Working for a company that offers a pension plan is one of the greatest financial benefits in Canada. But what is an employee pension plan and how can it help you achieve your  retirement savings  goals? 

Employee pension plans can vary. So a good place to start is with the basic differences between pension plans and what the benefits are. 

What are the two main types of employee pension plans?

There are two main types of employee pension plans: 

What is a defined benefit pension plan?

Defined benefit pension plans provide retirement income based on a formula that includes your:

  • years of service with your employer, 
  • salary, and 
  • age at retirement. 

How does a defined benefit pension plan work? 

Defined benefit pension plans pool the contributions from both you and your employer in a pension fund. Those funds are then invested. Your employer (the pension plan sponsor) is responsible for paying employees their retirement income from the plan. You may be required to contribute to a defined benefit pension plan during your time with a company. 

What is a defined contribution pension plan? 

Defined contribution pension plans provide retirement income based on the savings each member has in the plan. The amount of retirement income you get depends on: 

  • how much you contribute to the plan
  • how much your employer contributes, and 
  • how that money grows over time. 

There’s no prescribed income level that will be paid. 

How does a defined contribution pension plan work?

Usually with a defined contribution pension plan, you and your employer pay a defined amount into your pension plan each year. Companies have mandatory employer contributions, and most have an optional employee component. In most cases you control how you invest your money. You can usually select investments based on your own risk tolerance and goals. The investment performance determines what your retirement income will be. 

Who manages employee pension plans? 

Your employer is responsible for administering the plan. Most employers rely on different service providers to manage their pension plan. This often includes:  

  • plan administration service providers (provide record keeping and other services), 
  • investment fund managers (who invest the pension fund assets), 
  • life insurance companies (for record keeping and/or investment management services), 
  • trust companies (for custodial services), and 
  • consultants (for services like plan valuation, pension design consulting, member communications consulting and fund manager search services).

What happens to your pension plan if you change employers?

Under pension legislation in most Canadian jurisdictions, defined benefit and defined contribution pension plans vest* at some point. In most jurisdictions, the vesting is immediate. This means, once your employer makes contributions to the plan, it’s your money. In other jurisdictions, you need to work with your employer for a specified period of time before you’re vested in your benefits.

(*Vesting in a pension plan means ownership.)

What happens to your pension if you leave your employer?

If you leave your employer your options for what you can do with your pension will depend on the legislation and plan. 

You may be able to:

  • leave your money in the plan you’re leaving,
  • transfer the value of your pension to another pension plan (if the other plan permits),
  • transfer your commuted value to a registered retirement savings plan or other plan (if it’s not locked-in), or a locked-in vehicle (if it’s locked in), or 
  • take the cash value, less tax (if it’s not locked in).

Some provinces may have vesting based on years of service or membership in the plan. If you leave before the benefits vest, you’ll get the value of your own contributions and earnings. You won’t, however, receive your employer’s contributions and related earnings. 

If you’re leaving a pension plan for any reason, it may be helpful to talk to a financial advisor. They can walk you through your options. A Sun Life Financial advisor can help answer questions and address any concerns you may have.

Are there fees for employee pension plans?

With a defined benefit plan, you don’t pay fees directly. However, the pension plan may pay fees for investment management and actuarial services from the pension funds.

With a defined contribution plan, you may pay fees for investment management, plan administration and other services. These fees are often deducted from your investments. These fees are typically lower than those charged outside an employee pension plan.

What are the benefits of workplace pension plans?

There are many benefits to contributing to your company pension plan:

  • Lower fees.  Your employer negotiates with service providers on behalf of all employees in the plan. This often results in lower fees than you would be able to get on your own.
  • Free money. Employers are required to contribute to their employee pension plans when they set it up. Some employers also have a matching program. Choosing not to join, or contribute to, your workplace pension plan is like saying no to free money.
  • Tax deductions. Your contributions are tax-deductible, meaning you pay less income tax now. And contribution and investment earnings are tax-deferred until you withdraw them.
  • Regular contributions add up. Workplace pension plans require that you save regularly. These smaller, regular amounts eventually add up to provide an income in retirement. And, by investing a set amount, you’re able to buy more when prices may be lower.
  • Less emotional investing.  You typically can’t withdraw money from a pension plan for reasons other than retirement.* In turn, a pension plan can help you stay invested for the long-term to make the most of your investments.  

(*Except as allowed by the plan in specific situations.)

Need help understanding your retirement savings options? 

Knowing what your employee pension plan offers can help you make the most of your retirement savings. Or, if you don’t have a company pension plan, you can create your own retirement savings plan. Whatever the case, a Sun Life Financial advisor can help. 

This article is meant to only provide general information. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.