The Benefits of Defined
Benefit Pension Plans
From a Manitoba School
Sector Perspective
Defined Benefits Pension Plans
A presentation by
WALLY SKOMOROH
MANITOBA SCHOOL SECTOR COORDINATOR

A Defined Benefit Pension Plan is
essentially a deferred wage for the rest of
your, life and possibly for the remainder of
your partner’s life, where applicable

A Defined Contribution Pension Plan is
basically a savings account that pays you
in annuities and once the account has run
dry – you no longer have a pension
Definitions:

DB Plan
The objective is to provide funding required for
a pre-determined level of pension

DC Plan
An account that relies on the size of money in
the plan and the market conditions at the time
of withdrawal (Retirement)
What are the risks associated
with each plan?

Defined Benefit (DB)
The risk associated with this type of plan is
shared between the employer and the plan
members collectively, and is spread over time

DC Plan
•
Because the employer has no obligation to
fund any particular level of pension benefit,
the risk lies entirely with the employee
•
This places a greater importance on the size
of your account
•
The poorer your investment performance is,
the lower your eventual pension will be
Essentially, you run the risk of retiring “at the wrong
time”
Example:
•
1989 - $50,000 from a DC Plan could buy a
$506/month life annuity for a single woman
•
1998 – The same $50,000 would only buy
$344/month – a drop of 34%!

What is worse, the employer is under no
obligation to maintain any set level. It is
what it is!

Basically, the employer makes their
obligatory contribution once – and once
only. Then it is up to you to fend for
yourself

Additional Benefits

DB Plan Benefits may include:
• Enhanced early retirement
• Survivor benefits beyond those required
by legislation
• Portability
• Disability Benefits
• Inflation Protection

DC Plan Benefits:
•
Additional benefits must be purchased by
each individual at the time of retirement
•
This will significantly reduce the monthly
income available to retirees.
•
Example – A retiring plan member must take
an 8% cut in their monthly payment just to
make it a “Joint Life” annuity

Inflation Protection (AKA – COLA)

DB Plan
•
Many plans provide for increases which at
least partially protect against inflation
•
But even when a plan does not provide for
inflation protection, pension plan surplus is
frequently used to provide increases on an
ad hoc basis

DC Plans
• No set monthly payment and are not
protected from inflation
• It is possible to buy “protection”, but the
cost is high
For example:

To buy a modest 4% inflation protection,
your monthly payment reduces your
initial pension by more than 27%

Plan Administration Costs
• DB Plans

Many of CUPE’s larger DB Plans are
jointly trusteed
Best way to ensure plan members are
represented for important issues including:

Investment of pension funds

Use of surplus

Improved benefits for plan members

DC Plan Administrative Costs
•
They are managed as individual accounts
•
Plan members have no say in the
management of the plan as a whole
•
Employers usually prefer DC Plans because
they are easier to administer
•
The costs and liabilities are strictly limited
Why does CUPE Advocate
for DB Pension Plans?
(1) Adequate, secure, and predictable pension
income;
(2) Equality issues can be addressed;
(3) DB Plans are a collective approach

Example of Investment Risk in DC Plans
• John and Bev each join the plan earning
$20,000/year.
• Over 30 years, each get a 3% annual
raise.
• Each contributes 4%
Successive 10 Year
Investment
Earnings
John
Bev
Years 1-10
6%
10%
Years 11-20
8%
8%
Years 21-30
10%
6%
Account Balance
after 30 years
$148,212
$117,460
Monthly Income at 65 $1,431.35
$843.71

Because Bev’s “actual” versus “average”
rate of return was higher when her pot of
money was smaller, her account balance is
significantly lower than John’s

This translates into a smaller pension wage

If they were in a DB Plan, the plan is
managed over the long term with a better
risk/return

Longevity
• The DB fund keeps going with decisionmaking based on the entire membership
in the plan
• In DC Plans, the retiree has only her/his
“pot of money”, which attracts huge fees

Equality Issues

DB Plans may provide for:
•
Deemed Service for a leave of absence for child
rearing
•
Inflation Protection without reduction in basic
pension wage
•
Pay early retirement without penalty using criteria
for short service workers like immigrants and
women
•
Pay spousal benefits without reduction to basic
pension wage

DB v DC Pension Plan Examples
• The following examples and exercises
are for illustrative purposes only.
• While the methods used are
reasonable, they cannot be relied upon
as a guarantee of the pension benefit
for either plan

DC Plan Exercise

MSBA Statement
(a) Value of Pension Account at Most
Recent Date
(1)
(b) Estimated Value at Retirement Age
(i) Pick age 55, 60 or 65
(ii) Estimated Future Contributions
(Multiply Line (1) x 2 for every ten
years remaining)
(2)
(iii) Estimated Investment Income
(Line (2) x Estimated Return Rate
[0.08])
(3)
(c) Total Estimated Value of Pension at 55, 60
or 65
Line (1)
+ Line (2) _____+
Line (3)
= (4) __________
(d) Estimated Monthly Pension at Retirement
Line (4)
100,000
= (5)
Then
divided by
Line (5) _______ x the number chosen
from the appropriate annuity table
=
estimated monthly pension

DB Plan Exercise
(a) Pick an age of retirement – Magic 80,
55, 60 or 65
(b) Estimate “Best 5 year average” salary at
that point (Take years remaining,
multiply by 1.02 (2% wage increase) to
calculate annual wage increases, minus
3 years to get the average best salary)
(c) Apply Formula: Base pension = 1.5% x
number of years of pensionable service x
average salary = (1)
(d) Calculate penalties if applicable (If retiring
after 55 with 5+ years of service and do
not meet Magic 80 requirements)
(i) Number of months before age 60
____________ (2)
(ii) ¼% x 1% x Line (2) = __________ (3)
(iii) Line (2) x Line (3) = ___________ (4)
(iv) Line (1) minus Line (4) = _______ (5)
Pension
Total Pension Payable = Line (5) ________
MSBA (DC Plan) =

/monthly
DB Plan – Line (5)/12 =

/monthly

New Employee DC Plan Example

MSBA Statement
a) Value of Pension Account at Most
Recent Date
(1) $11,18.08
(b) Estimated Value at Retirement Age
(i) Pick age 55, 60 or 65
(ii) Estimated Future Contributions
(Multiply Line (1) x 2 for every ten years
remaining)
(2) L (1) x 2 x 2 x 2 = $94,544.64
(iii) Estimated Investment Income
(Line (2) x Estimated Return Rate
[0.08])
(3) Line (2) x 0.08 = $7,583.57
(c) Total Estimated Value of Pension at 55, 60
or 65
Line (1) $11,818.08 +
Line (2) $94,544.64 +
Line (3) $7,583.57
= (4) $113,946.29
(d) Total Estimated Value of Pension at 55, 60
or 65
Line (1) $11,818.08 +
Line (2) $94,544.64 +
Line (3) $7,583.57
= (4) $113,946.29
(e) Estimated Monthly Pension at Retirement
Line (4) $113,946.29 divided by 100,000
= (5) 1.13
Then
Line (5) 1.13 x the number chosen from
the appropriate annuity table ($559.21
based on 65 year old woman)
= $631.91 estimated monthly pension

DB Plan Exercise
(a) Pick an age of retirement – Magic 80, 55,
60 or 65
(b) Estimate “Best 5 year average” salary at
that point (Take years remaining, multiply
by 1.02 to calculate annual wage
increases, minus 3 years to get the
average best salary) = $51,908.97
(c) Apply Formula: Base pension = 1.5% x number
of years of pensionable service x average
salary = (1) (35 yrs x 1.5%= 52.5% x
51,908.87) = $27,251.74
(d) Calculate penalties if applicable (if retiring after
55 with 5+ years of service and do not meet
Magic 80 requirements)
(i) Number of months before age 60
(2)
(ii) ¼% x 1% x Line (2) = N/A (3)
(iii) Line (2) x Line (3) = N/A (4)
(iv) Line (1) minus Line (4) = $27,251.74
(5) Pension
Total Pension Payable
= Line (5) $27,251.74

MSBA (DC Plan) =

$631.91/monthly

DB Plan – Line (5)/12 = $27,251.74/12

$2,270.98/monthly

Long Term Employee DC Plan Example

MSBA Statement
(a) Value of Pension Account at Most
Recent Date
(1) $53,601.84
Estimated Value at Retirement Age
(i) Pick age 55, 60 or 65
(ii) Estimated Future Contributions
(Multiply Line (1) x 2 for every ten years
remaining)
(2) L (1) x 2 = $91,123.13
(iii) Estimated Investment Income
(Line (2) x Estimated Return Rate
[0.08])
(3) Line (2) x 0.08 = $7,289.85
(c) Total Estimated Value of Pension at 55, 60
or 65
Line (1) $53,601.84 +
Line (2) $ 91,123.13 +
Line (3) $ 7,289.85
= (4) $152,014.82
(d) Estimated Monthly Pension at Retirement
Line (4) $152,014.82 divided by 100,000
= (5) 1.52
Then
Line (5) 1.52 x the number chosen from
the appropriate annuity table ($559.21
based on 65 year old woman)
= $850.00 estimated monthly pension

DB Plan Exercise
(a) Pick an age of retirement – Magic 80, 55,
60 or 65
(b) Estimate “Best 5 year average” salary at
that point (Take years remaining, multiply
by 1.02 to calculate annual wage
increases ($36,000 in 2012), minus 3
years to get the average best salary) =
$38,967.55
(c) Apply Formula: Base pension = 1.5% x
number of years of pensionable service x
average salary = (1) (25 yrs x 1.5%=
37.5% x $38,967.56) = $14,612.84
(d) Calculate penalties if applicable (If retiring
after 55 with 5+ years of service and do not
meet Magic 80 requirements)
(i) Number of months before age 60
_______ (2)
(ii) ¼% x 1% x Line (2) = N/A (3)
(iii) Line (2) x Line (3) = N/A (4)
(iv) Line (1) minus Line (4) = $14,612.84
(5) Pension
Total Pension Payable = Line (5)
$14,612.84

MSBA (DC Plan) =


$850.00/monthly
DB Plan – Line (5)/12 = $27,251.74/12

$1,217.74/monthly

Male Mid Career Employee DC Plan
Example

MSBA Statement
(a) Value of Pension Account at Most
Recent Date
(1) $63,786.08
Estimated Value at Retirement Age
(i) Pick age 55, 60 or 65
(ii) Estimated Future Contributions
(Multiply Line (1) x 2 for every ten years
remaining)
(2) L (1) x 2 = $114,814.94
(iii) Estimated Investment Income
(Line (2) x Estimated Return Rate
[0.08])
(3) Line (2) x 0.08 = $9,185.20
(c) Total Estimated Value of Pension at
55, 60 or 65
Line (1) $63,786.08 +
Line (2) $ 114,814.94 +
Line (3) $ 9,185.20 = (4) $187,786.22
(d) Estimated Monthly Pension at
Retirement
Line (4) $ 187,786.22 divided by
100,000
= (5) 1.88
Then
Line (5) 1.88 x the number chosen from
the appropriate annuity table ($557.28
based on 60 year old man)
= $1,047.69 estimated monthly pension

DB Plan Exercise
(a) Pick an age of retirement – Magic 80, 55,
60 or 65
(b) Estimate “Best 5 year average” salary at
that point (Take years remaining, multiply
by 1.02 to calculate annual wage
increases ($40,000 in 2012), minus 3
years to get the average best salary) =
$53,834.74
(c)
Apply Formula: Base pension = 1.5% x
number of years of pensionable service x
average salary = (1) (36 yrs x 1.5%= 54.0%
x $53,834.74) = $29,070.76
(d)
(d) Calculate penalties if applicable (If
retiring after 55 with 5+ years of service and
do not meet Magic 80 requirements)
(i) Number of months before age 60 ______
(2)
(ii) ¼% x 1% x Line (2) = N/A (3)
(iii) Line (2) x Line (3) = N/A (4)
(iv) Line (1) minus Line (4) = $29,070.76
(5) Pension
Total Pension Payable = Line (5)
$29,070.76

MSBA (DC Plan) =


$1,047.69/monthly
DB Plan – Line (5)/12 = $27,251.74/12

$2,422.56/monthly
Questions?