EMPLOYMENT

SOURCES OF
RETIREMENT
INCOME
DEFINED BENEFIT PENSION PLANS
DEFINED BENEFIT PENSION PLANS

• Defines:
– amount of pension payable at
retirement
– based on formula which considers:
• earnings levels
• years of service
• Benefit defined up front
• Employer contributions not set, but must
be 50% of the plan cost
 TYPES OF DEFINED BENEFIT PENSION
PLANS
DBP = (pension credit per yr.) x (yrs. service) x (earnings amount)
Career Average -earnings based on average
over entire career
Final Earnings - earnings based on average
over last 3 or 5 years
Best Earnings - earnings based on average of
best 3 or 5 consecutive years
Flat Benefits -
– set $$ amount per month, pro-rated
– minimum level of service maybe
required
EMPLOYEE CONTRIBUTIONS

• Based on contributory earnings

– does not include overtime and bonuses
– % varies from plan to plan and depends
on:
• normal retirement age
• whether plan integrated with CPP
and OAS
• Integrated plans
– builds upon government benefits (CPP)
– lower contribution rate applies to
earnings below CPP’s YMPE
EXERCISE – PENSION CONTRIBUTIONS
AND BENEFITS
Calculate total employee contributions:
– CPP (5.45%)
– Pension (7% of earnings up to YMPE, 8.5% of
earnings above the YMPE)
– Earnings = $65,000
– YMPE (2021) = $61,600
Calculate benefits for employee:
– Final 5 yr. Average Earnings = $65,000
– Assume max. CPP Benefits
– Pension 1.3% on average earnings up to the
average YMPE, 2% on average earnings above
the average YMPE ((5 year average YMPE =
$57,780)
– Retiring after 25 years service
EXERCISE
Total CPP and RPP contributions
CPP = (5.45%) x ($61,600 - $3,500) = $3,166.45
RPP = (7%) x ($61,600) + (8.5%) x ($65,000 - $61,600)
= $4,312.00 + $289.00
= $4,601
Total = $7,767.45

Benefits
CPP = $14,109.96 +
RPP = (1.3% x 25) x ($57,780) + (2% x 25) x ($65,000 -
$57,780)
= $18,778.50 + $3,610 = $22,388.50
, Total = 14,109.96 + $22,338.50 = $35,498.46
DEFINED BENEFIT PENSION PLANS
Indexation for Inflation
– generally not available except for some
public sector and large corporation
plans
– May be automatic or ad hoc
– Indexing may be full or partial
PAST SERVICE CONTRIBUTIONS
• to cover period of employment probation
• to cover period of employment before RPP
introduced by employer
• to upgrade to new, higher pension credit
for each year of service before the new
credit was set (ie. 1.3% => 2 %)
• pay in lump sum or installments
• May restrict future RRSP contribution room
ACTUARIAL ASSUMPTIONS
• Mortality- try to base on members of plan
• Interest rates- conservative, long-term
• Expenses- 5%+ of cost of plan
• Employee turnover
• Normal retirement age
• Rate of early retirement
• Rate of salary growth
• Integration of public pension plans
DEFINED BENEFIT PLAN
Risk – employer vs employee
Investment Risk
Bankruptcy Risk
Survivor Benefits
Estate Benefits