Part 4: Workplace Pension Plan
When planning for retirement, there are different sources of retirement income, known as the three-pillar retirement income system in Canada. In parts 2 and 3 of this 5-part series, we went through government benefits and personal savings. The last source of the three-pillar retirement income system focuses on union and/or employer sponsored pension plans. A registered pension plan (RPP) is an arrangement by a union or an employer to make contributions to a retirement fund which in turn provides benefits to members upon retirement. All RPPs are subject to federal and/or provincial pension legislation and must also comply with the Income Tax Act.
There are single-employer and multi-employer pension plans. The main types of benefits these plans can offer are:
- Defined Benefit (DB) – your pension benefit is determined or “defined” by a formula that calculates how much money you will receive each year after retirement for the rest of your life. When you retire, a DB pension plan provides you with a pension in the form of periodic payments. A pension benefit is also provided to employees who leave the pension plan prior to retirement for reasons such as termination or death.
- Defined Contribution (DC) – your contributions are determined or “defined” by a formula that calculates the amount of contributions that are made to your individual account, which then earns investment income depending on how it is invested. When you retire, a DC pension plan provides you with your account balance. You will not know the amount of your ultimate account balance until you retire, and you will then need to manage how much to spend each year so that you do not outlive your savings. The account balance is also provided to employees who leave the pension plan prior to retirement for reasons such as termination or death.
The Teamsters Canadian Pension Plan (TCPP) is a multi-employer pension plan which provides defined benefits. If the total contributions (employer and/or employee) are not enough to cover the cost of pension benefits, your benefits may be reduced. In these types of pension plans, benefits are a target, as they are not fixed and may be reduced. As a result, these types of benefits are sometimes referred to as target benefits. It is important to the TCPP that your accrued pension benefits are not reduced and the TCPP trustees manage the plan with that goal in mind.
Participating in a workplace pension plan, like the TCPP, is a great way to save for retirement. Prior to being part of the TCPP, you may have been part of another pension plan where you did not withdraw your pension entitlement as a lump sum. You should know which pension plans you belonged to during your working life and how much income your workplace pension plans are likely to give you in retirement. That is why you should always keep a copy of your annual pension plan statement in a safe place as reference and as proof of entitlement. And always remember to keep your and your designated plan beneficiary’s contact information up to date with any pension plans that you belong to.
In this series on the retirement income system, we have outlined the various sources of your retirement income. To prepare for retirement, keep track of all the sources, and plan ahead.
Part 4 of our 5-part series discussed the last source of retirement income which is your workplace pension plan.
Stay tuned for the last installment of our 5-part series on the retirement income system!