How to make the most of your pension plan

Headlines about troubled company pension plans may have you thinking about your own plan, if you have one. Here is a guide to the differences between the 2 major types of pension plans, along with some tips to help you boost your retirement savings, whether you’re supplementing a company pension or building your retirement fund in the absence of one.

Pension plan trends

If you don’t have a company pension plan, you’re not alone. A  2011 Statistics Canada study found only 37% of male workers and 40% of female workers aged 25 to 54 had registered pension plans.

Company pensions are typically 1 of 2 types: either defined benefit or defined contribution

According to Statistics Canada, 84% of Canadians with a company pension plan in 1960 had a defined benefit plan. Another 14% had a defined contribution plan, and the rest were in hybrid or “other” plans.

Fast-forward to the 2010s, and the balance has shifted significantly.

By 2015, of the 3 million private-sector Canadian employees with a registered pension plan, only 31% belonged to a defined-benefit plan. Defined benefit plans are much more common among public-sector employees: Around 94% of public servants had a defined benefit plan in 2015.

Regardless of which type of pension plan you have, you need to read your statements and ask questions, says Heather Wolfe, an assistant vice-president with Group Retirement Services at Sun Life Financial. “A lot of people don’t understand the pension plan they have, so they need to take the time to read up and review what their responsibilities may be,” she says. “If you have questions, ask your HR department. Question anything that seems odd.”

What is a defined benefit pension plan?

In a defined benefit plan, the pension income you receive is a predetermined amount typically based on your earnings and years of service. With this type of pension, your company manages your plan and assumes the investment risk for you.

What is a defined contribution pension plan?

With a defined contribution plan, the money you receive is not pre-determined. Instead, you build your retirement savings based on the performance of the funds in your personal pension account, and you are assuming the investment risk, rather than your employer. While you’re working, your employer contributes money to your plan according to its own formula, and you may be required to make contributions that your employer will then match. When you’re ready to start drawing income from your savings, a defined contribution plan gives you the flexibility to purchase an income-producing vehicle such as an annuity or a life income fund (LIF) and allows you to play an active role in managing your plan.

Note: These are not the only types of pensions. Some employers offer hybrid pension plans; find out more about your plan by asking your employer.

How to boost your retirement savings

News reports of troubled retirement plans can be worrying, but it’s important to remember that a strong retirement plan incorporates multiple income streams. “The question on many people’s minds is ‘Can I rely on my company plan?’ However, it's important to note that the pension plan is only 1 pillar of your retirement plan,” says Wolfe.

The other 2 pillars are income from the government, via the Canada Pension Plan (CPP) and Old Age Security (OAS), and your personal savings. Strategically building up your retirement savings is crucial, especially if you're self-employed or don’t have a company pension plan. Without a company pension plan, you need to save aggressively to replace that pension income.

Here are 4 ways you can increase your personal retirement savings:

1. Do a financial check-up to get a picture of your money habits. Learn more about your financial health and get recommendations for action.
2. Use this retirement savings calculator to estimate how much you should be saving overall, and this RRSP calculator to get an idea of how much you should contribute to your RRSP.
3. Set up automated transfers to your TFSA and RRSP accounts, so putting away cash becomes automatic (and you’re less tempted to blow extra cash at the mall).
4. Talk to a financial advisor who can help you create and work towards concrete financial goals based on your age and your family’s needs.

The importance of keeping an eye on your pension

While you probably know how important your pension plan is, you might not always pay attention to it. Going over your statements may seem tedious, but whether you're in your 20s or 60s, reading up on your pension will help you to get the most out of your plan. If you have a defined contribution plan, it’s important to contribute as much as possible so you can take advantage of any matching contributions your employer will make.

“Don’t leave any money on the table. Read your pension statements regularly and speak up if you have questions or concerns,” says Wolfe.

And if you don’t have a company pension plan, meet with an advisor to create your own retirement savings plan.

Read more about company pension plans:

• Are you passing up free retirement savings?
• How do employee pension plans work?
• What happens to my pension when I retire?
• Employer pension plans: Is it ever too early or too late to contribute?