser of the following conditions:
- at least 700 hours of employment with the employer, or
- earnings of at least 35% of the year’s maximum pensionable earnings (YMPE). The YMPE is set by the Canada Revenue Agency (CRA) to determine your maximum contributions to your Canada Pension Plan and it changes yearly. Visit CRA’s website to see what the current YMPE is and then calculate if you make 35% of it.
When you join a defined benefit pension plan, you may be offered the ability to buy back service from the years you were not a member. You should consider this option carefully as you may be able to retire earlier and with a larger pension.
How are pension plans regulated in Ontario?
In Ontario, the Financial Services Commission of Ontario (FSCO) is responsible for the administration and enforcement of the Ontario Pension Benefits Act (PBA) and its supporting regulations. The PBA sets minimum legal standards for registered pension plans in Ontario. If you work in a federally regulated industry such as banking, telecommunications or airline transportation, your pension plan is covered by federal law and regulated by the Office of the Superintendent of Financial Institutions.
FSCO’s responsibilities relating to pension plans include:
- Registering new pension plans and pension plan amendments.
- Monitoring pension plans and pension funds to ensure they are being administered, invested and funded in compliance with legislated requirements.
- Processing required filings and applications from plan administrators.
- Investigating alleged breaches of the PBA and taking enforcement action when required.
- Administering the Pension Benefit Guarantee Fund (see below) and collecting PBGF assessments.
- Responding to inquiries and complaints from pension plan members.
Pension Benefit Guarantee Fund: what you need to know
In the event that your employer becomes insolvent or bankrupt, there may not be enough money in the pension fund to pay out the defined benefit pension that was promised to you. The Pension Benefits Guarantee Fund (PBGF) is a special fund established by the Government of Ontario to provide pension benefits coverage in the event of a funding shortage for privately sponsored single-employer defined benefit plans that are wound up. The PBGF is funded by yearly contributions from employers who sponsor defined benefit pension plans and qualify for this coverage. In 2018, the maximum benefit the PBGF provided was $1,500/month.
You should know the important players in your pension plan:
- Pension plan administrator: a registered pension plan must be administered by a person authorized by the Pensions Benefits Act (PBA) such as the employer. A pension plan administrator must ensure that the pension plan and the pension fund are administered in accordance with the plan terms and the PBA.
- Pension plan sponsor: the pension plan sponsor is responsible for designing your pension plan, setting the benefit structure, and for establishing, amending and/or ending the pension plan. The plan sponsor is often your employer.
- Pension fund trustee: the pension fund trustee is responsible for administering the pension fund maintained to provide benefits under or related to the pension plan.
- Actuary: a professional responsible for evaluating the assets and liabilities of your pension plan, calculating required contributions and preparing reports to be filed with the regulator. In Canada, an actuary must be a member of the Canadian Institute of Actuaries CIA) .
- Service providers: the individual or entities who are contracted by pension plan administrators to provide a range of services such as record keeping, collecting contributions, preparing reports and member annual statements, preparing tax calculations and organizing member education sessions.