Defined Benefit Registered Pension Plan (DBRPP) 

Defined benefit registered pension plans are no longer as common today as they were in the past. They are offered by the federal government, provincial governments, crown corporations, unions and some large corporations to their employees. They offer the most generous pension benefits for long term employees. The longer the employee is employed with the employer the more generous their pension benefits at retirement. In a defined benefit registered pension plan the employer is referred to as the plan sponsor and the employee is referred to as the plan member. The employer assumes all the risk and the employee receives guaranteed pension benefits at retirement. The employee can also make additional contributions by setting up their own individual RRSP. Contributions to the employee's RRSP are reduced by their pension adjustments. 

One of the disadvantage in a defined benefit registered pension plan is if the employee is in poor health does not have a spouse and deceases prematurely the plan sponsor keeps all their pension benefits. The employee is also limited when they can start their retirement, most plans only allow for benefits to be paid at age 65. The employee does have the option to opt out of their defined benefit pension plan and transfer their money to an individual plan called a LIRA. The amount of the employee's pension plan transfer is known as their commuted value. It many cases it is advantageous for the employee to transfer their pension assets to a LIRA.

Before transferring the employee's pension plan commuted value one has to asses a number of different factors including but not limited to:

1. 1. Life expectancy of the employee (plan member), including any medical conditions or illnesses that have resulted in a diminishing life span. 

   2. Does the employee (plan member) have a spouse that will require retirement income after they are deceased, not all plans offer a spousal beneficiary designation.

   3. Is the pension plan solvent.

   4. Is the pension plan underfunded or overfunded.

   5. The stability and financial resources of the employer (plan sponsor).

   6. Does the employee (plan member) want to leave their unused pension funds to their children, in most plans the only beneficiary options is the spouse.

   7. Does the employee (plan member) want to leave their unused pension funds to the their plan sponsor or designate their own beneficiary such as a charity, their church, mosque, synagogue or temple.

   8. Does the employee (plan member) need to unlock funds to pay off debts, pay off a mortgage, investment opportunity or start a business.

   9. Is the employee (plan member) willing to give up their guaranteed pension benefits and manage their own investments in a locked-in retirement plan (LIRA).

A Defined Benefit Registered Pension Plan (DB-RPP) is an arrangement to provide the employees benefits at retirement based on years of service and earnings.

1. 1. Plan sponsor selects the pension benefits level and decide whether employee contributions are required or not.

   2. Contributions and plan administration expenses payable and paid by the plan sponsor are tax deductible.

   3. Employer (plan sponsor) contributions are not subject to payroll taxes.

   4. Flexible retirement program – better suited to provide early retirement benefits and other ancillary benefits.

Plan Member Advantages:

1. Employees (plan members) receive a formal promise of a specific pension at retirement.

2. Retirement income determined by an established formula based on years of service and income.

3. Retirement income is independent of market performance and usually adjusted for inflation.

4. Retirement income is relatively high (up to 70%) for the amount of contribution the employee makes.

5. The higher income years prior to retirement really works to the employee’s (plan member's) advantage.

6. By naming a beneficiary, any death benefit is paid directly to the beneficiary with no need for probate.

7. Creditor-proof–to the extent provided for under applicable legislation, pension plan contributions and benefits cannot be seized by creditors.

Many defined benefit registered pension plans (DBRPPs) are underfunded. In Canada provincial governments, the federal government, crown corporations, unions and corporations have started to make adjustments to pension benefits for their employees. The adjustments and changes to pension benefits have resulted in a reduction of pension benefits, reducing or capping of indexation benefits after retirement, and increasing the age of retirement.

The assumption that a good job with a company, union, federal or provincial government is a guarantee for a comfortable retirement is no longer the case. The employer can reduce the pension plan benefits to their employees at their discretion without the employee's consent. 

Contact Us to Review Your Pension Plan Options

The information provided on this web site is intended for general information only. It should not be construed as legal, accounting, tax or specific insurance and investment advice. Clients should consult a professional advisor concerning their situations and any specific insurance and investment matters. While reasonable steps have been taken to ensure that this information was accurate as of the date hereof, Stone-Hedge Financial Group Inc. and its affiliates make no representation or warranty as to the accuracy of this information and assume no responsibility for reliance upon it.