Defined Benefit (DB) or Defined Contribution (DC)? The pros and cons to the big pension question. Is one pension scheme better than the other?
You are in a Defined Benefit (DB) Plan see http://www.mtspensionplan.ca
This TEAM bulletin provides a comparison of some of the key differences between the DB and DC pension plans. The underlined text provides you with a hyperlink to further information.
In Canada, the overwhelming majority of pension plan members participate in defined benefit plans. Statistics Canada reports that in 2006 over 81% of all pension plan members belong to a defined benefit pension plan, this figure climbs to over 90% if you are a public sector worker.
90% of all DC pension plans have less than 100 members in their plans. These plans have been the secondary pension [preferred] option for small employers that are unwilling or unable to take on a defined benefit plan. With many mergers and amalgamations these days there are potential challenges to employers. Some attack the secure DB plans and propose less secure, DC plans or worse yet group RRSP’S, which will save them long term funding commitment to their employees. [Comparing Defined Benefit and Money Purchase Pension Plans]
Both in the DB and DC pension plans, both employer and employees usually contribute to the plans at a set percentage of the employee’s salary for the length of service time worked.
In a DB plan your guaranteed pension benefit will always be provided by the plan as long as you shall live. Some additional benefits are: enhanced early retirement, survivor benefits, portability to other pension plans, and disability and inflation protection.
A DB plan helps attract and retain staff as new recruits today look beyond base salary, and seek out employers offering good benefits and pension plans. A DB plan also assists the HR departments to plan for staffing level changes. When employees know their retirement benefits, it is easier for an employer to predict when their senior employees will retire. [Jeff Sanford, Canadian Business Magazine, July 9, 2007]
Your DB pension calculations take into account two key factors: first the number of years of credited service, and secondly, 2% of the employee’s salary averaged over the best 5 years of salary. Deducted off of this amount is the 0.6% of the average Year’s Maximum Pensionable Earnings - YMPE (for the same five years of earnings) times your credited service.
In the DB plan at MTS your benefit does not depend on the rate of return on plan investments. The employer has an ongoing obligation to its contributions, with the costs being spread over time. Today, any shortfall in the plan is made up from additional payments from MTS. The predictable retirement income is the most desirable feature of a defined benefit pension plan. “In addition, what distinguishes our Plan from others is the valuable annual cost of living increase, which is less common now for corporate pension plans.” [Pierre Blouin CEO, MTS Annual Employee Pension Plan Report]
DC pension plans operate more like a Registered Retirement Savings Plan. The money accumulates in a fund. The amount the employee draws for retirement from their fund is dependent on how much the employee has put in, on how the investment market has gone up or down, and the cost to purchase annuities. Other variables that come into play are greater longevity and variable annuity returns. If you retire at a time of low interest rates, a downturn in the investment markets (such as we are seeing today), it will affect your retirement income and you may be short of retirement money. Once your money is gone, there is no more.
People should recognize that now: Not enough 30 year olds have yet realized that their prospects for retirement are a lot poorer than their parents. [Mark Da Silva, Barnett Waddingham, May 2002]
Typical money purchase schemes [DC and RRSP] do not match the benefits that come from a final salary scheme [DB plan]. The contribution gap means that a typical DC plan scheme may deliver a pension income that is, 20-30% less than that enjoyed by a DB pensioner. [Mark Da Silva, Barnett Waddingham, May 2002]
Given the choice, employers tend to prefer DC plans because there is no risk of being under funded (cost savings) and it is relatively easy to cap employer costs and liabilities (no volatility of the costs), they are also easier to administer and generally an easy ride in terms of regulations.
Once a DC plan is in place, it will become easier for the company to push the plan beyond just new employees. It is very expensive to convert from a DB regime to a DC, and even more expensive to have two plans operating at the same time. This is what MTS is proposing.
If a mandatory DC plan is introduced for all new employees, that means there are no new members to the DB plan, creating a gradual weakening, even erosion of the DB plan in the future. Those new employees might well be our children, nieces, nephews. They are not here today and so can’t speak up for themselves. It is also highly unlikely you will be able to bargain any future improvements to your DB plan.
Some forward thinking companies have rejected the idea of a DC conversion just on the fact that it puts the investment risk on to the employees.
In summary, offering a defined contribution plan to new employees is a giant step backwards. That is why TEAM-IFPTE Local 161 is taking a firm stand against the Corporation’s decision.
Please refer to www.mtsallstreamwatch.info for additional articles and letters regarding the pension question. For updates on bargaining and member communiqués visit www.teamunion.mb.ca
Your TEAM Bargaining Committee