Pensions: Good, Bad and Ugly

People often just assume having a pension is a good thing, but after a number of years with different employers and different plans I’ve noticed that not all of them are good.  Actually some are bad and others are just out right ugly. So how do you tell if your pension plan is good, bad or ugly?

First you need to determine what kind of pension plan you have: group RRSP, defined contribution or defined benefit.  I’ve personally been in all three so this is how you can tell them apart.  A group RRSP has no vesting period meaning you don’t have to stay with the employer for a set amount of time (typically 2 years) prior to being about to keep your employers contribution.  A defined contribution plan often does have  a vesting period, but it doesn’t guarantee how much you get at retirement.  The performance on the pension plan is determine by the stock and bond markets.  Lastly the defined benefit plan typically won’t give you balance that you have invested, instead there is a formula that will tell you how much you can expect from the plan when you retire.

Now what makes a plan good, bad or ugly?  Well having been in all three and talking to other people about there plans this is what I’ve noticed.

A good pension plan regardless of type should be open with information to you.  For a Group RRSP and defined contribution plans you should get at least quarterly statements with how well your money has preformed and you should be about to get information about the fees associated with your investment options.  Also if you have a good plan your fees should be low.  How low?  Well the best I’ve seen is this plan has a ‘Balanced Fund’ with a Management Expense Ratio (MER) of just 0.32%.  Which is in the range of Exchanged Traded Funds (EFT) and damn good since in Canada most mutual funds are well over 2%.

Now if you MER is over 2.5% for your Group RRSP or defined contribution plan you are starting into the bad category.  Pension plans are suppose to be about having larger pools of money invested and that is supposed to reduce your costs.  Unfortunately this often doesn’t happen and people end up paying high fees for lousy investment returns.  Also if you find it hard to get information from your pension plan I often will group those plans into the bad category as well.

Then there is the ugly set of plans.  I literally had a defined benefit plan once at a company where I didn’t know what my contributions were into it.  I didn’t understand how much I was supposed to get out of it.  Actually I didn’t really understand just about anything about that plan until I was leaving that workplace and taking my payout option.  Now this isn’t to say all defined benefit plans are in this category…I have hear of some plans that are good at keeping their membership informed on what is going on with the plan.  Even if the news wasn’t what people wanted to hear like 2008 was a bad year.

So if you have a pension plan how is yours: good, bad or ugly? If you don’t have a pension plan, how you rate your RRSP?

7 thoughts on “Pensions: Good, Bad and Ugly”

  1. I saw you live in Regina, have you seen http://www.leaderpost.com/business/City+Regina+maintains+credit+rating/4094073/story.html ? Buried in there is the fact that the Civic Employees Superannuation and Benefit Plan has a deficit of $238 million, which is $1300 for every man woman and child in the city. Looking at the most recent annual statement, it mentions an unfunded liability of $43 million, calculated as of the end of 2007. This looks to me like the unfunded liability has ballooned 5x in the last 3 years, do you think City of Regina pensioners should be worried?

  2. After reading your post, it seems I work for a company with a pretty good plan. I’m involved with a defined contribution plan where the MER is 1.5%, but the employer foots the bill. Ax a result I have recently increased my optional contribution amount and lowered what I save in my personal accounts and pay management fees on.

    Thanks for the post as it helps me appreciate how good of a job I have.

  3. This is an interesting post and not something most people evaluate. I have some pension benefits sitting in a DB plan from a previous employer, I didn`t take the payout as there are some benefits to keeping it there should I ever rejoin that company. For this plan, the disclosure is quite good and very transparent. I would also point out for DB plans, it`s also worth looking at contribution rates because not all plans are comparable even if the benefits are. There are some plans where previous generations undercontributed and now current employees are having to make up for it through higher contributions despite the expectation of receiving similar benefits (some teachers`plans would be an example).

    I`m now part of a group plan that gives a choice between joining a registered or non-registered plan. The registered portion has a two year vesting period for the employer`s contribution. This one provides a range of fund choices where almost all fees are below 1% and allows you to make additional contributions which is beneficial if you want access to low-cost funds for some of your personal investments.

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