A primer on workplace pensions

For a lot of Canadians, workplace pensions are the foundation of their retirement plans and often the catalyst that encourages them to become more engaged investors. And yet many who have workplace retirement plans may not be fully aware of the specifics of their plan.

For example, 52 percent of those recently polled in the 2015 BlackRock Global Investor Pulse Survey, said they did not know the maximum contribution to their workplace plan.

With that in mind, here are some key facts about the two most common types of workplace pension plans in the country: the defined benefit and defined contribution.

Defined benefit plan

Defined benefit (DB) pension plans were the workplace retirement benefit of choice a generation ago, but these plans have become less popular in recent years, namely because there is reduced incentive among employers to sponsor them.

Still, many Canadians remain DB participants who will receive a certain amount of retirement income for life as plan members. The amount of a defined benefit pension is based on a formula that usually takes into account your earnings and years of service with your employer. In most plans, both the employee and employer contribute to the plan, but it is the employer’s responsibility to invest the contributions to ensure there’s enough money to pay the future pensions of all plan members.

Defined contribution plan

Defined contribution (DC) plans have gained in popularity at the expense of defined benefit plans over the past couple of decades and are prevalent at small, medium and large companies in the country. Both employee and employer usually contribute to the plan, but it is the employee – not the employer – who is responsible for investing all contributions. The amount accumulated for retirement in a DC plan, therefore, depends on the total contributions made to the account and the investment returns that an employee is able to earn. At retirement, the money in a defined contribution account generates retirement income through an annuity or a locked-in retirement income fund (LRIF).

A group RRSP is similar to a DC plan but is not set up under pension legislation. As a result, DC plans have legislated “lock in” restrictions against taking the money out prior to normal retirement age and group RRSPs do not.

Whether it’s a defined benefit, defined contribution or group RRSP, it’s important to understand the details of your workplace plan, including maximum contributions, to ensure you are taking full advantage of it.