Personal Finance

Pension... am I missing something? This seems to suck

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[OP]
Jr. Member
Jan 12, 2010
183 posts
63 upvotes

Pension... am I missing something? This seems to suck

I was self employed for 18 years before getting hired at a crown corporation. Part of the "benefits" is a company pension. On the surface, it sounded great... I put in my share, and the corporation doubles it! Woohoo!

I just got my pension statement, and I am wholly underwhelmed. OK, ok, sure I've only been there not quite 2 years so the (lol) $1,348 per YEAR benefit payable at age 65 is understandably laughable... but what shocked me is that I apparently have paid $7,963.92 to get that! ("Your contributions with interest as at December 31, 2019")

Presumably the Corporation put in an equal amount, so that means we've got almost 16 grand "invested" to pay me out $1,348 a year!?!? If I had opted out of the plan when I was hired (that was, and remains, an option) and instead invested my share and told the Corporation to keep their share, I would have to do worse than 3.5% annually to not do better than this pension (assuming optimistically that I live to 85).

Or am I missing something? When it says "your contributions", does that mean mine + the Corporation's share? I doubt it, given the use of the word "your", but if that were the case it would be a better picture. I suppose I can look at my pay stubs and figure that out, but I'm on holidays now.

Having been self-employed since highschool, I really don't have a handle on how pensions work. I assumed they were a good thing, but right now I'm feeling a little duped. I have to be missing something, right?
54 replies
Jr. Member
Jan 14, 2013
123 posts
134 upvotes
Kitchener
You need to find out how the pension works. It appears to be Defined Benefit. You can look up that term vs. Defined Contribution.

Find out what the match is: What % of your salary is going in and how do they match this number?

To decide whether to remain in it, consider: If you were to contribute your own money to an RRSP/TFSA plan, when you retire the rule of thumb is you can safely withdraw 4% per year without touching the principle, and the principle should grow with inflation. So that 4% could possibly last indefinitely (there is always risks I know). On $8k that's just $320/yr but you still have your principle and it is growing.

So if you've put in $8k of your own to date, assuming the corp matches - that is a deal right away that you shouldn't turn down.
The return per year of payout on just your own money is 1348/7964 = 16.9% which is unsustainable if it were just your own money. You'd have all of your contributions back in just 6 years. You just don't get to pass on the principle once you pop your clogs.
Member
Apr 3, 2009
323 posts
82 upvotes
Edmonton
You should check the paystub for deductions.

At not quite 2 years, that benefit might be for 1 year of service. Maybe your benefit is 1% of income for every year of service? You should really know and compare these things when looking at new opportunities.
Deal Fanatic
Jan 21, 2018
7561 posts
8138 upvotes
Vancouver
You should certainly get more details about what you are actually contributing and what the future payout terms are.

Pension calculations are difficult, and involve several assumptions about future factors that are difficult to predict.

For example, the average life expectancy for males in Canada at age 65 is around 79, or 14 years (more or less in various parts of the country). So the likely payout period of an annual pension is around 14 years - unless it's transferable to a surviving spouse or dependents, which would affect the probable term.

FiftyYardFistFight mentioned above a guideline of 4% withdrawal per year from RRSP. Actually you convert your RRSP to RRIF when you retire (or latest at age 70), at which point the government makes you draw it down by an accelerating minimum per year which is calculated to draw it down to zero capital left by the age when you are likely to have died already. And of course that's a total guess based on average interest rates over a recent period of time, which may not be accurate as global events change historical averages. We have been in a period of historically low interest rates for some time now where 4% return is not reasonable, and that state of affairs is likely to continue for many years in the wake of a global pandemic.
Deal Addict
May 16, 2017
2364 posts
3086 upvotes
Checking after 1-2 years of employment simply isn't going to give you a realistic view of the "value" of such a pension. Without details, like what is the % of your salary contribution, is it defined benefit, vesting period, etc, etc.

You'd likely need to be there 5 - 10 years before getting a reasonable picture of your pension amount. If you switch jobs frequently, pensions become rather dubious retirement schemes - and you would need to explore what happens to your contribution if you leave that employer after a few years.
Deal Addict
Aug 28, 2010
1281 posts
332 upvotes
Toronto
I wish i understood why my co-workers love our pension plan. Ive sunk tons of money (mandatory) into the plan at the cost of investment properties, specific shares, and other opportunities because i did not have that extra cash available to me. Heck an extra $400 a paycheck that i am putting towards retirement could open tons of doors many years ago....

Literally feel 50/50 toward it, mostly because i have no choice and looking back i probably wouldn't have bought much more TSLA anyhow.
Sr. Member
Nov 8, 2006
993 posts
441 upvotes
Toronto
LOL @ people who prefers not to have pension.
1. You get "free" money since your employer also contributes.
2. You get a job with benefits!
3. At 65, you dont have to worry and can actually retires.
4. The contributed amount is yours. If you choose to leave, most cases you can leave it with the company "freeze but invested" or you can transfer it out to a pension account.
Deal Guru
Dec 11, 2008
11057 posts
2113 upvotes
I assume it is still a good deal. Just got my pension statement, for 12 years contributing I contributed (current value) is $82,000. If I stopped working now and collected pension at 65 it will be $22,000 per year. Of course as I keep working and contributing it will add up even more based on years of service and income.
Deal Addict
Aug 19, 2002
3514 posts
989 upvotes
Wow, people shunning a DB pension or want out? Learn about your DB and what it offers and do the math.

Mine offers survivor benefits. i.e. once I die my wife get a percentage of my DB for life. The payments will also be inflation indexed. This coupled with other investments and savings means no worries at all for retirement and ensuring stability. In my case, I could actually be making more post retirement than pre-retirement. Last thing I want to worry about iis money n retirement and whether real estate will keep going up, or the stock market goes into a bear market, or a recession.
Deal Fanatic
User avatar
May 11, 2014
5646 posts
7546 upvotes
Rankin Inlet, NU
How is this laughable? Most pension's are indexed to inflation and $1348 per year starting at 65 means in 6 years you have over what you contribute, and continue to have a risk-free payment of money. If you live 20 years after 65 years, you are looking at $26960 in payments. Additionally, many pensions also have survivor benefits options or cash payout on early death and health benefits as well. Mine has 80% healthcare coverage which in my old age may be worth more than the pension for all I know.

Most DB plans are under 2% per year (to make this easy...when including CPP) for the highest 5 years you work. So say you made $40000 for most of your career, you get a promotion and now make $90000. Your pension moves up with your pay, and so your contributions become higher precisely because you are in a position paying more.

Additionally, you have the option to cash out the transfer value of the pension plan which is calculated separately. They do an actuary amount and you get your pension value as a LIRA and cash payment. Since you are under 2 years, you likely would only get your contributions back, but after 2 years, you would get a chunk of cash worth more than your contributions because the pension value to get the same guaranteed payment requires a large investment.
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Deal Addict
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Dec 13, 2016
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speedyforme wrote: I assume it is still a good deal. Just got my pension statement, for 12 years contributing I contributed (current value) is $82,000. If I stopped working now and collected pension at 65 it will be $22,000 per year. Of course as I keep working and contributing it will add up even more based on years of service and income.
That's almost the same amount with basic pension and OAS
Deal Addict
Jul 15, 2009
2623 posts
1833 upvotes
s_mack wrote: Presumably the Corporation put in an equal amount, so that means we've got almost 16 grand "invested" to pay me out $1,348 a year!?!? If I had opted out of the plan when I was hired (that was, and remains, an option) and instead invested my share and told the Corporation to keep their share, I would have to do worse than 3.5% annually to not do better than this pension (assuming optimistically that I live to 85).
Market rate for guaranteed 30-year investments is 1.007% right now, far short of 3.5%. You can't compare the rate on a risk-free investment to investing in risky assets.
[OP]
Jr. Member
Jan 12, 2010
183 posts
63 upvotes
Thank you all for the replies!
FiftyYardFistFight wrote: You need to find out how the pension works. It appears to be Defined Benefit.
It is, yes.
FiftyYardFistFight wrote: Find out what the match is: What % of your salary is going in and how do they match this number?
Looking at my stub, it appears just over 10% of my gross is going toward the pension. While I can't find anything that says how the Corp is matching, the wording makes me think it is 1-to-1. Although, really all it says is "both the employer and employee contribute to the plan". Co-workers seem to think it is equal parts.
FiftyYardFistFight wrote: To decide whether to remain in it, consider: If you were to contribute your own money to an RRSP/TFSA plan, when you retire the rule of thumb is you can safely withdraw 4% per year without touching the principle, and the principle should grow with inflation. So that 4% could possibly last indefinitely (there is always risks I know). On $8k that's just $320/yr but you still have your principle and it is growing.

So if you've put in $8k of your own to date, assuming the corp matches - that is a deal right away that you shouldn't turn down.
The return per year of payout on just your own money is 1348/7964 = 16.9% which is unsustainable if it were just your own money. You'd have all of your contributions back in just 6 years. You just don't get to pass on the principle once you pop your clogs.
Well... except... if I put in my $8k on my own now, that's working for me for let's say 40 years. But in the pension, that $8k (now) is doing nothing for me for the next 20, and then kicks in for the following 20 only, right?
tzhuge wrote: You should check the paystub for deductions.

At not quite 2 years, that benefit might be for 1 year of service. Maybe your benefit is 1% of income for every year of service? You should really know and compare these things when looking at new opportunities.
I hear you. I've read through the plan and I don't see anything about % of income per year. They really don't explain it well at all. There's just a calculator that spits out a number based on when I plan to retire, and a statement that says "if you retired now" (which is the $1348 figure)

robsaw wrote: Checking after 1-2 years of employment simply isn't going to give you a realistic view of the "value" of such a pension. Without details, like what is the % of your salary contribution, is it defined benefit, vesting period, etc, etc.

You'd likely need to be there 5 - 10 years before getting a reasonable picture of your pension amount. If you switch jobs frequently, pensions become rather dubious retirement schemes - and you would need to explore what happens to your contribution if you leave that employer after a few years.
Of course, but I'd hate to sit on it for 5-10 years and THEN realize I should have opted out! % of salary appears to be 10%. It is defined benefit. Nothing noted about vesting period.
porchemasi wrote: I wish i understood why my co-workers love our pension plan. Ive sunk tons of money (mandatory) into the plan at the cost of investment properties, specific shares, and other opportunities because i did not have that extra cash available to me. Heck an extra $400 a paycheck that i am putting towards retirement could open tons of doors many years ago....

Literally feel 50/50 toward it, mostly because i have no choice and looking back i probably wouldn't have bought much more TSLA anyhow.
Oh don't even mention f(&@#$ TSLA! I *did* buy it... and I sold it when it got to $420 (Musk's "insane" prediction about a year earlier). Ok, I made money so I shouldn't complain... but yesterday I see $1200 so FML, right?
marketb wrote: LOL @ people who prefers not to have pension.
1. You get "free" money since your employer also contributes.
Yeah, that's what I thought... until I look at the numbers, and it just doesn't seem that way. "free money" is only good if the net total at the end is higher with than without, right? I mean... if my half grows higher on its own than with it combined with their half but in their pension scheme... then I shouldn't take their free money. BUT, that's why I'm asking if I'm misunderstanding something.
marketb wrote: 2. You get a job with benefits!
The devil is in the details. I was self employed for 18 years without "benefits"... and I did alright.
marketb wrote: 3. At 65, you don't have to worry and can actually retires.
I don't plan on working that long. Hopefully not even close. I did look at the calculator again, and IF I work there to 65 and IF I live to 85, then the pension benefit total is higher than my 6% self-managed. So is that the catch? It is only worthwhile if I stick with this job for 20 years? Cause I don't see that happening. 5, sure. 10... I doubt it but maybe, and only because that's around when my kid would be out of the house. I had planned on retiring around now or maybe 50. But... a fire decided that wasn't in the cards so I had to get a job once my office was gone.
marketb wrote: 4. The contributed amount is yours. If you choose to leave, most cases you can leave it with the company "freeze but invested" or you can transfer it out to a pension account.
I'm not so concerned with what I've put in this far. I want to figure out if I should continue, or opt-out.
speedyforme wrote: I assume it is still a good deal. Just got my pension statement, for 12 years contributing I contributed (current value) is $82,000. If I stopped working now and collected pension at 65 it will be $22,000 per year. Of course as I keep working and contributing it will add up even more based on years of service and income.
Yeah that sounds like a good deal. Although, I wonder if you run the numbers and had invested that on your own where it would be anyway?
goob3r wrote: Wow, people shunning a DB pension or want out? Learn about your DB and what it offers and do the math.
That's what I'm doing :)

xgbsSS wrote: How is this laughable? Most pension's are indexed to inflation and $1348 per year starting at 65 means in 6 years you have over what you contribute, and continue to have a risk-free payment of money. If you live 20 years after 65 years, you are looking at $26960 in payments.
But investing that 20 years earlier (ie. now) and it grows far larger. That's what I'm getting at. Instead of $26960 at 85, that same $4963.92 invested 2 years ago would net almost $82k by the time 85 rolls around, assuming a return of 6% (which is a very reasonable average over any longer term). Like I said, I'd have to do worse than 3.5% over a 40 years period. That's (almost) impossible, even for a lousy investor like myself.
xgbsSS wrote: Additionally, many pensions also have survivor benefits options or cash payout on early death and health benefits as well. Mine has 80% healthcare coverage which in my old age may be worth more than the pension for all I know.
Survivor benefits don't really mean much. If I invested the capital and I died before my wife, she'd get it anyway. So again, isn't it better than she get the $82k vs the $26960? But the healthcare coverage... I'm not sure if that's part of my package, but that's something to consider.

bubak wrote:
Market rate for guaranteed 30-year investments is 1.007% right now, far short of 3.5%. You can't compare the rate on a risk-free investment to investing in risky assets.
Sure you can! That's precisely what we're doing :) A 30-year bond is silly. That yields less than inflation. I'm not here to lose money, which is why I'm here asking for input on something I'm not very familiar with - pensions. Risk analysis... that is something I'm familiar with. 6% yield over a 40 year period is almost a given. There's going to be some -20% years in there and there's going to be some +20% years in there... but even something like an indexed fund is going to yield over 6% easily. Unless the economy collapses, and then it doesn't matter what your payments are, because you're %#[email protected]'d either way :)




I very much appreciate the help folks. I'll go over it with my wife this weekend and our HR person next week, but it sounds like I've got the math right and I'm not really missing anything, and it just comes down to perspective on risk. I totally get that some people would rather have some chunk come off now and get it back later in case they forgot to save. But that's never been me. I just want to maximize my returns (because that's the point of investing), and if I can do that better with 100% on my own vs. 200% managed by the corporation, then I'd just as soon save the good taxpayers that little piece of the pie.
Deal Addict
Nov 13, 2013
3805 posts
2361 upvotes
Ottawa
Yes you are right. The 100% vs 200% doesn’t even include higher MER and importantly your lower life expectancy as a man. Survivor benefits are reduced and you might not be married at death. Also an RRSP is under your control. You can take it out and pay tax if you want. If you get terminal cancer you can withdraw it all and importantly you can pass it on to your kids.

There is a lot of crazy math from people who love their pension or jealous people who would never save 10% of their income and do the math like it only takes a few years to break even and complain like government workers are getting millions extra from taxpayers. Actually the matching contribution more than pays for benefits and there was a huge surplus the government was able to use for other purposes. Bottom line it is an extra 10% of salary expense but even that gives benefits as it makes it difficult for people like the OP to quit. (See below)

. As Beige Toyota pointed out for the first 15 years its almost worthless due to clawback and it replacing CPP. It assumes your only work was this pension so you lose all your CPP contributions future or past.
Deal Addict
Feb 2, 2007
1011 posts
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GTA
fogetmylogin wrote: . As Beige Toyota pointed out for the first 15 years its almost worthless due to clawback and it replacing CPP.
This is stupid beyond comprehension.

"Almost worthless"?
"Clawback"?
"Replacing CPP"?

Read a book about pensions (e.g., Bruce Cohen's Pension Puzzle), then comment!
Deal Addict
Nov 13, 2013
3805 posts
2361 upvotes
Ottawa
adrian2 wrote: This is stupid beyond comprehension.

"Almost worthless"?
"Clawback"?
"Replacing CPP"?

Read a book about pensions (e.g., Bruce Cohen's Pension Puzzle), then comment!
Actually maybe you don't understand how government pensions work ( I mean for public sector workers). You do not get CPP you get a pension amount. Until 65 you get a top up. If you work from 55-65 and you had worked in private sector 30 years before that you will get less than nothing as CPP will/would have been higher (depending on your salary of course but in no case will it be a good investment). This is extreme example but If you work 50-65 you might only get a few thousands dollars a year over what CPP would have been. You paid a lot into that pension to get such a small return. Especially if you joined at a senior level and stayed steady so didn't benefit from the most generous provision which is the best five years payout calculation.

As for clawback yes it might not impact many. But if you worked and saved in the private sector and/or have non-registered dividend income and/or rental properties it will reduce again the benefit you get from the pension. While true private savings would also be impacted you have control over this so can move around income more easily to reduce this impact. Another example of getting hit by clawback is my person above who works 50-65 in public sector and then continues to work after 65. The pension unlike CPP can not be deferred further and the full 15% may be clawed back.

Frankly OP seems like someone who might be impacted by one or more of the above factors. I will grant you 90%+ of people who have one of these plans don't need to care about any of above. But at the same time less and less people join at 25 work for low pay 25 years and then get big raises for the last 10 years before retiring at 60 and living 20 more years.
Deal Addict
Jul 15, 2009
2623 posts
1833 upvotes
s_mack wrote: Risk analysis... that is something I'm familiar with. 6% yield over a 40 year period is almost a given. There's going to be some -20% years in there and there's going to be some +20% years in there... but even something like an indexed fund is going to yield over 6% easily. Unless the economy collapses, and then it doesn't matter what your payments are, because you're %#[email protected]'d either way :)
If you are sure of a 6% yield then you are 100% right that there is no point in guaranteed investments like pensions and bonds. The guarantee costs money. If you don't want to pay for the guarantee, don't get the pension.

But consider this: if the market was as certain as you are of a 6% long-term yield, it wouldn't be buying bonds yielding 1%.
Deal Addict
Feb 2, 2007
1011 posts
975 upvotes
GTA
fogetmylogin wrote: Actually maybe you don't understand how government pensions work ( I mean for public sector workers). You do not get CPP you get a pension amount.
Everybody who had worked in Canada gets CPP, once they reach a certain age and apply for it. This includes public sector workers, who get CPP and their public sector pension, as two separate amounts.

Yes, the formula for calculating the pension takes into account the CPP earned up to YMPE, but the typical government DB plan considers CPP as 0.5% per year up to YMPE and awards another 1.5% per year up to that amount. Over YMPE the credit is the full 2% per year maximum allowed by legislation.

IOW, tripling the CPP until YMPE and quadrupling the contribution on top of it. Almost worthless to get at least triple the amount, indeed. :twisted:
fogetmylogin wrote: As for clawback yes it might not impact many.
There is no clawback on CPP or any pension such as the subject of this thread.
None, nil, nada.

Saying that a government pension "for the first 15 years its almost worthless due to clawback and it replacing CPP" is unadulterated horse manure.
Deal Addict
Nov 13, 2013
3805 posts
2361 upvotes
Ottawa
adrian2 wrote: Everybody who had worked in Canada gets CPP, once they reach a certain age and apply for it. This includes public sector workers, who get CPP and their public sector pension, as two separate amounts.

Yes, the formula for calculating the pension takes into account the CPP earned up to YMPE, but the typical government DB plan considers CPP as 0.5% per year up to YMPE and awards another 1.5% per year up to that amount. Over YMPE the credit is the full 2% per year maximum allowed by legislation.

IOW, tripling the CPP until YMPE and quadrupling the contribution on top of it. Almost worthless to get at least triple the amount, indeed. :twisted:


There is no clawback on CPP or any pension such as the subject of this thread.
None, nil, nada.

Saying that a government pension "for the first 15 years its almost worthless due to clawback and it replacing CPP" is unadulterated horse manure.
Clawback is OAS as I explained.

I don't mean it's worthless in that you don't get anything I mean what you pay into it makes a favorable return unlikely.

Example. (real one)
If I have 35 near maximum years of CPP contribution when I join public service or Crown Corp. Work there 10 years making $60k. I will pay +/- (more + than - actually) $ 60k in contributions. I will get theoretically a $12k pension but they will reduce that by nearly a third from CPP. Meanwhile after year 4 I was already maxing out. So I really get a bit over $8k. Subtract 15% lost to clawback leaves about $7k . If we only look at my contribution it is a decent return if I expect to live past 75 and/or value the survivor benefit. If looking at matching I consider it rather weak. Especially considering I have not control and can only pass on to a spouse. Men in my family rarely live past 70 for example. This doesn't even bring in early retirement penalty which again assumes a long life. (With no gender difference of course)

Someone who has no other income will have a more substantial clawback of GIS making it truly worthless. Especially if they saved instead in a TFSA and could use their $60k to pay off their mortgage or another taxable investment. Kids down payment etc.
Deal Addict
May 20, 2017
1148 posts
760 upvotes
ON
s_mack wrote: I was self employed for 18 years before getting hired at a crown corporation. Part of the "benefits" is a company pension. On the surface, it sounded great... I put in my share, and the corporation doubles it! Woohoo!

I just got my pension statement, and I am wholly underwhelmed. OK, ok, sure I've only been there not quite 2 years so the (lol) $1,348 per YEAR benefit payable at age 65 is understandably laughable... but what shocked me is that I apparently have paid $7,963.92 to get that! ("Your contributions with interest as at December 31, 2019")

Presumably the Corporation put in an equal amount, so that means we've got almost 16 grand "invested" to pay me out $1,348 a year!?!? If I had opted out of the plan when I was hired (that was, and remains, an option) and instead invested my share and told the Corporation to keep their share, I would have to do worse than 3.5% annually to not do better than this pension (assuming optimistically that I live to 85).

Or am I missing something? When it says "your contributions", does that mean mine + the Corporation's share? I doubt it, given the use of the word "your", but if that were the case it would be a better picture. I suppose I can look at my pay stubs and figure that out, but I'm on holidays now.

Having been self-employed since highschool, I really don't have a handle on how pensions work. I assumed they were a good thing, but right now I'm feeling a little duped. I have to be missing something, right?
1348/year till you die. So it really depends on how long you can live. Say if you live another 30 years after retirement, you got 40k, much more than your contribution.

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