Gold Plated Pensions: Have We Seen The Last Of Them?

Most defined benefit pensions – also known as gold plated pensions – were designed in an environment that supported and encouraged early retirement.

But things are different today. We’re living longer. Life expectancy increased from age 75 to age 82 in the last 35 years.

Gold plated pensions in the private sector have disappeared, while public sector pensions face criticism of growing deficits fuelled by early retirement subsidies.

Related: What Is A Defined Benefit Pension?

Defined benefit plans across the country are experiencing funding challenges. My employers’ pension plan is no different.

They’ve proposed changes to try and preserve the value of the plan for its members and address the long term financial security of the plan.

Their main focus is to redirect a portion of early retirement subsidies towards strengthening inflation protection for retiree pensions.

How the Current Pension Plan Works

My pension is based on my salary (average of the five highest years of earnings) and pensionable service (number of years I contributed to the plan), up to a maximum pensionable salary, which is set by the Income Tax Act and is $150,164 in 2013.

The formula goes like this:

1.4 percent x earnings up to the Yearly Maximum Pensionable Salary (currently $51,100) + 2 percent x capped earnings above the YMPE = pension earned for each year of service.

For example, someone who’s hired at age 40 and retired at age 65 with:

  • 25 years of service
  • $120,000 highest average earnings
  • $50,000 average YMPE

Their pension would be calculated as:

1.4 percent x $50,000 +2 percent x ($120,000 – $50,000) = $2,100 for each year of service

Related: Decoding Your Company Pension Plan

The annual pension would equal to $2,100 per year x 25 years of service = $52,500 per year at 65

Early Retirement Conundrum

Reduced pension – You can retire under our current plan once you reach 55, but your lifetime pension will be reduced by 3 percent until you turn 60 or when you achieve the 80 factor (age + service equals 80), if earlier.

So if I retired at age 55 with 15 years of service, my total pension would be reduced by 15 percent.

If the proposed changes take effect, there will be a greater percentage reduction for each year that your retirement date precedes your 65th birthday.

  • The reduction for retiring one year early (age 64) is 1 percent.
  • The reduction for retiring two years early is 3 percent (1 percent for age 64 and 2 percent for age 63).
  • The reduction for retiring three years early is 6 percent (1 percent for age 64 and 2 percent for age 63 and 3 percent for age 62).
  • The reduction for retiring more than three years early (before age 62) is 6 percent plus 4 percent for each year that your retirement date is earlier than age 62.

Under the new plan, if I retired at age 55 my total pension would be reduced by 34 percent instead of 15 percent.

Unreduced Pension – Under the current plan, you can retire and receive an unreduced pension as long as you’ve reached age 60 or achieved the 80 factor, if earlier.

Related: Do You Have A Locked-In RRSP?

If the proposed changes take effect, the portion of my pension earned for service after 2014 will be reduced if I retire before 65.  The 80 factor is no longer a factor.

Bridge Pension – Currently, you can retire before age 65 and receive a bridge pension that’s paid from your retirement date until age 65.

It’s equal to 0.6 percent of earnings up to the YMPE, and stops at age 65 once Government benefits are expected to start.

So if you were hired at age 35 and retired at age 60, with 25 years of service, your earned pension of $2,100 per year of service will be topped up by a bridge pension of $7,500 per year ($50,000 x 0.6% x 25 years) that is paid until age 65.

Under the new plan, the bridge pension will be eliminated for service earned after 2014; however it will continue to be paid on pensions for service earned before 2015.

Cost of Living Adjustment – Pensioners currently receive a guaranteed cost of living increase each year that is equal to 60 percent of the annual change in the Alberta Consumer Price Index (CPI).

Under the new plan, pensioners will receive a guaranteed annual cost of living increase of 75 percent of the change in the Alberta CPI (hey, an increase!)

Related: Will A Pension Plan Handcuff You To Your Job?

Compulsory Pension Age – You must take your pension on December 31st of the year you turn 69, even if you continue working.

Under the new plan, the date changes to December 31stof the year you turn 71, even if you continue working.

Elimination of 35 Year Service Cap – You currently cannot accrue more than 35 years of pensionable service, even if you continue working.

Under the new plan, the 35-year cap on pensionable years of service would be eliminated.

Final thoughts On Gold Plated Pensions

Gold plated pensions need to be fixed. They heavily subsidize early retirees, who can, on average, expect to collect their pensions for as long (or, in some cases, longer) than they’ve contributed to the plan.

Meanwhile, new plan members have been paying more to finance the retirements of those who have gone before them.

Related: Why More Companies Are Offering Defined Contribution Plans

The old defined benefit pension plan model is not sustainable (just look at Greece).

While it would have been nice to retire at 55 with a full, unreduced pension, I know that’s no longer even close to reality.

That’s why I’m working on my own brand of early retirement, one where the income from my investments and side business exceed my expenses and savings goals.

Then I can choose to truly retire early – on my own terms.

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  1. James on May 27, 2013 at 5:52 am

    I agree with most of what you reviewed. I think you missed an important aspect. The impact of having survivorship for a spouse can greatly impact your DB pension payout. It would have been nice to have these numbers reviewed as well.

    • Bet Crooks on May 27, 2013 at 8:49 pm

      Survivorship can be a difficult thing to quantify. I know one of my relatives had to choose how much defined benefit pension he would receive by choosing how much survivor benefit he would be leaving for his wife if he died first. For example, he could have a higher monthly pension if they accepted that he would leave her with no survivor benefits. Nasty, eh? They had to try to decide who would die first!

  2. Adina J on May 27, 2013 at 1:07 pm

    I don’t have a pension (though I sometimes wish that was the case), but your post reminded me of my grandmother. Keep in mind that she worked (and retired) in a different era and culture, and that her pension is actually miniscule by Western standards. Anyway, she retired at 55 and has been receiving her pension for 35 years now … at least 5 years longer than she worked. I have no idea how the public sector is going to manage pay-outs based on a person’s x highest income earning years given the population’s increasing longevity (and the high salaries in some areas of the public sector).

  3. Bet Crooks on May 27, 2013 at 8:46 pm

    The government already does this in reverse. If you have a pension plan from work, your RRSP maximum is reduced by your pension adjustment. So to be fair, it should be an increase in RRSP room for everyone or no one.

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